Nicholas Vardy has a newer low-end advisory called Smart Money Masters, and it looks like he’s aiming to be one of the “whale watchers” who run 13F-following services — the folks who watch the big buys by Warren Buffett and a couple dozen of the big hedge funds and institutional investors, and try to emulate those successful investors. He’s got an ad or two running to recruit charter subscribers at $49/year (which he says is an 80% discount off the “list price” of $249… though who knows if anyone will every actually pay that), so we’re taking a look at those ads today to see what investments he’s teasing as he dangles the bait.
Following big and successful investors is not a bad idea, of course — and there are whole industries set up to follow the big guys, which is why 13F season tends to get so much attention six weeks after the end of each quarter.
If you’re unfamiliar with that, 13F filings are the portfolio reports that institutional-size investors (anyone with a portfolio over $100 million) have to make to the SEC each quarter… they’re public, and include any long US equity positions, so they give great insight into the portfolios of large and successful investors (they don’t cover debt or options or short positions, so they’re incomplete… but still useful).
These filings are due six weeks after the end of each quarter, so the last wave of them hit in mid-February. You can search for filings at the SEC if you want to see what your favorite investor owned last quarter (Berkshire’s latest 13F info table is here, for example), but there are also lots of free sources that make the information much more accessible and track the ups and downs and portfolio changes (here’s how Insider Monkey shows Buffett’s portfolio, for example, and here’s gurufocus’ version — those are two of the higher-profile free services, though both require free accounts to get the full picture).
It’s always interesting to see what big institutional investors are buying, and sometimes we can find great ideas that way — though it’s certainly no guarantee. Even if you focus on those who generally have long-term positions in stocks (the 13F’s from active traders and “quants” are almost worthless, since the data is at best six weeks old and their portfolios are probably far different by the time you see the filing), and even if you’re able to buy at prices near what that hedge fund or investor paid (Buffett could have bought a stock back in October and we wouldn’t hear about it in a 13F until mid-February, so that’s a big assumption — they report the quarter-end value, but not their cost or the price they paid), most hedge funds and institutional portfolios have far different restrictions and priorities than do little individual investors like ourselves. Buffett himself, for example, routinely notes that he would expect to earn dramatically better returns if Berkshire were able to invest meaningfully in small cap stocks — but, since they have a $150 billion portfolio, they really can’t… any position big enough to make a difference to Berkshire’s performance would overwhelm a little sub-$1 billion company… or even, in many cases, a sub-$10 billion company.
So those are the standard caveats for “whale following” investment strategies — but what is the specific stock that Nicholas Vardy is pitching?
First, this is how he describes, in a different ad for the service, the idea of following these “guru” investors:
“How to Legally Skim Off Profits from Wall Street’s Trillion Dollar Club
“The Secrets Hidden on Page 11 of this Obscure Federal Document Could Potentially Hand You Double- and even Triple-Digit Gains this Year…”
Yes, despite the fact that Wall Street pundits and news sources pretty actively follow insider and 13F portfolio filings with the SEC to glean new info about what major investors are doing, most ads for these kinds of services persist in referring to these filings as “obscure federal documents” or as somehow “secret” things that poor plebes like you and I could never hope to understand.
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But anyway, what’s the pick? Here are the clues from the latest version of the ad:
“… why would anyone ever want to invest in a shipping company?
“Enter one of Wall Street’s top contrarian investors, our billionaire “Smart Money Master.”
“Where most investors see risk, he sees opportunity. And when he bets on a contrarian opportunity, he bets big. (He’s the largest shareholder and owns nearly 40% of this company’s shares.)
“And by digging deeply into the structure of this shipping business, he believes that he can wring out profits even as other investors shout ‘abandon ship.'”
So yes, this is a liquefied gas transport company — an area that has gotten a fair amount of attention as LNG projects have been started in the US and elsewhere (if you’ve been with us for a while you might remember that Cheniere was pitched as the “fifth greatest trade of all time” because of the startup of its LNG facility back in late 2015… or that Michael Lewitt pitched as having a “94.5% chance of dropping in price” back in October beause of its heavy debt load).
And for a while, the LNG shipping companies enjoyed a nice renaissance as well, because they all built up shipping capacity for the foreseen new demand for LNG shipping from the US and Africa and Australia into Europe and Asia (especially South Korea and Japan, which have long been the biggest markets for LNG shipments). That was fairly short-lived, because it turns out that building LNG tankers is a lot faster and easier than building LNG import and export facilities, so the supply of ships ramped up too quickly and got out of touch with the demand for shipping… so perhaps that’s turning around now? Is that what Vardy is pitching, or why his favorite billionaire bought whatever stock this is?
Let’s keep checking the clues to ID our stock, then you can decide…
“The company owns and operates a large fleet of LNG carriers with an even bigger global footprint: 14% of its cargos are loaded in South America, 30% in Europe, 23% in Asia, 26% in the Middle East and 8% in the United States….
“… the technological flexibility of its vessels has allowed my # 1 recommendation to transform itself from an LPG transporter to a broad-based shipper of LPG, LNG and other petrochemical gasses.
“As the CEO puts it:
‘(O)ur business benefits from a geographical diversification, and that we are not dependent on any one geographical area or country for export volumes, nor are we dependent on any one product, we carry LPG, propane, butane, we carry ammonia, and a variety of petrochemical gasses. The rates and utilization of this trade tend to be far less volatile than, say, the very large gas carriers that have essentially carried propane from the U.S. or the Mid East to the Far East.’
So… hoodat? This is the tanker company Navigator Holdings (NVGS). That billionaire investor cited is Wilbur Ross, who is certainly a well-known investor — particularly well-known for “vulture” investing in distressed companies. And yes, that’s now Commerce Secretary Wilbur Ross… and as a result of that, it’s not really Wilbur Ross making the call on Navigator Holdings going forward. He sold his W.L. Ross firm to Invesco ten years ago, though he maintained a substantial interest and had been active in managing the investments… but as part of his confirmation process this year he announced he would be selling his remaining interests in Invesco and asking them to take his name off the firm. So W.L. Ross is still the major investor in Navigator Holdings (commonly called Navigator Gas), but Mr. Ross himself apparently won’t be calling the investment shots for that position going forward. And W.L. Ross might be known as WLR or something else going forward, though I haven’t seen the official word on that.
And yes, Navigator is really a specialist in gas transport — but they are not focused on the big LNG carriers that have gotten so much attention over the past few years. The big part of their business where the competition is very stiff and rates remain pretty weak is LPG transport (that’s propane), which is about half of their business at the moment (down substantially from where it was a year or two ago, as they’ve intentionally diversified).
The more specialized product transport they focus on is in chemicals and other liquefied gases, including ammonia and ethane, where there isn’t as much competition and where there are some profits still to be made — particularly as low natural gas prices over the past few years have increased the amount of specialty chemical production in the US, which then has increased the export of specialty chemicals from the US and increased competition with other providers, particularly in the Middle East.
That’s important because most of the customers for ethane and the like are in Asia, so if more ethane is being shipped from the US that substantially increases the demand for vessels — the trip from the US (usually the Gulf of Mexico) to Asia is much longer than the trip from the Persian Gulf to Asia, and if each shipment takes longer to get to the customer, you need more ships if the demand for product is otherwise unchanged.
So they are a bit hopeful that this diversified product mix, combined with their roughly 60/40 mix of long term charters and spot market charters, will help them to boost revenues… but they are currently in a little bit of a soft patch when it comes to earnings, mostly because there really hasn’t been much profit to be had in shipping propane because that market is still oversupplied with ships.
That’s the impression I get, at least — and I’ll confess that I only spent a few minutes researching the name. I will note that Wilbur Ross’s firm has held a controlling position in this stock since before its late 2013 IPO, so it’s not like you could have “followed him into the shares” when it first appeared on the W.L. Ross 13F in early 2014, he had already held it for a while by then. I don’t know what Ross’s initial investment into Navigator was, but if you did choose to buy it shortly after the IPO, you would have paid too much… the IPO price was about $18 a share, close to 2X book value at the time, and it went up to well over $25 in the months following, partly because of the Wilbur Ross connection (and, of course, because oil and gas had not yet hit that mid-2014 collapse).
They’ve grown their fleet pretty quickly, with a pretty reasonable debt level for a tanker stock, and they are trading at a discount to book now — they got down to about 40% of book value last Fall before the election, and are now at about 75% of book value. They aren’t likely to grow earnings this year, analysts think the earnings per share will be pretty flat (maybe even down a few cents), so the PE ratio is right around 15 or so (depending on which forecasts you look at). They are not shockingly cheap, but most of the tanker companies that look super-cheap also have ludicrous debt levels or other problems, so they do stand out favorably on that front.
You can check out the presentation that the company made to potential bond investors earlier this year here, which will give you a good idea of the business and the trends (and the risks that they disclose), and I’d suggest also, at a minimum, reading through the transcript to their last conference call to get a better picture of the current situation.
And, funnily enough, just as I was finishing up this piece about the “top secret” stock… I noticed that Nicholas Vardy has also separately written about it in some free publications, so you can see the words straight from the horse’s mouth here if you like.
Since that one didn’t turn out to be “secret”, I also went back to the well and checked his other ad for Smart Money Masters — and that one hints at a few other ideas, so I can toss those into the ol’ Thinkolator for your edutainment:
“Trillion Dollar Club Stock #1: One of The Greatest Retail Stocks in the World
Founded in 1976, this company has been a favorite of the Trillion Dollar Club for years now. And for very good reason: it is a huge money maker.
“Currently boasting a $71 billion market cap and $116.2 billion in annual sales, the company operates 690 locations, including 482 in the United States and Puerto Rico… 90 in Canada… 36 in Mexico… 27 in the United Kingdom… 23 in Japan… 12 in Korea… 11 in Taiwan… 7 in Australia… and 2 in Spain.
“The company is unique for several reasons. First: Pricing. You’ll never find anything cheaper at one of their stores (hint: it’s NOT Walmart). Second: Amazing customer loyalty.
“I said it was a huge money-maker. Here’s why: since 1982, accounting for stock splits, shares have gone up 18,369%. And they’re still heading higher – in just the last 12 months, shares are up about 11%.”
That’s Costco (COST), one of the few real survivors in the retail space over the past few years (other than off-price fashion stocks and Amazon.com) — and while there hasn’t been a huge amount of “guru” movement in COST shares lately, there are a bunch of heavily-followed investors who hold shares, most notably Berkshire Hathaway (holds about 1%, not a huge holding for Buffett but it has been a long-term one) but also including widely-recognized names like Joel Greenblatt, Ken Fisher, Mario Gabelli (who’s been reducing his position) and John Rogers.
I haven’t looked at COST in detail for a long time, but on the surface it looks pretty expensive (30 times earnings for a company that has had flat earnings recently… though analysts do forecast that earnings will rise by 5% or so this year and 14% next year). And yes, it has risen about 11% over the past year — though it’s down about 6% since their disappointing earnings report last week (the S&P 500, in case you’re wondering, is up about 20% over that same time period).
Next? “Trillion Dollar Club Stock #2: A Contrarian Bet on Global Shipping” we started out with, so we’re on to #3…
“Trillion Dollar Club Stock #3: The Little Giant of Media Companies
“While giant mega-companies like Comcast are pretty much household names, few outside of the Trillion Dollar Club know about this media upstart. Instead of running cables and selling broadband access, this company acts more as a ‘holding company’ – taking huge shares in other media corporations to increase value and leverage growth.
“So far, it’s strategy is paying off nicely. Last year, the company delivered an annualized return of 13% over the last 10 years – beating both the S&P 500 (7.7%)… and Warren Buffett’s Berkshire Hathaway (7.5%)….
“One of the most prominent members of the Club has bought 5.81% of the company’s outstanding shares. According to Nick, this stock accounts for an eyepopping 23.19% of this man’s entire investment portfolio, making it his largest position.
“And I’m sure this Club member is liking what he’s seeing so far. Over the past year, shares are up 80%.”
That could be pretty much any of John Malone’s Liberty companies — Perhaps Liberty Formula One or Liberty Interactive or Starz (or Liberty Expedia or Liberty TripAdvisor Holdings or Liberty Ventures or whatever else they’ve spun out over the years — there’s a partial summary here if you want to spin your head around a few times and try to figure it out). My guess would be Liberty Broadband from those clues, but that’s still a guess, I haven’t confirmed the insider holdings (partly because each of Malone’s stocks has enough different stock tickers to give your friendly neighborhood Gumshoe a headache).
The tickers for Liberty Broadband are LBRDA for the one-vote shares, LBRDB for super-voting shares, LBRDK for no vote — this is essentially a holding company that owns 20% of Charter Communications (25% voting control), as well as a subsidiary called Skyhook that is quite small and loses money (though not a lot of it) in offering location services for cell phones (that’s mostly a legacy business, it appears, they lost their major customer and are trying to reorganize — no idea what the prospects for that are).
Liberty Broadband trades at a discount to the value of its holdings in Charter (CHTR), so it is effectively a cheaper way to get access to Charter shares if you happen to like that stock (Charter’s market cap is $87 billion, so 20% of that ought to be worth $17.4 billion… Liberty Broadband’s enterprise value is about $15.5 billion… so it’s not a wildly crazy discount, particularly since those shares are locked up and Liberty is losing a little bit of money on their subsidiary and other operating expenses, but it is a real discount). It’s perhaps more logical that the hints here are actually leading to what used to be Liberty Media Corporation, which has restructured itself into three tracking stocks (Formula One Group, Liberty Braves Group, and Liberty SiriusXM Group), but that restructuring took place in April of last year so it’s a little tricky to peg an annual gain for any particular one of them (Liberty Broadband was spun off a couple years earlier, in November 2014, and is up roughly 80% over the past year — most of the Liberty companies can’t claim that).
This is what John Malone does, he creates crazy new tracking stock structures and new companies and wheels and deals and gets wealthier and wealthier. Lots of folks love following his investments and enjoying the fruits of his dealmaking and financial engineering, but it mostly gives me headaches and there’s certainly no steadiness to most of the Liberty stocks. Mario Gabelli is such a fan of Malone that he’s tried to launch what would effectively be a “Liberty Media ETF”, designed to buy all the stocks that have been created, spun off, merged or otherwise evolved from what was originally John Malone’s Liberty Media in 2001 — the fund exists and has a December report, but it only has $2.5 million in assets so I’m not sure what the status is… it might just be seeded with some money to start but not actually approved by the SEC for trading yet. They describe it on their website here if you’re interested (it’s a pretty steep expense ration, almost 1%, for holding a couple dozen companies that you already know about… but who knows, it might work and perhaps Gabelli’s managers can allocate an investment across various Malone-formed companies better than you or I can).
Warren Buffett, for what it’s worth, is also invested in John Malone indirectly: Berkshire Hathaway owns a chunk of Liberty Global and of Liberty SiriusXM, though they’ve now sold the shares they owned in Formula One Holdings (Berkshire also owns a substantial chunk of CHTR, FYI).
And one more…
“Trillion Dollar Club Stock #4: Fast Food Feeding Frenzy
“When Nick tracks the activities of the Trillion Dollar Club, he looks for specific tell-tale indicators – like when one or more members take a HUGE position in one stock.
“Well, that’s this one. One of the elite money managers of the Trillion Dollar Club has invested more than 30% of his entire portfolio into this little known fast-food owner… a whopping $1.74 billion worth of shares. Now that’s commitment to a stock! A commitment like that is as close to a sure sign of future profits as you can get. No billionaire money manager is going to risk his reputation on that big a position in one single stock unless he’s convinced it’s going to be a winner for years down the line.”
And, of course, we must note that sometimes billionaire money managers make terrible, terrible mistakes… including the one being hinted at here. That’s a reference to Bill Ackman, whose Pershing Square has more than 30% of its portfolio in shares of Restaurant Brands International (QSR), which is the conglomerate that was put together, with Ackman and 3G working together, to merge Burger King and the Canadian Tim Horton’s chain (and has now made a deal to buy Popeyes, adding fried chicken to the donut and burger offerings and achieving the holy trinity of health and wellness).
I generally like Bill Ackman’s thinking and his activist investment strategies, and I do find some of his current portfolio appealing — but I also was quite burned by him when I owned shares of Pershing Square Holdings for a while, all because I was a little too convinced by just the kind of argument Vardy is making here… that Ackman wouldn’t make that kind of outsize investment in one stock unless he was convinced it would be a winner.
The last stock that had that kind of weighting in the Pershing Square portfolio, of course, was Valeant (VRX)… which has severely tarnished Bill Ackman’s reputation over the past year or two. That doesn’t mean Ackman is suddenly a dummy, everyone makes mistakes, but it means I don’t trust his hyper-concentrated management anymore because of the many red flags that he overlooked in rapidly ramping up Pershing’s Valeant investment.
QSR is, of course, dramatically less risky than Valeant ever was — even if Valeant hadn’t had its business model blow up, it was clearly a risky and highly leveraged stock with complicated financials before Bill Ackman ever owned a share. With Burger King and Tim Horton’s (and now Popeye’s), and with cost-cutting management by 3G (the Brazilian investment group that Buffett has also partnered with on Kraft/Heinz), you pretty much know what you’re getting.
If you’re into QSR, though, and particularly if you also happen to like Chipotle (which is now almost 20% of Pershing’s portfolio) and Mondelez (17%), you could always effectively buy it at about a 15% discount and get exposure to whatever other ideas Bill Ackman might have in the future by buying Pershing Square Holdings (PSH in Amsterdam, PSHZF in the US). There are some tax implications, since it’s a passive foreign investment vehicle, so do be careful if you hold it in a taxable account, and there are hedge fund fees, though lower than such fees used to be.
Pershing Square Holdings has continued to disappoint over the past year, having not yet recovered from that mid-2015 collapse (the Valeant kerfuffle, which is what caused me to sell my holdings in the fund), but I might look at it more favorably today if I didn’t have that history with Ackman losing my money on Valeant — it’s hard to get past that kind of thing, even if you know he’s otherwise been a phenomenal (if volatile) investor for close to 20 years and may perhaps be chastened or more careful after that experience… but if it weren’t for that complete misjudgment on Valeant and the blowup that ensued, the idea of getting access to Bill Ackman as a money manager at a reduced fee (PSH pays lower hedge fund fees than Pershing’s other hedge fund investors do) and at a 15% discount to NAV would sound pretty exciting. Maybe you can get past Valeant, particularly if none of your money was at stake — I’m not there yet.
And, for what it’s worth, I don’t think Burger King will ever recover to challenge McDonald’s and Wendy’s again. And I think they overpaid for Popeye’s. QSR looks frighteningly expensive for a fast food stock, mostly because analysts are expecting 50% growth in earnings over the next two years and hoping that they can expand more aggressively, including internationally, to really juice growth (partly in partnership with their big franchisor Carroll (TAST), which we wrote about for a Stansberry teaser pitch last month) — maybe they can, but Burger King and Tim Horton’s didn’t show much excitement last year in terms of same-store-sales, so I think they’ve got their work cut out for them… and overpaying for a fried chicken chain, even if I do love an occasional Popeye’s chicken artery plug, seems like a risky and perhaps desperate move to grow through acquisition.
But, of course, I could be wrong — and maybe I’m just still mad at Bill Ackman.
Have any thoughts on any of those stocks, or the gurus who love them, or about other folks you’d like to follow in their 13Fs? Think there are any whales worth chasing out there? Let us know with a comment below.
Disclosure: Berkshire Hathaway, mentioned above, is my largest individual stock position. I do not own any of the other investments covered in this article, and will not trade in any covered stock for at least three days per Stock Gumshoe’s trading rules.