Sahm Adrangi's Presentation on Ad Fraud & Short QuinStreet: Kase Learning Short Selling Conference

We're posting up a series of presentations from the recent Kase Learning Short Selling Conference.  Next up is Sahm Adrangi of Kerrisdale Capital who presented about ad fraud and talked about Quinstreet (QNST) which he published a short report on last month.


Sahm Adrangi's Presentation on Ad Fraud & Short QuinStreet (QNST)

- Recently gave a presentation on being short St. Joe (JOE) and short QuinStreet (presentation here), the latter of which plays into the theme of ad fraud

- Ad fraud is basically when online ad impressions or clicks are artificially higher due to bots, not actual users viewing the material.  Pay-per-click ads see 'fake' clicks and then there's sites with tons of fake traffic that are just full of ads to inflate the numbers.  Ad stuffing is when a video has other videos behind the main video someone is watching, giving impressions to something that's not actually being viewed

- Ad fraud is so prevalent and the intermediaries are beneficiaries of it (ad agencies etc), making them slow to adopt preventive measures.  The ultimate loser is the buyer of the ad but it's difficult to detect who is viewing your ad (human vs bot)

-  Technology is rapidly evolving and the bad actors are using more sophisticated measures to generate more fraud

- QuinStreet: if you look at investor presentations or management comments, it's hard to discern where exactly the revenue is coming from (lead generation, or ad-matching placements, etc).   Another report by a separate firm attacked Criteo late last year for suspect traffic as well.

- Walked through examples where some of Quinstreet's sites were receiving traffic from other sites that isn't what it seems: a car insurance site was receiving a lot of traffic, but not from people looking for quotes on car insurance, but rather people earning 'swag bucks' for filling out online surveys and things like that.  Thus car insurers buying ads / paying for leads, weren't really getting what they thought they were (the video below walks through the whole scenario as it's too long to type out)

- Thinks the opacity in the online ad space and lack of disclosures is a good place for short activists to hunt

Embedded below is the video of Sahm Adrangi's presentation:



mbedded below is the slideshow pdf of Sahm Adrangi & Kerrisale Capital's presentation on short QuinStreet (QNST):



Be sure to check out the rest of the presentations from the Kase Learning Short Selling Conference.

Kerrisdale Capital's Short Thesis on Dish Network: Calling Charlie's Bluff

Sahm Adrangi's hedge fund Kerrisdale Capital recently raised $100 million to short 1 stock.  That stock has been revealed as Dish Network (DISH).  They outlined their thesis in a presentation called "Calling Charlie's Bluff."

The title refers to DISH CEO Charlie Ergen, a noted poker player.  While most would think of Dish Network as simply that, a satellite television provider, Ergen has essentially bet the company on wireless spectrum by acquiring a ton of it with the view that there are multiple options to monetizing it.

Kerrisdale's argument is that the most likely buyers/partners for that spectrum (the major wireless carriers) don't really need as much of it these days and as such its value has decreased.  Combine this with DISH's core TV product that is in decline, and Kerrisdale thinks that DISH shares can trade between 58-80% lower.

Embedded below is Kerrisdale Capital's 31-page thesis on their short of Dish Network:



You can download a .pdf copy here.

InvestPitch 2014: Summary of Stock Picks From Emerging Hedge Fund Managers

While most investment conferences feature big names that manage large sums of money, the recent InvestPitch competition put on by Institutional Investor and SumZero highlighted up and coming smaller hedge fund managers.  Videos of the pitches will be available at II in a few weeks, but in the mean time here's a quick summary:


Summary of InvestPitch 2014 Stock Picks

Sahm Adrangi (Kerrisdale Capital): long Savills (LSE:SVS)

Kyle Mowery (GrizzlyRock Capital): long Leucadia National (LUK)

Daniel Lawrence (Elmrox Investment Group): long Realogy (RLGY)

Spencer Grimes (Twinleaf Management): long E.W. Scripps (SSP)

Travis Cocke (Voss Capital): Short GW Pharmaceuticals (GWPH)

Ian Clark (Dichotomy Capital): Short Transocean (RIG)

Michael Zapata (Sententia Capital): Long Aaron's (AAN)

Keith Rosenbloom (Cruiser Caiptal): long Ferro (FOE)

Brian Pitkin (URI Capital): long JPMorgan Chase TARP Warrants (JPM/WS)

Sam Hendel (Levin Capital): long Newcastle Investment (NCT)

Nicholas Snyder (Snyder Brown Capital): long Sears Holdings (SHLD)

David Hanson (Hanson Wells Partners): long Alleghany (Y)

Josh Young (Young Capital): long Stone Energy (SGY)

Donald Marchiony (Westpark Capital): long Tower Semi (TSEM)

Vad Yazvinski (Jordan Capital): long American Capital (ACAS)

(ValueTree Investments): long Kohl's (KSS)

Terry Lally (Spotlight Funds): long Staples (SPLS)

Mike Winston (Sutton View Capital): long Starz (STRZA)

Charles Goldblum (Hurley Capital): long Lifepoint Hospitals (LPNT)


There have been a ton of investment conferences lately and if you missed any of them, we've got you covered with notes below:

- Notes from Sohn San Francisco (Ubben, McGuire, Billick etc)

- Notes from Capitalize for Kids Sohn Canada (Ainslie, Dinan, Robbins)

- Robin Hood Investors' Conference: Summary of stock picks (Tepper, Loeb, Einhorn, etc)

- Great Investors' Best Ideas Dallas (Ackman, Einhorn, Perry & more)

-  Check back for Invest For Kids Chicago notes later this week as well

Sahm Adrangi's 2 Long Ideas at Capitalize For Kids Sohn Canada Conference

We're posting up notes from the Capitalize For Kids Sohn Canada conference that just took place.  Next up is Sahm Adrangi of Kerrisdale Capital who pitched two long ideas.


Sahm Adrangi's Sohn Canada Presentation

Address the crowd regarding his recent GSAT short. Mentioned holding your own conference/presentation is a good way to articulate your point.

Pitched LONG SS&C Technologies Holdings (SSNC). It’s a hedge fund administrator company, considered one of the top 5 companies. Very sticky customer base – similar to the way firms don’t change accountants, funds also avoid changing fund administrators, enormous hassle and data/history is often hard to transfer from one to another. Believes the company should trade at 20x FCF and has grown over 20% Revenue CAGR last 10 year (from organic growth). Posted any average retention rate of 90%, again, highlighting the stickiness of the business.

Next, pitched LONG Cognizant Technology Solutions (CTSH). This is a high performing IT service business which has recently experienced a weak quarter. Operations in India, causing a low cost provide advantage. Enjoys multi-year contracts to ensure a steady revenue stream and has a $3.5B contract over 7 years (health net). Price target of $70 using DCF valuation.

Be sure to check out the rest of the presentations from Capitalize For Kids Sohn Canada here.

Sahm Adrangi's Value Investing Congress Presentation on Via Varejo

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Sahm Adrangi of Kerrisdale Capital who presented the long case for Via Varejo (VVAR11).


Sahm Adrangi's Value Investing Congress Presentation

• Theme: looking abroad. US up 41% since Jan 1, 2013. Trailing P/E expanded from 15x to 19x.  Meanwhile int'l markets stalled and valuations are depressed 
• Likes Russia especially. Up +6% in same period and trades at 7x P/E. Also BOVESPA (+6%, and 10x P/  E) and Hang Seng (+12%, 9.5x P/E) 
• Side idea: Sberbank. 5.4x P/E, 0.9x TBV. Weathered the Russian Ruble crisis of ‘87, oil crash of ‘09,  and 2014 sanctions today. During period of extreme distress, Russians tend to revert their deposits  back to their most venerable banking institution. Investors are focused on NIM growth, but the edge is in future fee income


Long: Via Varejo (VVAR11)  

• Brazil’s largest electronics retailer and leader in home furnishing and household durables. Kerrisdale   thinks Brazil's emergent middle class positions Via Varejo for multi-year growth 
• Opportunity exists due to broken IPO (R$23.00 IPO price vs. initial range of R$25.60 – R$33.60) and   due to capital pressures at the government level 
• Hidden value: Via Varejo owns 23% stake in CNova, a rapidly growing ecommerce retail platform   with €2.9bn revenue in 2013

Via Varejo: 

• Leading brands include Casas Bahia (611 stores) Ponto Frio (361 stores) and CNova (ecommerce) 
• Casas Bahia is Brazil’s most valuable retail brand name. Management plans to expand footprint by   7% per year in 2015 and 2016. Kerrisdale thinks reinvesting capital for these stores presents a high   internal ROE opportunity 
• Advantage comes from scale. Distribution network is 3.5x larger than peers, sells 3x more than next   largest peer and uses distribution centers that allows it to be lowest cost-provider 
• Household durables are under owned by Brazil's emergent and middle class. The average Brazilian   doesn't own a washing machine, computer, flatscreen tv, etc. 
• Due to high import taxes on electronics, English speakers in high income brackets tend to buy high   cost goods abroad. Casas Bahia's target audience of mid to low income groups are less likely to buy   offshore and are therefore more captive
• Important note: Via Varejo supports sales by extending credit to customers and this serves as a  profit center for Via Varejo 
o 15% of sales are financed by their balance sheet 
o Kerrisdale claims Varejo’s credit underwriting is a core competency as they maintain a   decades-old database of repeat customers

CNova: 

• CNova is result of merger between Nova Pontocom (Brazil’s #2 ecommerce company behind B2W)   and CDiscount (France’s #1 ecommerce company) 
• Pending IPO: CNova filed an F-1 registration statement on June 6th 
• Amazon has had trouble expanding in Brazil due to lack of infrastructure. They just stared shipping   goods in Feb’14  
• Kerrisdale cited Brazilian ecommerce retail penetration of 5% vs. 15% in US – odd because the next   presenter cited 6% for US 
• Tiger Global invested $500mm in competitor B2W to restructure balance sheet and fund   infrastructure buildout

Valuation:

• Trades at 13.6x unlevered LTM earnings, 10.5x 2015 P/E including CNova. When you strip out CNova   at 2x revenue, multiple falls to 7x 2015 P/E 
• Price target: R$40 vs. R$25 today


Be sure to check out the rest of the Value Investing Congress presentations here.

Sahm Adrangi Short Bank of Internet Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Sahm Adrangi of Kerrisdale Capital who pitched a short of Bank of Internet (BOFI).


Sahm Adrangi's Value Investing Congress Presentation

• Posting a short – originally long this company. One point the largest stock position. Stock is up 15x since when they originally bought it. 6x P/E less than 1x TBv and no   sell-side coverage when they first bought it. Went from $100MM to 1.2B, 26 PE 4x   TBV. Largest short. Bank of Internet is that short (BOFI).

• Owns a wide variety of internet banks, one branch in San Diego. Offers one of the highest savings rate (not the highest). Sources loans through branded websites and through the wholesale correspondent channel. LTM NI is $47MM versus 1.2B market cap.
• Key part to the thesis – BOFI is over-earning. Why will there be pressure? On the asset side and liability side. Yield on the assets inflated by MBS purchased three to four years ago (bought distress RMBS) – particularly high securities yield. As they roll off NIM declines. Loan book focused on jumbo mortgages – increasing competition. Either yields will decline or adverse credit quality. Loan provisions are thin. Long duration – Deposits will re-price upwards, won’t be able to raise NIM   without taking interest rate and other risks. Increasing competition among online banking as well will hurt NIM.
• (1) BOFI’s asset yields not sustainable - made attractive RMBS investments. Yields have started to decline, believe it will continue to decline. Loan yields and securities are in-line with other banks ex. RMBS purchased in the downturn. Asset yield versus   its peers 4.4% for BOFI versus 2.2% for their peers. 
• (2) Jumbo loans are a material driver for BOFI – competition is increasing. More and more banks are competing – either yields decline or BOFI takes on greater credit risk.
• (3) Another risk – BOFI is/may be taking on longer duration assets. Banks generally have a mismatch, but as interest rates drive up, deposits re-price, but you have to wait for the loan to mature before you can re-deploy capital. Mentioned that BOFI looks like it has made bet on declining interest rates.
• (4) Liability side – Deposits are less sticky – plus BOFI can’t offer the relationship/cross-sell services. Plus, it’s much easier to set up an online bank account versus physical account.
• (5) New Competition is weakening BOFI’s position. Large lenders like GE Cap, Ally Bank, CIT, etc. are going after the online banking space. U.S. regional banks are launching online divisions as well. Believes GE or Ally/other providers will capture new deposits as well. BOFI isn’t in the top 10 for a lot of segments.
• (6) Organic growth has stalled 
• Putting it all together, NIMs will fall.
• Outside of NIM – a quarter of operating income came from mortgage gains on sale. Problem with this, is that mortgage origination has been declining due to Fed tapering and rising rates – will be a headwind.
• May be under-reserving on NPLs. Only 55 bps allowance for loan losses versus gross loans, competitors are higher. 
• Valuation multiples – 4x TBV is higher than even its peers – twice as high. Think there is a lot of retail investors in BOFI and Motley Fool talk.
• NPV of loan book is ~$400MM 
• 7% short interest
• Risk: good management team – thinks 2.5x TBV reasonable valuation. Stock has ran up largely over the past couple months. Think there may be some more short term volatility. Think they can pull levers to grow perhaps, but at 4x TBV – not justified. Further, NIM pressure will probably offset growth. 


Be sure to check out the rest of the Value Investing Congress presentations.

Sahm Adrangi & Kerrisdale Capital's Quarterly Letter

While we typically cover prominent hedge fund managers (like John Paulson) here on Market Folly, we're trying to also focus on some talented up and coming managers to follow over the long haul. We recently covered the latest investor letter from Kevin Byun's Denali Investors and today we're turning to Sahm Adrangi's Kerrisdale Capital.

This is the first time we've covered Kerrisdale and we wanted to post up their first quarter 2010 investor letter. Kerrisdale performs rigorous bottom-up fundamental research on public equities and employs a long/short strategy. They are a value oriented and special situations investment manager. You may have seem some of Adrangi's investment analysis write-ups scattered around the internet as they are some of the most detailed we've seen. We'll also attach his latest thoughts on Intercontinental Exchange (ICE) below.

For the first quarter, Kerrisdale was up 17.8% net of fees and the performance speaks for itself. In their letter, Kerrisdale touches on select investments including Ruth's Hospitality Group (RUTH) and DJSP Enterprises (DJSP) Warrants. Additionally, Adrangi discusses his previous bearish stance on the solar industry and argues that solar PV cell makers were "commodity manufacturers operating in an environment suffering from massive and growing oversupply." Solar shorts were 36% of their short book at the end of March. Kerrisdale's largest solar short positions are in Q-Cells (QCE), First Solar (FSLR) and Suntech Power (STP). This is a rare look into a firm's short side of the portfolio as many often keep these investments guarded close to the vest.

Embedded below is Sahm Adrangi's Kerrisdale Capital's first quarter letter to investors:



You can directly download a .pdf here.


Additionally, if you wanted to get a sense of Kerrisdale's research process, we highly recommend checking out Adrangi's recent write-up on shares of Intercontinental Exchange (ICE). The document is embedded below:



You can also download a .pdf here.

That wraps up our coverage of Sahm Adrangi's Kerrisdale Capital. If you found their ICE write-up insightful, then we'd recommend checking out their blog where they often post up their investment theses. For more investor letters from talented investment managers, we recently covered Kevin Byun's Denali Investors and hedge fund Ellington Management's 2010 equity outlook.