GameStop – Hard Reality Ahead

I’ve been following the retailer GameStop (GME) on and off for a couple years now. It’s trading at $4.80 a share with a market cap of $490m. The stock has been in free fall for a couple years now.  It did stabilize for a bit last year when they were shopping the company around but they ended up not doing anything.


They recently slashed the dividend that had a yield of over 10%. The move will save them $157 million a year. When you see a juicy 10% dividend yield, it usually means that it’s too good to be truth. The large majority of times it means that the company is not healthy and I’m not surprised they cut it. They have a failing business with $468m in debt plus $550m in operating leases.

I’m looking at it for a shorting point of view. Shorting is very risky even though GameStop gives you the vibe that it’s the next Blockbusters. People are playing videogames more than ever. It’s just they are not buying their games at GameStop like they used too.

GME might survive, in a different form. They have a collectible business that is growing but very small. Somebody might take them private. They just announced a Dutch Auction buyback. Maybe its a zero. They have enough cash to pay their bills for a while. They have Net Operating Losses (NOL) which could be attractive to another retailer. Shorting is a hard game to play. Plus betting on a retailer going to zero is not a game I’m comfortable with. That’s why I don’t short.

They operate 5,800 stores in 14 countries. I don’t know what’s going with They bought the company in 2015 for $140m and I know they took some impairment charges on the brand name.

The reality is that the long-term outlook of their core business doesn’t look good. They are in the wrong line of business at the wrong time. Sure the next generation of consoles (PS5 and Xbox) might give them a short-term boost (or hurt them because people are delaying their game purchase), but the hard reality is that all the games are going over the cloud. It’s much more convenient and more profitable. They are cutting out the middle men by going directly to the consumer (digital delivery). This is a pattern we have seen with music, video, and now video games. It’s just taking longer for video games because of the more demanding hardware/software/Internet requirements. We have the technology today. When was the last time you bought a music CD or a DVD? Video games are going the same way.

A hobby retailer that seems to be doing well is Games Workshop (GAW.l), which is the company behind Warhammer. Maybe GameStop with their collectibles and reach can emulate the good side of that business. But it would have to be on a smaller scale on cheap rent real estate. That’s probably not what investor want to hear.

Ironically, GameStop was once a streaming video game innovator. It bought Spawn Labs in 2011 to create a kind of Netflix for video games. But it was too early: The technology wasn’t quite ready, and GameStop shut down Spawn Labs in 2014.

The competing landscape is also changing. Google is getting into gaming with Stadia, a cloud gaming streaming service. Apple is getting in the business too. Nintendo is pushing their games on the mobile. And Sony and Microsoft are working on the next generation of console.

I don’t know what happened in the board room when they were looking to sell the company around. Maybe the offer wasn’t good enough (I bet it looks great in hindsight now). The business of selling new and used console is a dying one. The business would be good in the hands of independent retailer or a private owner that has the patience to work things out.

Inside John Malone’s World

John Malone and Greg Maffei.jpg
Credit: Barron’s. John Malone and Greg Maffei / Illustration by Michael Hoeweler

Barron’s has done a big article on John Malone’s Liberty empire. Barron’s took a deep dive into the world of Liberty and it’s various moving parts. Malone has been one of the greatest capital allocators of our time and investors that has followed him through the years has tremendously benefited.  Malone has been one of the subject in the famous book The Outsiders by William N. Thorndike (must read).

Article: John Malone_s Liberty is a different kind of media empire—and its stocks look attractive – Barron’s

Liberty Media

What’s Wrong, Warren?

Below is Barron’s article published in 1999 on Warren Buffett. The dot-com bubble of the late 90s was a wild time for the stock market. People quit their jobs and became millionaires day-trading tech stocks. Buffett didn’t want anything to do with the high-flying stocks. Chimps were having better returns.

On December 27, 1999, Barron’s published a piece entitled, “What’s Wrong, Warren?” which suggested “Warren Buffett may be losing his magic touch.”

A bullish BRK analyst (Russ) in the article was comparing Yahoo to Berkshire. “Berkshire’s market value is less than Yahoo‘s, yet Berkshire could earn $2 billion after taxes in 2000, while Yahoo will be lucky to make $200 million.” Berkshire now is valued at $83 billion, while Yahoo has a capitalization of $120 billion. Russ believes that Berkshire could double over the next several years.”

In December 1999, Yahoo’s market cap was worth 120 billion and BRK 83 billion. Last year Verizons bought Yahoo for $4.5 billion and Berkshire is now worth over $500 billion.

It was probably not Barron’s shiniest moment.

What’s Wrong, Warren?

Reposted from Barron’s
By Andrew Bary

After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.

Shares in Buffett’s Berkshire Hathawayare set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.

At around $54,000 a share, Berkshire’s Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company’s famed investment portfolio, which includes such stocks as Coca-ColaGilletteand American Express.

But there’s more to Berkshire’s weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.

Continue reading “What’s Wrong, Warren?”

Bruce Flatt of Brookfield on owning the backbone of the global economy

Bruce Flatt of Brookfield on owning the backbone of the global economy

Reposted from The Financial Times
By Peter Smith

It is a windy Tuesday in London and from a Canary Wharf skyscraper, Bruce Flatt, chief executive of Brookfield Asset Management, surveys a corner of his global empire.

Close by is Newfoundland, 62-storeys of homes for rent beside the Thames. In the distance, nestled among City of London towers, is 100 Bishopsgate, a 37-floor office building under construction. To the right, in fashionable Shoreditch, the 50-storey residential Principal Tower is taking shape.

What about the West End, which is studded with cranes? No, nothing there is big enough for Brookfield. “The sites are small and our advantage is scale,” says Mr Flatt.

Toronto-based Brookfield keeps a low profile but its scale is vast. In 20 years under Mr Flatt, it has become one of the largest real estate and infrastructure investors, with a footprint in 35 countries. Continue reading “Bruce Flatt of Brookfield on owning the backbone of the global economy”

Mittleman Brothers, Open Letter to the Board of Directors of Aimia Inc.

Below is a repost of the Mittleman Brothers letter to the BOD of Aimia (AIM). I have some shares of Aimia, better known for their Aeroplan loyalty program, that I bought at a very distress level. I’m a valuation guy and the value the market attributed to Aimia didn’t add up. I’m not saying this is a company that you need to buy and hold forever. It’s also not a company that I’m really fond of. This is a situation where there’s a large disconnect between price and value. That’s it.

Mittleman Brothers, the largest investor in Aimia, has publicly been outspoken on the situation at Aimia. I reposted the following letter because it provided clear detailed valuation of Aimia and it’s different parts. A consortium composed of Air Canada and a couple banks made an offer to buy Aeroplan. The offer is clearly way below the conservative estimated value of Aeroplan and was wisely rejected. This story is not over. Remains to be seen how it plays out. Original link.

NEW YORK, Aug. 6, 2018 /CNW/ —

Board of Directors
Aimia Inc.
525 Avenue Viger West, Suite 1000
Montreal, QC H2Z 0B2

Re: Recent offers for Aeroplan and PLM

Dear Sirs and Madam:

As the Chief Investment Officer for Mittleman Brothers, LLC, which is Aimia Inc.’s largest shareholder with a 17.6% stake, I feel compelled to share my opinion of the offer for Aeroplan announced on July 25th (revised and expired Aug. 2nd), and the offer for PLM announced on July 26th (wisely rejected by you on same day). The views expressed here are mine alone, but I’ve had unsolicited calls from many shareholders since July 25th, with estimated ownership of 20% of Aimia’s stock, who related opinions on these matters that largely concur with my own views.
Continue reading “Mittleman Brothers, Open Letter to the Board of Directors of Aimia Inc.”

Home Capital Group

The Home Capital Group (HCG) story is quite a roller-coaster story. The Berkshire (BRK) Buffett deal raises at least as many questions as it answers. Before I get into this, I want to state that I don’t have a position in HCG. HCG is a subprime lender and I have no interest in that business. I never bought HCG or short it. A lot of the comments surrounding HCG are either by people 1) who are losing a lot of money 2) short-sellers trying to make the stock crash. I don’t have a horse in this race but I’m following the developments.

Let’s back up a little bit. This is from the Ontario Commission (OSC):

  • On July 10, 2015, HCG announced that an ongoing review of its business partners had led it to terminate certain brokers, causing an immediate drop in Originations. The next trading day, HCG’s stock price fell 18.9%, resulting in an approximate $600 million loss in market capitalization and significant investor harm.
  • Prior to this announcement, from February 2015 until July 2015, HCG misled its shareholders as to the immediate and on-going causes of the decline in Originations. Internally, HCG knew it had terminated certain brokers because it had discovered fraud in HCG’s broker channels.
  • …HCG was receiving fraudulent employment income documentation through its broker channels which had not been detected by HCG’s underwriting controls.
  • Specifically, when asked about the decline in Originations for Q1 2015, Soloway attributed the continuing decline in originations to a range of factors including cold weather, macroeconomic conditions and a cautious approach to lending. Given the information known to Soloway, including as contained in the May 4 Memo and the President’s Report, his statements were materially misleading and untrue.

Back in April 2017 HCG was formerly accused of “materially misleading statements” to its shareholders, blaming the decline in its mortgage business to “external vagaries, such as seasonality and competitive markets.” In fact, it was internal fraud that was depleting Home Capital’s bottom line. All these troubles originated in 2014 and early 2015 when the lender’s brokers provided “fraudulent employment income documentation” on some of the home buyers.

The accusations by the OSC led to a crisis of confidence. There are repercussions to what happened. Several news reports have tried to create a U.S.-style sub-prime mortgage crisis by playing up recent problems experienced by HCG. The accusations combined with the media freaking out led to a run on HCG. What’s a bank run? When you deposit money in a bank, the bank loans it out. So it’s not there for you to access. They keep a small portion on reserve that they can give out in case people want to withdraw money, but if there’s ever a situation where a sufficient number of people lose confidence in the bank and try to get their money out at the same time, the money’s not going to be there. You’re going to be screwed. Depositors freaked out and started pulling their money out of HCG. The deposits are HCG’s cheap funding. Now the cheap funding is gone and had to get a $2 billion very expensive emergency loan.

Let’s be clear. From what we know so far, Home Capital has a governance problem, not an accounting one (yet). There are a lot of questions. If HCG’s management is so confident in their $25 book value, why would they sell shares to Buffett for $10? This confirms what everybody is saying about your company: “Your numbers are fake”. Why are they having a hard time selling their loans? Why would they accept such crazy terms on their bailout loan? If the loans are as good as they state they are, why give $2 of collateral for every dollar of loan?

And what about Buffett? His investment in HCG was a blow to short sellers and left people in a bit of a daze. Buffett famously said to sell when others are greedy and to buy when people are fearful. HCG fits the bill. But he also said to do business with people with integrity and high ethical standards. HCG fails that test miserably after its many ethical lapses. The Buffett deal parallels those made with Goldman Sachs and Bank of America in the wake of the financial crisis

Anyone claiming that Berkshire investing in Home Capital somehow discredits short-seller Marc Cohodes fails to see the genius of both investors. Buffett structured a deal where he can’t lose. And it is still possible that HCG is a zero.

I looked at the HCG when it was around $6 in back in April after it crashed. And when I say I looked at it, I didn’t know if I should short it or go long. But I came to my senses. Does anybody have a clear picture of the state of Home Capital’s finances? It’s way too messy and too speculative. Now the stock is trading at $16 but I don’t regret by decision. It’s the process that matters. With HCG trading at $16, it doesn’t confirm anything. I will stay on the side lines. This story is not over.

How Stupid Decisions Are Made and Rubber Ducks


Your assumption that a chunk of your hard earned money that goes to the government is wasted does not go unfunded. For the celebration of the 150th anniversary of Canada, the Ontarian government is spending $120,000 on a giant inflatable rubber ducky. This is one of many cases where you wonder who makes these decisions? How does this happen?  We will never know in this case but having worked for a large organization in the past I have insights on how stupid decisions happen. It’s easy to blame the Premier/leader for such stupid waste but with so many levels of management and bureaucrats, I think good ideas are lost in the process and are affected by the result of group think. Here’s my take on the rubber ducky fiasco.

First, a comity probably set a budget for the festivities. With the help of a HR firm, they hired a bunch of people (like Bill and Randy) with MBAs to come up with ideas how to spend the money. Lacking ideas, Bill and Randy hires an external consulting firm to come up with something exiting. The very expensive per hour +fees consulting firm gladly accepts the task. The consulting firm runs a bunch of focus groups, do some “market research”, and other gimmicks to fill up their pricey report. Bill and Randy then send the report to the comity for approval. The comity, looking for ways to justify is existence, hires another consulting firm to have a 2nd opinion. The consulting firm suggests some changes to justify their fees. The comity submits the amended report to some board to get it approve. The board then sends the report to some regulatory agency with their own army of bureaucrats to make sure that none of the ideas were too over the top because you wouldn’t want a scandal on the 150th anniversary of Canada. This takes a lot of time and the report is sent back requesting some changes. By that time, the original people that were hired, Bill and Randy, got transferred to a different department and were replaced by new hire Linda and Hank (both MBAs). Hank and Linda goes back to the drawing board to come with new refreshing ways to celebrate Canada’s 150th. During the process, Hank is off on paternity leave for a year and Linda is unfortunately on medical leave. Again with the help of an external HR firm, the comity manages to temporarily replace Hank and Linda with Tim and Gus (MBAs) at the last minute. With time running out and knowing that he has no job prospect following this project, Gus decides to smoke weed with his buddy Bobby (Bob) that has a rubber ducky company. Bob makes a joke about a giant rubber ducky and that’s when Gus decides to use it as his idea to celebrate Canada. Gus suggests the giant rubber duck idea to the comity and plugs in his buddy’s rubber ducky company. The board submits the idea for approval to a few agencies like nature, ethics, marketing, First Nation, Second Nation etc… And finally Bob gets the contract because he’s the only one that submitted a bid since nobody else has a giant rubber ducky in their inventory. Gus is then poached by Bob’s rubber ducky company and becomes an official lobbyist. Happy 150th Canada Day!

I think that what happened. I think that’s how a lot of serious decisions are made. I have seen some of the stuff above happened when I worked in the private sector. I don’t mind giant rubber ducks. I just wish it was private money that funds it. Anyway if the rubber ducky ever comes near my home I will bring my daughter to see it so I can tangibly show her why her school is broke.

As for what’s to come next, since the giant rubber ducky has no particular meaning, it could be used for a bunch of other government celebrations. With about 200 countries around the world and a scarcity of giant rubber ducks, this could lead to situations of over bidding which would result into a gold mine for Bob since governments are not in the business of saving money any time soon.

“Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”

Subway’s Soy + Other Stuff Sandwich

Let’s say you are on the road and you need a quick, healthy, fast meal. If you had to choose between A&W, McDonald’s, Wendy’s,  Tim Hortons, and Subway, you would probably hop for the last one. Subway has always positioned itself as a healthier alternative. So all the time that you went to Subway because you though you were making a healthier choice, well you are in for a slap in the face. It turns out that the chicken in your Subway chicken sandwich might not contain very much chicken meat at all.

Trent University and the CBC’s marketplace conducted a DNA analysis of the poultry in several popular grilled chicken sandwiches and wraps found at those popular fast food joints. The study revealed that in the case of two popular Subway sandwiches, the chicken was found to contain only about half chicken DNA. In testing, Subway’s oven roasted chicken and the chicken strips in its Sweet Onion Chicken Teriyaki sandwich clocked in with just 53.6% and 42.8% chicken, respectively. The results stood up after extra rounds of sampling.

So it looks like chicken, might taste like chicken, but it’s not chicken. So what is it? An unadulterated piece of chicken from the store should come in at 100 per cent chicken DNA. Seasoning, marinating or processing meat would bring that number down, so fast food samples seasoned for taste wouldn’t be expected to hit that 100 per cent target.

Here are the results:

Source: Trent University/CBC

In the tests, most of the meat from Subway’s competitors was shown to contain 85 to 90% chicken DNA.“Subway’s results were such an outlier that the team decided to test them again, biopsying five new oven roasted chicken pieces, and five new orders of chicken strips,” CBC News explained. Surprisingly, A&W and Wendy’s topped the chart. Now I didn’t expected that. McDonald’s and Tim Hortons did well. So if you are limited in your options, you know you are getting at least 85% chicken. McDonald’s has been working very hard at cleaning its reputation in the last few years. I wish they did the study 10 years (I’m sure its out there) to compare the progress they made.

Naturally, Subway disagree with the results. Subway claimed to use only 100% white meat chicken in their chicken products, they did admit to using soy as a stabilizer. They are going to check with their suppliers. I wonder if A&W and Wendy’s are going to ride high with the results with some kind of marketing campaign. Wendy’s is delicious, but its delicious for all the wrong reasons. You committing a sin eating there, but it’s a sin that makes you feel good (well just at first when you are eating). Now the quality of their chicken is superior to Subway!!??? “Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”. I smell class action lawsuit for misleading consumers…

Subway’s chicken also caused a stir in late 2015 following a study by the environmental group Friends of the Earth, which awarded the franchise an F for using antibiotics in their meat. In response, Subway announced that they would be removing poultry raised with antibiotics from its 27,000-plus of its U.S. locations by the end of 2016.


What’s in your chicken sandwich? DNA test shows Subway sandwiches could contain just 50% chicken

The chicken challenge: Testing your fast food (Video)

Company responses: Chicken


Negative Interest Rates for Dummies

If you ever borrowed money, you are most likely familiar with the concept of positive interest rates. That’s the world where you pay interest on the money you borrowed. Lately, you probably been hearing more and more about negative interest rates, where depositors are actually charged to keep their money in an account and borrowers are paid interest on their debt. I admit that the concept of negative interest rates can take a while to sink in. Imagine a bank that pays negative interest.  The common reaction is “Wait, what! Instead of paying interests on my mortgage I’m receiving interests? Why would a bank do that? I don’t follow you…” or the other popular reaction is “If the bank charge me interest on my deposits I’m taking my money out”. Well it hasn’t gone that far, yet.

Negative interest rates are a last ditch effort by a central bank to stimulate the economy by effectively imposing a tax on the excess reserves that banks hold at the central bank. Banks earn interest on the money, called reserves, they park at the central banks, just like savers park money in a bank. In countries where there’s negative interest rate, the banks have so far mostly taken on the cost on holding excess reserves at the central bank.  At the moment, they haven’t pass the cost on to the consumer, out of fear that doing so might spark a bank run. In some cases, in the Denmark, where some homeowners are getting paid interest on their mortgage. In Switzerland, there’s a bank that’s charging clients to hold their deposits. There’s definitely side effects, both positives and negatives.

Why is this happening? The economy is weak and needs a boost. Banks are a pillar of the economy and are not lending as much as they should. Maybe the standards to borrow are too high following the financial crisis. Maybe there is not enough demand. Whatever the case is, banks are keeping excess reserves at the central bank and are receiving interest on them. Theoretically, low interest rate is suppose to stimulate demand for loans and as a result grow the economy. Central banks provide an ample supply of cheap money to banks in order to encourage lending to various individuals and businesses. But that’s not happening. The banks are “hoarding” the money. You are not growing the economy if you have money parked doing nothing. So to stimulate lending and to get these excess reserve out in the real economy, central banks are charging banks for their holdings.

Denmark set negative interest rates as early as 2012, followed by the European Central Bank in 2014. Since then, they’ve been joined by Switzerland, Sweden, Japan, and Hungary. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else so they can keep their currency down in an attempt to make their exporters competitive. With the European Central Bank trying to “tank” their currency, Sweden and Switzerland responded. Policy makers are also trying to prevent a slide into deflation, or a spiral of falling prices that could derail the recovery. By weakening their currency, they hope to import inflation by making goods coming into the country more expensive, raising domestic prices.

There are other consequences as well. Retirees are feeling the pain as they need income to live on. The days where you could get a guaranteed 5% on your money have been behind for a few years now, but this is something else. Pension plans, insurance companies, retirees, are being driven in riskier asset classes to make up for the loss income. This works in the short-run as long asset prices are increasing, but is not necessary a sound investment policy. In the long-run, who knows what the consequences are? It’s uncharted waters. There are other side effects, Sweden is dealing is a potential housing bubble and people are on a borrowing frenzy. It might ended up badly once rate rises. The best analogy I heard about the dilemma is the joyful feeling of eating McDonald’s right now. It’s delicious in the moment but the perverse effect of eating it will show up later.

Both Canada and the U.S. have their current interest rate at 0.50%. After decreasing them last year Canada just announced they were maintaining their rate. The U.S. are slowly starting to increase them after almost ten years of no increase. There is debate on whether they should go negative. Rates are just above zero, so nobody knows if going negative will actually make a difference. So far the North American central banks are looking at the experience in other countries and will judge the results.

Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. It’s a bid to boost the economy. Is it working? So far the experiment doesn’t prove to be fruitful. Instead of boosting lending like the theory states, banks are taking on the cost which hurt their income, and as a result tighten credit. If banks are not profitable, they don’t lend.  Another perverse effect, banks have been unwilling to pass on negative rates to individual depositors, and have tried to compensate for profits by jacking up mortgage rates, even as headline interest rates fall. These are not the results they were hoping for. Taking such action is suppose to help the economy, not hurt it.

This is where a herd of academics, bankers, analysts and economists are getting in a never ending debate, and the person with the argument that nobody understands usually wins. You get the feeling that nobody knows what they are doing. Falling prices, banks paying you money, it’s a confusing world. I hope this clarifies the insane world of negative interest rate.

Barron’s 2016 Roundtable

This is a massive repost from Barron’s 2016 Roundtable. Barron’s does this every year and I read it every year.  You have some of the best investment mind in the business debating their ideas and picks.

I included all three parts in this post.. Here are the original links:
Barron’s 2016 Roundtable Part 1, Part 2, and Part 3

I merged all three articles so its all accessible with one click. Like I said, it’s very long.


Continue reading “Barron’s 2016 Roundtable”