David Rubenstein

 I am currently reading The American Story by Rubenstein and have his other book on hold. I also love listening to his interviews with "leaders" on The David Rubenstein show. I think he is hilarious and hope his books and show provide a medium of knowledge. His guests vary from policy makers to CEOs and I am often left wondering do all these elites seek to deliver a message to the public through his show. I am not convinced that private equity is the "highest calling of mankind," or the benevolence of his guests, but I am grateful for the opportunity to reflect through their experiences.

LSXMK

 The spread of 8.4 shares of SIRI to one share of various Liberty Sirius trackers has narrowed to 5%. When I buy, I am not buying for the arbitrage opportunity that is suppose to collapse the spread come the end of 3q this year. I am buying because I think the Sirius radio has a decent prospect going forward. Yes, this started off as a thesis of most likely Ted Weschler who I look up to as an investing model, but I have grown comfortable as its valuation has continued to drop from arbitrage to undervalued thesis. I have think the fcf and unit economics of the business model weighed against the negatives of terminal value and increased competition favor the former.

SiriusXM had $1.2 billion of FCF of which they returned half ($650 million) through dividend/buybacks to shareholders last year. In the current year, costs are suppose to be cut by another $300 million. This leads to $1.5 billion in fcf on a market cap of 12.5 billion of market cap and 21.5 billion in enterprise value. The FCF yields are 12% and 7%. They will have a cycle of capex coming up with the launching of satellites, but this might be a scaled business that will cash in on the high fixed cost. The $9.5 billion of debt they have is manageable and at a 5% rate that will stagger in maturity dates vs. a lump sum soon.

The 34 million subscriptions with minimal churn is attractive as long as the churn does indeed remain minimal. Spotify and Apple is scary, but there does seem to be a differentiator when they are installed in so many new vehicles as a base and the conversions of 40% of trials seems to suppor that. The US will sell around 15 million new vehicles a year.

I have grown comfortable with the thesis although I am not sure what Ted still sees. I see the fcf and the unit economics and think it's worth a roll of the dice with the bonus of Ted being in too. 

Biotech Buyouts

JNJ buys Ambryx for $2b

BSX buys Axionic for $3.7b

Merck buys Harpoon Therapeutics for 680mm

AbbVie buys Cereval, a neurology and psychiatry company for 8.7b. It has a drug in development for Schizophrenia. Immunogen for $10 billion

PFE buys 43 billion for Seagen

BMS buys Karuna Therapeutics for $14 billion for its neuropsychiatry pipeline.

It is so seductive to think I can find one that will be taken out for many multiples. The advances in health science makes it even more exciting. Simply does not work to buy in hopes of a buyout. Maybe the list is a form of survivorship bias with cherrypicking the ones that do get picked out. I like looking at biotechs because I have become somewhat of a healthnut as I have gotten older; however, I do not get how to price life itself. Pricing anything is difficult.

Housing

All investing is based upon suriving and the cash flow generated. It seems that the Holy Grail is uncorrelated returns that outpace risk taken. In order to do that, you have to bet big when the few good opportunity arises and cap your downside. Real estate can be concentrated and the tangible quality has people at least thinking of the downside. 

Some people are obsessed with real estate which certainly has its charms with the tax code and leverage, but the latter cuts both ways. Maybe one day I get an opportunity to invest in real estate, but the best I can think of now to get exposure to that market that makes sense would be homebuilders. REITs don't appeal to me and the cap rates everywhere seems to be bloated; especially if rates stay high to combat inflation. With a homebuilder business, the constraint of inventory on the market due to some homeowners having locked in lower rates a few years ago preventing them from moving, will be a tailwind to provide more supply by building. Below is a list and the NVR reminder that is one of the best investing thesis to have hit imo.

DHI 51b

LEN 43b

NVR 23b Norbert Lou, Punchcard, on June 20, 2001, made a VIC post on it. It was succinct and vcut down to why it would generate value. The stock has 50x in 23 years or 18.5%. Last 5 years it has done 22.5% and in the last 10 years it has compounded at 21.7% for 7x. The thesis was NVR used options to control land and they presold their homes before building. This efficient use of capital helped them develop a moat. This separated it from its competition that would be at the mercy of the cyclical nature of their business.

PHM 22b

TOL 10.7b

KBH 5b

BZH 1b

LGIH 3b

MTH 6b

HOV 924mm

TPH 4b

TMHC 5.6b

Healthcare

Healthcare is fascinating and is a big pie in America's GDP at $4.5 trillion or close to 20%. It was not always this way. In 1960, it was 5%. In 1980, it was 8.9%. In 1990, it was 12.1%. In 2000, it was 13.3%. In 2010, the first year that the ACA was enacted, it was 17.2%. The costs don't seem to be sustainable, but here we are. Since the beginning of 2010, the SPX has returned 12.8% a year assumming all dividends were reinvested. Healthcare in general has outperformed despite the big techs emerging in the 2010s. The breakdown below does not do service to how complicated and complex the industry is as the PBMs are inside UNH, CVS and CI.

Insurance Companies: UNH (up 17x since 2010 at 22.4% a year), CVS, ELV, CI

Hospitals: HCA (9.87x since 2011 at 19.3%)

Drug-Makers: PFE, MRK, AZN, ABBV (15.27x since its spinoff in 2012 14.9%), AMGN (5.2x since 2010 at 12.6%), GILD, BMY, LLY (20.5x since 2010 at 24%), NOVO (17x since 2010 at 22.4%)

Drug Distributors: MCK (7.8x since 2010 at 15.8%), CAH, COR (formerly Amerisource Bergen)

Device Manufacturers/Equipments: SYK (6x since 2010 at 13.7%), BSX, 

Service Providers: ABT, DVA (3.5x since 2010 at 9.4%)

Everyone is getting a cut and the pie that divides is interesting beyond the science of health.

Quick Hits

Risk is permanent loss of capital. Rule #1 and Rule #2. To win, you must first survive. (WEB)

Untapped Pricing Power (WEB)

Royalties with asset-light/low capex businesses. (WEB/CM)

Below Replacement Cost (Sam Zell)

"Listen, business is easy. If you've got a low downside and a big upside, you go do it. If you've got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.”(Sam Zell)

In any deal, locate the weakness in it. The rest don't matter as much. (Jay Pritzker)

Margin of safety. (Seth Klarman)

Free cash flow (John Malone)

Big bubbles get bigger, small bubbles disappear — it’s surface tension, the law of physics; and in business it’s scale economics." (John Malone)

Scaled Economics Shared (Nick Sleep)

Buy what you know (Peter Lynch)

Don't cut your flowers and water your weeds (Peter Lynch)

Turn-arounds seldom turn around (Peter Lynch)

Yield on company and roic. (Joel Greenblatt)

Buy good companies. Buy at low costs. Wait. (Terry Smith)

Three legs are extraordinary business, good management, and great reinvestment opportunities and history. (Chuck Akre)

Heads I win, tails I don't lose much. (Monish Pabrai)

Recurring and predictable revenues. (Bill Ackman)

Three engines of returns: earnings growth, change in P/E, change in shares outstanding. (John Huber)

Buffett's Japan/Apple investment: cheap valuations, rising ROIC, and significant capital allocation policy changes. (John Huber)

Rising ROIC is increasing the capital invested, increasing the productivity, or shrinking the denominator. (John Huber)

If you have won the game, stop playing. (William Bernstein)

Buying What You Know

My college roommate loved NVDA and MSTR. Lets use 2007 as the start point for those two. 17 years.

MNST 2024: 61b $59 2007: 3.1b $3 CAGR 19.2% for 19.67x In 2009, it had 133mm in FCF that has grown to a billion a year in 2020s.

NVDA 2024: 1.34t $543 2007: 13.7b $5.61 CAGR: 30.9% for 96x In 2010, it had 408mm in FCF that has grown to 8b in 2022 and 3.8b in 2023.

Hard to beat. I am the idiot who at the time said they barely make money and skyhigh PE. Value is Probability multiplied by Payout. Business is making money and growing the empire. MNST and NVDA did both of those things and the making the money as simplified by the PE lags.