Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion...
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Transcript of Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion...
![Page 1: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/1.jpg)
Long or Short? Think Qualitatively
Danny Hassan
Managing Partner
Boulder Capital, LLCFor Discussion Purposes Only NOT Investment Advice
![Page 2: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/2.jpg)
About Me
• Managing Partner of Boulder Capital, LLC since 1/1/09.
• Long/Short equity with a US/Europe focus on the financial space
• 10 years in the business
• Strong focus on fundamental research
• Strong focus on meeting management teams
For Discussion Purposes Only NOT Investment Advice
![Page 3: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/3.jpg)
Common Hedge Fund-isms
• “Look how cheap/expensive it is! This valuation is unsustainable”
• “stock has had a great run and is due for a break”
• “It’s trading below book! Below tangible book!”• “they’re buying back stock”• “The CEO just sold shares”• “They have tough/easy comps in the 2nd half of
the year”
For Discussion Purposes Only NOT Investment Advice
![Page 4: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/4.jpg)
What Makes A Great Long/Short?
Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1980
Government Intervention is a 6th Force
For Discussion Purposes Only NOT Investment Advice
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Power of Suppliers
• How much pressure can suppliers put on the business?– Highly concentrated suppliers?– No substitutes?– Can’t do without the input
• Examples– Gas stations, Starbucks, Microsoft, Tiffany’s
For Discussion Purposes Only NOT Investment Advice
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Power of Buyers
• How much pressure can customers put on the business?– Small number of buyers– Purchases of large volumes– Switching is easy– Very price sensitive customers
• Examples– Defense Department, Auto Manufacturers v
Tire Manufacturers, Wall Street Traders
For Discussion Purposes Only NOT Investment Advice
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Availability of Substitutes
• Can someone easily switch to a competitive product or service?– How similar are substitutes? Coffee versus
tea?
• Examples– Drinking containers, TV transmission (sat,
coax, etc), Internet transmission (DSL, cable, etc), building a deck (wood, concrete, etc), Laptops/iPad
For Discussion Purposes Only NOT Investment Advice
![Page 8: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/8.jpg)
Competitive Rivalry
• How intense is the industry competition?– Many players of similar size– Little differentiation between the products and
services– Mature industry with low growth. Growth
achieved by stealing
• Examples– Banks, insurance, computer production
For Discussion Purposes Only NOT Investment Advice
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Threat of New Entrants
• How high are the barriers to entry?- Existing loyalty to major brands- High fixed costs- Buying incentives- High switching costs
• Examples– McDonald’s, GE, Colorado Ski Pass,
Facebook?, Apple?
For Discussion Purposes Only NOT Investment Advice
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Government Intervention
• How susceptible is the company to government regulation/intervention?– Industries with too much market power– Industries that have caused systemic pain
• Examples– AT&T, Microsoft in Europe, Mortgage
business, Banking
For Discussion Purposes Only NOT Investment Advice
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Long Example: Stock ABC
• ABC is a global credit card network• Threat of new entrants? Rating = 8
- Some threat of a bank entering or a new form of payment emerging• Bargaining power of suppliers? Rating = 8
- Merchants and merchant acquirers have very little power currently• Bargaining power of customers? Rating = 6
- Customers have some power. Banks are concentrated. However, largest profits come from smallest players.
• Substitutes? Rating = 8- MA, V, AXP, DFS, PayPal, etc. Worldwide it’s V and China UnionPay
• Competitive Rivalry? Rating = 8- Oligopoly
• Regulatory? Rating = 2- Very pronounced, though waning a bit. Business is “too good”?
Ratings are my opinion with 10 being best For Discussion Purposes Only NOT Investment Advice
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Who follows this nonsense?!
For Discussion Purposes Only NOT Investment Advice
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The Envelope Please?
For Discussion Purposes Only NOT Investment Advice
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Short Example: BAM! Entertainment (NASDAQ: BFUN)
• Threat of New Entrants? Rating = 3- Fixed costs are high: talent, machines, manufacturing. However, if you have a pile
of cash you can enter. BAM entered in October 2009 and conducted a well-received IPO just 2 years later.
• Bargaining power of suppliers? Rating = 2- Suppliers are their employees or developers. Talent extremely tough to find and on
average costs ~$95k per direct employee. A franchise game can cost $50m to $100m to develop and take years (WoW cost ~$100m for example)
• Bargaining power of customers? Rating = 3- You need a “franchise” game in order to command market power.
Sellers/Distrubution is highly concentrated• Substitutes? Rating = 2
- Over a $12B industry in 2001 (according do BAM’s own filings). Once you have a franchise game, life becomes a bit easier
• Competitive Rivalry? Rating = 2- As of this week, Amazon.com lists 2,142 different video game titles on the PS3
• Regulatory? Rating = 10- No one in government cares about video games
Ratings are my opinion with 10 being best For Discussion Purposes Only NOT Investment Advice
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Tough Industry. Are We Missing Something? Nope.
• “The bulk of Bam's sales last year, 66 percent, came from its three "Powerpuff Girls" titles, which are aimed at 10-year-old and younger girls.” Oops
• “Bam! Entertainment makes games such as "Hot Potato" and "Fire Pro Wrestling" for Sony Playstation and Nintendo customers.” Hot!
• Shares priced at $8 in late 2001. FY2001 revenues were $17m and net income was $-500k.
• But! But! But! “While Bam has been losing money, the losses "are not as bad as others might think," Menlow said. "There is a very strong revenue curve for a company that has not been around all that long."
• This was a ~$100m market cap company throwing a Hail Mary pass.
For Discussion Purposes Only NOT Investment Advice
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The Envelope Please?
For Discussion Purposes Only NOT Investment Advice
![Page 17: Long or Short? Think Qualitatively Danny Hassan Managing Partner Boulder Capital, LLC For Discussion Purposes Only NOT Investment Advice.](https://reader035.fdocuments.us/reader035/viewer/2022072006/56649d155503460f949e9f2e/html5/thumbnails/17.jpg)
Conclusions
• Qualitative skills > Quantitative?
• Don’t always trust valuation
• Don’t buy what other analysts are selling. Especially if they’re on the cover
• Be highly skeptical of “flavor of the month” themes
• Read, Read, Read. I found BAM on C14 of the WSJ
For Discussion Purposes Only NOT Investment Advice