Thelongview wrote: I was planning on a short post but turned out to be longer than I had anticipated. Going forward, I will post once a month.
The title of this post is inspired by and in honor of Howard Marks
There are really only two investors that have shaped how I think about business and investing:
Warren Buffet and Howard Marks.
Since I’ve become an investor, I have most likely read over 1,000 books on investing. I couldn’t tell you precisely how many, because over time, I’ve come to realize that almost all of them were horrible and totally useless books and so I’ve thrown them into the garbage over the years – nowadays I recycle.
I don’t read investing books anymore, and haven’t for years, unless it is written by someone truly spectacular, like Howard Marks. Today my book reading is concentrated on, psychology, financial history and corporate history.
Howard Marks Some of you may be aware of Howard, but for those of you who don’t know who he is, here is a brief introduction:
Howard is 76 years old and is the co-founder and co-Chairman of Oaktree Capital Management, which is a distressed debt investor. He has written 2 books, both of which are worthwhile reading in an era where most investing books are junk, and writes a “Memo from the Chairman’ from time to time, typically every month or so, where he talks about investing and various concepts.
In 2019, Brookfield Asset Management, a company of which I’ve been a shareholder for over 10-years, acquired 61.2% of Oaktree and so Howard now sits on the Board of Brookfield.
Howard is the kind of man that I really like. He is a deep thinker. He really thinks things through and analyzes all details.
Howard once told the story of how he came up with the title of his first book, “The Most Important Thing”. When he first started Oaktree, he would go over to his clients’ offices and for about 1-hour or so, would talk about investing.
He would say things like, “the most important thing in investing is not to overpay” and talk about that. Then he would say, “the most important thing in investing is to minimize risk” and talk about that. Then he would say, “the most important thing in investing is to understand second level thinking”.
After about 1-hour, he realized that he had said, “the most important thing in investing is”, exactly 20 times. It’s just how Howard talks.
So, he decided to write a book about investing that would have 20 chapters and the title of each chapter would start with, “the most important thing”.
His book, “The Most Important Thing” is worth reading. His Chairman’s Memos are worth reading as well. You can read them for free on Oaktree’s site.
Here’s a link for those of you that are interested:
Memos (oaktreecapital.com) His Memos are archived and go back to his first one in 1990.
Gamehost 2014 GH stock has suffered a lot since the end of 2014 when it closed at $13.90.
Back then in 2014, Gamehost shareholders did not know that its business was at its peak. Revenues and free cash flow per share were at all-time highs, $83,700,000 and $1.10 respectively, and it was all downhill from there.
Since the end of 2014, Gamehost would see the price of West Texas Intermediate oil (WTI) collapse from $93.17 in December 2014 to $26.68 in January 2016, a collapse of more than 71% in 13-months.
It would see Alberta’s economy decimated. To add insult to injury, Gamehost had to suffer through the wildfires in May 2016 and its economic impact on its Boomtown casino (Rivers today) in McMurray.
This casino had to shut down on May 3, 2016 due to a civic evacuation order that was given as a result of the fire that was threatening the city. Gamehost and its insurers only had access to the property starting June 1, 2016 and substantial smoke and heat damage had occurred and the casino only reopened on July 15, 2016.
While GH had insurance, there is no compensation for future lost business due to an exodus of people from McMurray. It seemed that those that did not leave due to the collapse of oil and by extension oil jobs, left and vowed never to return as a result of the wildfires
The above are two specific factors that have had a severe impact on the Company’s operating results and on its valuation
I always like to use the period of 2011 – 2019 when looking at Gamehost data because 2011 is the first year that it converted from a trust to a corporation and the years after 2019 are COVID impacted years. Looking at pre-2011 and post-2020 data would lead to incorrect conclusions as it is comparing apples to oranges.
Since the price of started its collapse at the end of 2014, I’ll use that year as the start of the analysis of value in GH stock.
When analyzing Gamehost, we are blessed with the fact that it has a very consistent operating history and its results are very predictable as far as company analysis goes. It is one of the easiest stocks to value and estimate an intrinsic value for that I know of.
From 2014 to 2019, GH has seen its revenues go from $83.7M to $68.1M and its free cash flow go from $26M to $19.5M. Its stock price has declined from $13.90 to $8.48 and its trailing free cash flow multiple decline from 12.6 to 10.6.
Put another way, its revenues declined by 19%, its free cash flow declined by 25%, its stock price declined by 39% and its trailing free cash flow multiple declined by 16%.
The above numbers are bad. If you were a shareholder back then, you were not happy.
However, let’s look at the change in the Company’s estimated intrinsic value from 2014 to 2019.
At the end of 2014, I would estimate its intrinsic value to be $12.13 - $13.86.
At the end of 2019, I would estimate its intrinsic value to be $11.00 - $12.57.
So estimated intrinsic value declined by 9.3% (using the mid-point of each years estimate range).
So in other words, while its stock price fell by 39%, the company’s intrinsic value declined by only 9.3%, which may be indicative of value and would need further analysis.
In 2014, GH’s stock closed at $13.90, which is above the high range of $12.13 - $13.86 of my estimated intrinsic value. Not an investment I would have made back then.
In 2019, GH’s stock closed at $8.48, which is well below the low range of $11.00 - $12.57 of my estimated intrinsic value. This represented tremendous value in GH stock.
Today, as a result of purchasing the remaining 9% interest in the Deerfoot and taking into account all stock repurchases from 2020 onwards, I would estimate GH’s intrinsic value to be $12.50 - $14.29.
While GH stock has declined by 44% since the end of 2014, its intrinsic value has increased by 3% and is currently trading at a discount of 38% - 46% below intrinsic value and represents tremendous value.
In business it is the future and not the past that is important.
Investors are focusing too much on the mediocre corporate results post 2014 and not enough on the factors that were responsible for producing those results:
The collapse in the price of oil and the ensuing devastating effect on Alberta’s economy and resulting exodus of people in Fort McMurray due to lost oil jobs and the wildfires.
The above factors were a massive headwind that Gamehost was forced to operate in but has now turned into an even more powerful tailwind that will likely last many years and see the Company post very strong results going forward.
The 2 factors that we need in place for Gamehost to excel is a strong economy in Alberta and a lot of people around our casinos.
In other words, sustainably high oil price and population growth.
The Most Important Thing: the price of oil From 2015 - 2020, the price of oil was a big headwind. Now it is a big tailwind that will likely last for years as there is a big oil supply issue going forward.
sWestern Canadian Select (WCS) is priced in USD and at the end of 2014 was trading at $81.28 when converted to CAD.
Today it is trading at $121.25 when converted in CAD.
In other words, the price of oil, for our Canadian oil companies, is trading at 49.2% higher than in 2014. This has huge implications for Alberta’s economy from the trickledown effect of increased provincial taxes and increased oil job salaries.
Our Canadian oil companies get their revenues in USD but pay their expenses in CAD. So you can see how insanely profitable they are.
This has to be repeated again: it is as though oil is trading at 49.2% higher than in 2014.
This is a huge tailwind going forward for GH.
There are structural issues in the oil industry that are limiting and will continue to cause the limiting of oil supply in the coming years.
There is no short-term solution to this problem and oil will stay elevated for years to come.
The Most Important Thing: population Since 2011 the population has grown by:
Fort McMurray: 11%
Grande Prairie: 25%
Calgary: 18%
Ward 12 in Calgary: 50% What should jump out at you is the 50% growth in the population of Ward 12 in Calgary, where the Deerfoot is located. This is very impressive and very telling.
The more people you have near your casinos, the more customers you will get.
Population growth is a key figure that can’t be ignored.
Clearly we have many more potential customers relative to 2014 when we produced revenues of over $83M and free cash flow of $26M and this bodes well for the future.
The Most Important Thing: odds and ends The price of oil and population size and growth are the key for GH to produce outstanding results over time.
However, we must not also forget that our casinos are bigger and nicer than in 2014 and we have an additional hotel in Grande Prairie.
Conclusion Bigger casinos, more appealing casinos, expanded food & beverage areas, expanded concert & show areas, additional hotel rooms, sustainably high oil prices at all-time highs when converted to CAD, a strong Alberta economy, and increased population size are the massive tailwinds that Gamehost has in its back.
With this as your backdrop, it does not make sense for the Company’s stock to be trading at the significant discount to intrinsic value that it currently is.
Investors are still thinking like its 2015 -2019.
They are wrong.
It is 2022 – 2026.
To long-time shareholders, I say this:
Enjoy the ride.
You have earned it!