If you could turn the clock back to 2014 and had a room full of 100 avid oil market followers how many do you think would have been calling for an oil collapse?
I’d bet that it would be maybe a couple.
Of those couple of people in that room who were correctly calling for an oil collapse how many of them do you suppose would have expected oil to still be at $45 two years later?
I think you would have been hard pressed to find any.
That is because it wouldn’t have made sense. At that time there were a scant few drilling opportunities anywhere that could be developed profitably at current oil prices. Even if oil did collapse it was sensible to believe that the supply response would be swift.
So what happened?
Saudi Arabia, Iraq and Iran. That is what happened.
Since the middle of 2014 OPEC has increased production by close to two million barrels per day. That was more than enough to overwhelm the supply and demand response elsewhere.
OPEC keeping production flat into a declining oil price surprised most of us. These were the guys who were supposed to support the oil price. Not only did they not cut production to support it, they increased production to drive the price of oil down further and keep it there longer.
Here’s Why Oil Has to Go Higher … Eventually
I still think that oil prices have to go higher and I think it when it happens it could be significantly so. As to when it happens I have no clue. Here are the five main reasons why I see that price rise eventually happening.
1) Oil demand continues to grow at a very healthy pace. If a person could have gone long oil demand fifty years ago they would have made a very sensible investment. Nothing about that has changed in the last five years.
Despite all of the publicity that Tesla’s electric cars receives oil demand continues to march higher by more than a million barrels per day every year.
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Lee Enterprises has a stock price that suggests that the company’s long-term survival is in doubt. A deeper look at what the company is actually doing suggests (in our opinion) that is not the case.
While not a low debt, low risk company like we prefer, we think the upside opportunity offered by Lee Enterprises at the current share price is compelling for an investor willing to take on a little more risk.
This is a newspaper company, obviously not a growth industry. However, the company generates a very steady amount of cash flow and is reducing debt at a very fast pace.
As the debt continues to come down, the market’s assignment of value to the company’s equity should increase significantly.
While not a low risk opportunity to be sure, we are pretty excited to present Lee Enterprises for your consideration.
QUICK FACTS (from August 2016) – LEE ENTERPRISES (NYSE:LEE)
Trading Symbols: NYSE:LEE
Share Price: $2.63 (NYSE)
Basic Shares Outstanding: 55.7 million
Market Cap: $146 million
Net Debt: $625 million
Enterprise Value: $771 million
2015 EBITDA: $163 million
Ent Value to EBITDA: 4.7 times
– Multi-bagger upside potential
– Disciplined debt reduction plan which is a clear catalyst for equity value
– Dominant positions in their mid-sized markets
– Stable EBITDA underpins debt reduction plan
– The best days of the newspaper industry are behind it
– The company needs to bring down its debt level
– With heavily indebted companies the worst-case scenario is much more unpleasant
– It may be tough to bring cash costs down much further after several years of aggressive reductions
The Superinvestor We Are Following On Lee Enterprises – Warren Buffett
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We previously presented the first part with Ryan Morris of Meson Capital. In this article we will share the second series of our Q&A with this thoughtful investor who is more than willing to get his hands dirty to generate returns for his investors.
If there are other managers who would like to take part in our interview series, please drop us a note through Seeking Alpha.
As for today we hope you enjoy this interview with young Mr. Morris.
Superinvestor Bulletin – How important is insider buying and insider ownership to you?
Ryan Morris Meson Capital – It’s a component for sure, I want to see that people are well aligned, but past track record and the overall incentive structure of management is more important.
Having the net worth to buy a large amount of stock is nice to see, but maybe the CEO who is younger and hungry and can’t afford to buy much stock but has a heavily incentive driven compensation scheme is a better set up.
Superinvestor Bulletin – How much thought do you give to macro level issues?
Ryan Morris Meson Capital – Quite a bit actually but not the typical variables referred to as macro. I spend no time on trying to forecast interest rates, GDP, currency, or equity risk premium type variables. I do spend a lot of time trying to understand macro trends in business especially around supply/demand dynamics and the cost of key inputs, especially technology.
One of my heroes since I was a kid has been Ray Kurzweil, who has articulated brilliantly the concept of Moore’s Law translating into a much broader array of information technologies.
In general people are not wired to intuit exponential functions as nothing in our evolution would have appeared this way, our day to day lives are basically linear. If you have a cost of a certain technology declining at an exponential rate, such as digital sensors or solar panels or batteries, then the impact on the current state of the market will be invisible at first but then appear abrupt once you hit the ‘knee in the curve’. Kodak is a good example how an apparently small threat from digital cameras ended up eating the company – it had a low P/E and looked cheap all the way to zero.
I want to make sure that these exponential macro trends are tailwinds for me rather than headwinds.
For example – coal may look cheap, but it is never coming back. Natural gas was the body blow and solar will be the knockout punch. The cost of solar power will be lower than coal relatively soon and you would be betting against about a million self-reinforcing processes around the world to bet otherwise.
Superinvestor Bulletin – If you could only pick one investment to put 100% of your net worth into what would it be and why?
I have never owned stock in Amazon because of the valuation but it is hard for me to imaging them not being the largest company in the world in very short order. They were first to scale in two gigantic markets and are 10X larger than their nearest competitor in both online retail and cloud hosting. It’s hard to imagine anyone putting a serious dent in them at this point and the technological tailwinds are very strongly in their favor.
Superinvestor Bulletin – What do you think will be the best sector to invest in for the next 25 years? Why?
Ryan Morris Meson Capital – I really think about things as more individual companies not sectors, so this is a tough thing to answer.
Software and internet will continue to become a larger part of the world but that is also priced in. Biotech will revolutionize the human race over the next 25 years but then will be obsolete shortly thereafter so it’s sort of threading a needle on that timescale. I honestly can’t answer this very well.
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Our approach at the Superinvestor Bulletin is to scour the portfolios of the best investors in the world looking for great investment ideas.
With that in mind, we are embarking on an interview series with the next generation of investors. We are looking to find the Superinvestors of tomorrow.
We would like to present the first part of our lengthy Q&A with Meson Capital’s Ryan Morris.
Superinvestor Bulletin – How did you get started in the business?
Ryan Morris Meson Capital – I founded Meson Capital in February 2009 after receiving my Master’s degree in Engineering from Cornell. I had previously successfully co-founded and run a software company called VideoNote.
I half-joke that nobody would hire me after graduating because I am Canadian and the work visa burden that I carry makes it very easy to move onto the next candidate. So I’ve always needed to be an entrepreneur. By combining some business success with a frugal lifestyle, I have been able to avoid getting a real W-2 job since college.
The backstory of how I got into investing as a passion goes back to when I was 11 years old and learned about nuclear fusion and its ability to solve the world’s energy problems. Trying to learn how to finance such a grand project led me to stumble across Warren Buffett’s shareholder letters and I became “inoculated” as they say in value investing.
Superinvestor Bulletin – Have you tried to emulate the style/method of any particular successful investor?
Ryan Morris Meson Capital – Warren Buffett was the original spark and his principles still hold true although the world of investing has changed dramatically during the 60+ years he has invested.
Most people don’t realize he actually made much of his money in the early partnership days as an activist going after small overcapitalized companies. Small investors who try to invest in similar stocks to Buffett today have a huge competitive disadvantage as they lack low cost insurance leverage that he has.
I am a student of many successful investors with different styles from venture capitalists to quants. I am not trying to emulate anyone per se, as I believe I have a fairly unique background and perspective to bring to investing as someone who is simultaneously an activist investor and a computer programmer.
Some of the investors that I have learned a great deal about investing from have been Richard Fullerton, Mario Gabelli, Marc Andreessen, and Joel Greenblatt. I would say to give context to everything I say in this interview – I think of “investing” as necessarily having a 3+ year horizon, everything else is trading… which is not a game I really have an interest in.
Superinvestor Bulletin – How would you describe your investing approach?
Ryan Morris Meson Capital – Deriving from first principles.
The summary is I am a focused business-building activist investor for my longs and then hedge market risk and generate returns by shorting a larger number of lower quality companies. I rarely take any position unless I would be okay with the stock market closing down for 3 years.
The number one question I ask in any decision I make is “What is my competitive edge in this investment?” First principles mean that you build up from the most fundamental truths you can rather than reasoning by analogy or copying another investor’s style because it worked for them. Supply and demand are the most fundamental truths for economics.
For instance – why be an activist? It is very labor intensive to serve on boards and hire people and sometimes have to do proxy fights but it is easy to articulate the competitive advantage. Nobody else is willing to do the work.
Why be a business-building activist vs. what most do and push for buybacks/sales/spin-offs or other de-capitalizing moves? Well those are easy to push for, to actually invest in R&D and build a company is harder, and in the environment today, it can be financed cheaply. Unlike venture capital, by starting with a foundation of a company that has been around for decades, you eliminate much of the existential risk and have much more data to base decisions on.
Why short? Even though the index rises over time, most companies actually go down, the winners like Amazon (NASDAQ:AMZN) drive 10 others out of business over time (or maybe 500 in Amazon’s case!). So shorting is actually easier than people realize if you do it thoughtfully. The trouble is that portfolio management is much harder and you need to be more diversified so you can tolerate squeezes – that’s where good systems are important.
To put a point on it: I invest in stocks with a lot of raw business material (i.e. cheap valuation vs. revenues or assets) and good management (that may be put in place by us) and short companies with little competitive edge and weak, unadaptable management.
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