KKR: PE Powerhouse With Room To Run

U.S.-listed private equity (PE) partnership KKR & Co LP is the latest name I have singled out as a long investment idea for Eklund Research over at Seeking Alpha.

KKR apple-touch-icon-144-precomposed
KKR logo. Source: www.kkr.com

 

 

 

 

 

Summary

  • Private equity powerhouse KKR’s price performance has been weak lately. Beyond price volatility, however, KKR is a high quality business generating double-digit client returns and attracting more and more capital.
  • KKR is different to its listed peers in that it puts the majority of its partnership capital where its mouth is: alongside clients in KKR deals and fund products.
  • And despite increased size and scope of activities, KKR has also managed to keep a beneficial alignment of interests with its public unitholders, compounding their equity at +20 percent annually.
  • Risks associated with a KKR partnership unit investment include dependence on future fund return performance and potential future compensation/governance issues at the partnership level.
  • Investors willing to accept price volatility should consider accumulating KKR’s common units as they are currently offered at a significant discount to intrinsic fair value.

Now please head over to SA and study the full KKR article plus my recent primer on investing in U.S.-listed private equity partnership units. And if you find this analysis interesting don’t forget to get in touch and/or interact with the SA/Twitter community.

Continue reading “KKR: PE Powerhouse With Room To Run”

Investing In Listed Private Equity Units: A Primer

Earlier today I published a primer on the merits of investing in the listed common units of major U.S. private equity partnerships over at Seeking Alpha. The private equity industry has provided the U.S. stock market with a growing series of IPOs since the Great Recession but is still relatively new, and possibly still misunderstood, as a public asset class.

Summary

  • The jury is still out on private equity partnership units as a publicly listed asset class. The partnerships’ business activities are often criticized and their GAAP financials leave you clueless.
  • This article will outline 1) why private equity units offer interesting optionality and 2) a simple framework for evaluating how the underlying private equity management businesses are implicitly priced.
  • While the underlying private equity business of KKR is found to trade at a significant discount to peers, industry giant Blackstone trades like its polar opposite at a significant premium.
  • Among the more credit focused private equity shops, Ares Management is at a big discount while Oaktree Management’s units are at a big premium.
  • Fortress Investment Management, the sample’s smallest partnership, trades for very little in relation to its asset base. Here Mr. Market is clearly very doubtful on the chosen hedge fund-specialization.

Continue reading “Investing In Listed Private Equity Units: A Primer”

Hugo Boss: GARP-Type Long Investment Case

Yesterday we had a new long position idea published on SA: German apparel firm Hugo Boss.

hugoboss brand

If looking for a GARP-type investment (Growth at a Reasonable Price) make sure to have a look at our analysis and share or leave some feedback if you find the article interesting.

Summary

  • German premium/luxury menswear powerhouse Hugo Boss has lost its premium valuation in a period of slower business. Growth has stalled and margins dropped due to market weakness and firm-specific challenges.
  • While we should expect a tough 2016, recent years’ repositioning of the Hugo Boss core brand towards own retail stores will strengthen the group’s brand and franchise value longer term.
  • Strong financials, return on capital and free cash flow generation will help the group weather out current headwinds. Meanwhile, a high and sustainable dividend plus buyback potential provide some downside support.
  • Our Base case valuation indicates a fair value upside of +47%. Taking Bear and Bull case scenarios into account, the current risk-reward looks attractive.
  • Opportunistic investors are offered a high quality business at a reasonable price and should start accumulating shares. Once Hugo Boss starts to grow again, so will its valuation multiples.

Disclosure: Long Hugo Boss

The author is long Hugo Boss in the German stock market, where its ticker is BOS3. In the U.S. stock market, the group’s official U.S. ADR programme trades under the ticker BOSSY with a ratio of 5:1.

Eklund Research may increase or exit its position at any time.

On Why To (Short-)Sell Marine Harvest

This week I have posted a (short-)selling idea on Norwegian salmon farming giant Marine Harvest (main ticker in Oslo MHG, U.S. ADR ticker MHG) over at Seeking Alpha. The article’s title is Marine Harvest: Sell Fredriksen’s Soon To Expire Salmon.

Summary

  • Marine Harvest, the bellwether of the global salmon farming industry, has successfully played an unsustainable dividend payout game to please its institutional owners and keep its share price up.
  • With a steep valuation after a multi-year rally, this stock is ripe for a correction. This article will argue why readers should (short-)sell Marine Harvest at current levels.
  • Bulls are right in that salmon farming constitutes a promising source of food production for the future. The industry is supported by steadily growing demand and R&D improvements.
  • However, salmon farming is still farming. And farming means a commodity business where Mother Nature will offer challenges along the way, in the case of salmon: biological and environmental issues.
  • Major shareholder John “Viking Raider” Fredriksen and insiders cast their vote by cutting their holdings. Further operational problems or a cyclical salmon market downturn will eventually push this stock down.

Now, if this sounds interesting feel free to study the full MHG article and comment over at SA.

Salmon_Run
Photo: Todd Gordon Brown 2012 via Wikimedia Commons. “The mightly salmon as found along the Fraser River in BC. They come inland from the salty sea to spawn in the fresh waters then die on the shore by the thousands. This fish was a meter long.”

Continue reading “On Why To (Short-)Sell Marine Harvest”

Risky Chinese M&A Opportunity in Opera Software

Started this week by publishing a new SA article with title Opera Software And The Chinese Cash: A Risky 10% Short-Term Play this Monday. As portrayed by the title this is not a longer-term investment play (from my value investing perspective) but rather an ongoing special situation.

Summary

  • Norwegian mobile-browser firm Opera Software (main ticker OPERA in Oslo, U.S. OTC ticker OPESF) might become Chinese very soon. But despite having board backing, financing and due diligence ready, the market is not yet buying this $1 billion-plus deal.
  • Implied probability of a successful closing of the cash tender offer was around 70% this Monday for an upside of almost +10% absolute return potential in one-and-a-half month (over +110% annualized).
  • The downside if the deal fails was in excess of -20%. U.S. interference through CFIUS is the potential elephant in the room that could make the deal blow up.

Now if this sounds interesting, please study the full article and comment over at SA.

Chinese_draak
Photo: Wiki Media Commons user Caseman “Chinese dragon in a dragon-dance for Chinese New Year 2000 in Helsinki.”

Special situations provide uncorrelated returns

Special situations are nice in their feature of being highly uncorrelated to the short-term general trend of the stock market. Thus they may provide a source of uncorrelated portfolio returns (and losses!) for any investor with financing to put aside for a limited period of time.

The risk-reward in these situations can range from very unattractive to fantastic (in terms of upside versus downside). In addition, public tender offers involve so many moving parts that conditions and parties involved can end up biting you in the most unexpected ways along the way. So a word of advice: never consider a public M&A deal to be over until it is really over(!).

DISCLOSURE: The author is currently net long OPERA through the Oslo Stock Exchange. The Opera position is currently a tracking position of non-material size, both in absolute terms and in relation to the author’s portfolio. Eklund Research may increase or sell off its Opera position at any time.

Buy-And-Hold In Daily Leveraged ETFs: Why You Should (Still) Avoid It

To have some content to start this project off with I returned to Worth Repeating: Why Buy-And-Hold In Daily Leveraged ETFs Should Be Avoided, a popular ETF strategy article I published a few years ago at Seeking Alpha.

The article’s main takeaway:

Daily leveraged exchange traded funds will over time destroy your capital if bought and held as long-term investments. Legimate uses (if any) are limited to day trading.

SPY VS 3x leveraged ETFs SPXL and SPXS. Apr 17 2015 - Apr 15 2016
The Daily Leveraged ETF Compounding Problem Illustrated. Notice how both Direxion Daily +3X daily (3X long) S&P 500 ETF SPXL (in blue) and its inverse -3X daily (3X short) sibling SPXS (in red) both have had their values eroded when compounding the last 12 months of day-to-day price changes. The S&P 500 unleveraged (1x long) ETF SPY (yellow) is added for illustrative purposes. Chart: Google Finance. Data: SIX
Continue reading “Buy-And-Hold In Daily Leveraged ETFs: Why You Should (Still) Avoid It”

Launching Eklund Research. A Warm Welcome!

sunrise
Photo credit: Wikimedia Commons user “Dori”. “Sunrise at North Point Park, Milwaukee, Wisconsin.” 1 February 2009

In some time Eklund Research will slowly but steadily start publishing with a focus on value investment ideas. Other topics covered will include investment strategy and valuation.

Until then you find our guiding principles here.

Please follow us on Twitter and Seeking Alpha to keep track of coming updates.

Over and out.