RGIII, Kyle Bass & Telephone Books

Previously, I mentioned RGIII as a reason why I don’t study 13F.  Although that reference was obviously tongue-in-cheek, my prediction regarding RGIII’s performance has played out better than I hoped, which is unfortunate for me as a Redskins fan.

This time I will discuss an actual investment manager who files 13Fs.  I first heard about Kyle Bass when I read Boomerang from Michael Lewis.  Lewis is a great storyteller and author (Moneyball, Liar’s Poker and The Big Short are some of my favorite books).   I enjoy his writings and wanted to learn more about Kyle Bass.  Lewis focused specifically on two investments Bass had made: shorting the U.S. housing market and shorting Greece.  I was curious to learn where he was looking next.  Currently his main focus seems to be shorting Japan (at least that is what he has been talking about for quite some time).  I don’t do much investing internationally (i.e. none) so when I came across an article about Bass promoting a domestic business, my interest was piqued.  His presentation on Dex Media was made on May 8, 2013.  The stock traded at $13.71 prior to his presentation and shot up over 20% on the day of his presentation.  The stock continued to climb to reach a high two weeks later of $20.41, gaining 48% from the day before his remarks.  I assume that this 48% increase in market value during those two weeks was attributable solely to a dramatic improvement in the company’s business practices and financials (or so I learned from the Nobel Prize winning, Eugene Fama).

On May 9, I looked at the original documents of Dex Media.  I was unimpressed.  First of all, the stock recently emerged from bankruptcy on May 1, 2013.  Dex is a combination of two bankrupt telephone book providers. Incidentally, I had recently moved from a large apartment building in Manhattan (and by large I don’t mean Park Avenue fancy, but densely occupied).  Every year, at least once (and it seemed like twice), our apartment building would get an entire pallet full of telephone books for the residents to pick up.  After about a week or two, with approximately 0-1 telephone books being picked up (out of about 300), the maintenance staff would remove the pallet complete with the (almost) full stock of telephone books to the recycling area.

I wasn’t sure what to expect when I opened the SEC filings, but I was somewhat guarded.  Both companies went through pre-packaged bankruptcy in order to emerge, a stronger, faster, better company–according to the press release.  Putting two bad companies together in bankruptcy is Wall Street’s version of mixing up all the leftovers in the fridge and hoping it tastes good (and charge a lot of fees in the process).  I have had that meal before and it doesn’t end well.  I won’t go into the details, but the company has pinned its hopes on the idea that the telephone book business will last long enough to fund its shift towards digital and pay off the roughly $3B in debt outstanding.  I recently saw their latest quarterly results. It turns out the promised synergies from the two companies have not yet appeared (surprise, surprise) and the growth in digital revenues has flatlined.  In fact, costs rose 13% in the latest quarter and the stock currently trades at $6.00 (12/4/13).  This means, if you had bought the shares the day before Bass’ presentation you would have only lost about 55% and if you waited till immediately after he published his report (the most logical scenario), you would have lost about 65%.  I won’t give you the gory numbers on your loss if you waited two weeks.

This investment may work out well in the end.  It has only been 7 months since Bass gave his presentation.  Bass has not yet exited the stock (in fact, he has bought more).  I don’t know how it will end.  However, my point is that I would rather do my own research and be wrong due to my own bone-headed reasoning than to follow the herd of 13F filers.  When its comes to behavioral finance issues, I think getting ideas from 13Fs biases your research. If you think the manager is good, you are more inclined to think optimistically about the stock idea you got from him.  You may think you are coming to the company with a clean slate, but you’re not (search Kahneman and anchoring).

Value investors complain about the herd mentality of the markets, yet easily succumb to herd behavior when their heroes are at the head of the pack.


Postscript: John Paulson and Prem Watsa are also fairly well followed investors who are looking at large paper losses on this investment.



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Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

This Post Has 2 Comments

  1. Matt,

    Nice post. I had a similar post in my investment thoughts doc I write (which often produces many of my posts) on DXM, but never got around to posting it. I took a good hard look at DXM and also LEE back in the summer. They are two different businesses (LEE is a newspaper business that owns around 50 local papers), but have similarities… Both are trying to shift revenues from print to digital, both have been through bankruptcy, and both have sizable debt. I came to notice LEE from Buffett… Berkshire owns some of the debt, and Buffett has been a proponent of the newspaper business on a very local level-he thinks local papers have a moat of sorts that the larger papers lack… i.e. people still read the local papers to get info on the community, whereas the national news is more ubiquitous and can be found everywhere.

    Anyhow, I passed on both LEE and DXM for similar reasons. Too much debt, unsure of the ability to shift revenue in time.

    But, as a contrary to your idea on 13-f’s, I find them quite useful as I’ve mentioned on the site before.

    And I think that this DXM is an example of why you might find some value in the 13-F’s. After all, you passed on it even after you saw Bass, Paulson, Watsa, Ross invested in it.

    I suppose that if one feels anchoring will be an impact, then it’s not a good idea. But as a tool to simply generate ideas, I find them useful.

    As I said before, I like your A-Z method… and I suppose you don’t need anything else. But I find that using some filters to narrow the list can help improve the probability that the time spent reading will be more efficient.

    Nice post!

  2. Matt, if you haven’t yet, take a look at Yellow Pages Limited. (YLWDF) It was in a similar situation to DEX but has more managable debt and is already beyond 50% digital in total revenues. The opportunity on Yellow I feel is really in the warrants that are outstanding. (YLWWF) The main play on this company is can it pay off it’s debt and return to profitable growth. Things are looking good and the warrants payoff about 7 times the price at the time of this comment. Would love to know your thoughts. (Plus it will get you some potential international exposure haha)

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