Skip to content
Tags

,

Why would you buy that (GME)? and other updates (GLIBA)

June 12, 2019

Last year around this time I made a couple of interesting purchases; I bought shares of GCI Liberty (GLIBA) and Charter Communications (CHTR) on the same day. It was the day after Charter announced that it had lost video subscribers in the 1st quarter and, in consequence, the shares plunged to around the $250 level. I had also previously purchased shares in LVNTA prior to the spinoff from Liberty in March of 2018, but I want to focus on the GLIBA shares and CHTR shares purchased on the same day, April 27th. Since then, the Charter shares have risen in price by more than 50% while the GLIBA shares have risen only 35%. These results serve to remind me that certain investing strategies, even with the most logical of analyses, can go awry. I purchased GLIBA shares as a surrogate for CHTR shares because from my analysis they were trading at significant discount to their sum-of-the-parts value, with the overwhelming majority of that value coming from ownership of CHTR shares (say around 70%). In theory (my theory at least) GLIBA shares should have increased in value at least as much as the CHTR shares and perhaps more, if I was lucky, if the sum-of-the-parts discount narrowed. But exactly the opposite happened. The leverage I had hoped for worked in reverse. The General Communications part (Alaska telecom) of the business ran into a rough period and was clearly de-valued by the market which partially offset the increase in value of GLIBA’s Charter holdings. The lesson to remember for me is that sum-of-the-parts discounts can widen as well as narrow. Will the discount eventually be closed on GCI’s Charter holdings? Most probably; Charter may well gobble up GCI Liberty if it generates a lot of excess cash, especially if the GLIBA discount widens, but it’s unlikely, given that they are both Malone related entities, that Charter will pay a premium for the GLIBA’s Charter shares. And who knows when that might happen?

With Charter shares up so much this year I decided to rebalance my portfolio somewhat. So instead of trimming Charter shares I trimmed the less well performing GLIBA shares.

OK, of all stocks to buy for a value investor type of guy why would I buy GameStop (GME)? Look at the charts, the stock has been in freefall for 6 years. Revenues and profits have been in constant decline and management hasn’t been able to make any headway in turning around the business for all those years. Management even failed in their attempt to find a buyer who would pay a decent price for a runoff business. There were simply no takers, even in our current low low interest rate environment. Shouldn’t that mean the business, and thus the stock, is really dead? Nobody needs a physical store to sell hardware and software gaming stuff anymore. Gamers just buy whatever they want on-line! Got a computer, download the game you want, maybe even preview it on-line before downloading it!

So you might think it would be time to just close up shop and liquidate the business, or sell off any pieces (the collectibles business, for instance) that might have some value to another retailer. Nope, the board has decided to stick it out and has brought in a new CEO from the Retail sector. The business (and stock) looks like dead meat.

But me, I’m a sucker. I like to take the part of the underdog, the David rather than the Goliath. Ok, so I realize a number of times I have been wrong (viz. Rite Aid, Glassbridge Enterprises, et al.) with this strategy, more time wrong that right recently. But I just can’t help myself. This time my position is small, really, very small. I want to see if the new CEO can do anything, come up with a strategy that can eek some value (for shareholders!) out of a company that will most likely still earn a chunk of change this year, and maybe even next. Furthermore, if the CEO is in any way street wise he has “kitchen-sinked” the first quarter and so we should see some improvements in the near future quarters. I like to buy on bad news, and, boy, could there be any more bad news for investors than last quarter’s results? (that was rhetorical! of course there could, be worse news, are you fooling yourself? the business could declare chapter 11, and may well!) Revenues were down again last quarter and the dividend was cut. Yup, the only thing that was keeping the stock price afloat was the dividend, and they eliminated it. The stock dropped close to 40% the day after the announcement….

update…

as I was writing this, GME announced that it would roll out a modified dutch tender auction for 12 million shares at a price not less than $5.10 and not greater than $6.00. That would represent just under 12% of the outstanding 102 million shares and if the maximum number of shares are tendered would cost the company at most $72 million. The share tender, of course, doesn’t address the company’s strategic problems, but from an investor’s point of view gives the share price a floor and a ceiling for the next month (until the tender offer ends). As my current position is too small to impact my portfolio returns meaningfully and I most likely won’t be able to pick up more shares in the next month for under $5.00, I will be tendering my shares at the maximum of the range, if not selling previously; a 20% gain in a week is an acceptable return, and 25% in a month OK too. Perhaps there will be a chance to pick up shares under $5 again once the tender is complete.

 

 

Advertisements
2 Comments
  1. joelhornstein permalink

    Andrew, great read as always. And definitely true that ” sum-of-the-parts discounts can widen as well as narrow.”. But is that what happened with GLIBA? Alternative read is that the market revalued one of GLIBA’s parts. Separately, why sell GLIBA rather than Charter? Appreciate the logic of sticking with the winner in other contexts (e.g., rivals in a winner take all space). But not in a SOTP trade.

  2. joelhornstein permalink

    Oops – just realized I addressed this to “Andrew”. Can’t keep track: Long Term Value Blog, Yet Another Value Blog…. they all blend together! Sorry Jay!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: