As per Greenhaven Road Capital’s Q1 2019 Investor Letter (download here), its Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) is its “least ‘consensus’ holding”. In the letter, the fund reported a quarterly return of 16% and shared its recent views of the company. Here are its comments:
Chicken Soup for the Soul Entertainment (CSSE) is outside of the Top Five holdings but worth a brief discussion. I think it is fair to say that this media company is our least popular and least “consensus” holding. If you exclude the Royce Funds and an index fund, we own several times more shares than the next largest holder. I understand some of the reticence. The company does not have the right pedigree, having gone public in an unconventional fashion through raising $30M in a Reg.A financing. Additionally, the CEO formerly ran WinStar, which created a lot of shareholder value… until it didn’t. I personally think that,thus far, Bill Rouhana has built a really interesting collection of assets at CSSE with a thimble full of capital.
Bill’s Chicken Soup for the Soul Entertainment is hovering around $100M market capitalization. On a trailing basis, last year they had $27.8M in revenue (up 2.5X), a net loss of $.8M, and adjusted EBITDA of $11.3M. There is also a content library valued in the tens of millions of dollars. On a backward-looking basis, CSSE is a modestly interesting set-up from a cash flow and revenue perspective. What is more interesting is that the pieces were put into place with a series of small asymmetric investments. Bill has done a series of deals, generally with little to no cash down and payouts contingent upon profitability. He is not betting the farm. The growth is consuming very little capital and generally adds to profitability.
At Chicken Soup, Billis building an advertising-supported video-on-demand business. The beauty contestant winners of this cord-cutting bonanza are, of course, Netflix and Amazon. Yes, these are great businesses with massive subscriber bases and more original content than the world has ever seen. They also have massive valuations. At the very end of the first quarter, Bill struck a deal with Sony to combine its existing on-demand business with Sony’s Crackle, which is a massive step forward for the company. Chicken Soup will put in no capital, yet own the majority of the joint venture, which should be immediately accretive. After one year, Sony will either own 49% of the joint venture or “put” their portion to Chicken Soup for $4M in preferred shares. In addition, Sony will have the right to buy up to one-thirdof CSSEover the next five years at prices generally higher than where shares trade today. So, for effectively no cash down, Sony could buy into Chicken Soup, or the company could possibly issue $4M in preferred shares. The following is from the press release: “The combination will lead Crackle Plus to become one of the largest ad-supported video-on-demand platforms in the U.S. with nearly 10 million monthly active users and 26 million registered users. The new service will also have access to more than 38,000 combined hours of programming, more than 90 content partnerships and more than 100 networks.”
On a combined basis, the company will be streaming more than 1.3 billion minutes per month. The deal gives access to portions of the Sony library, Sony technology that costs tens of millions of dollars to develop, and their user base.
Like most of Bill’s bets, Chicken Soup feels asymmetric here. Should 1.3 billion minutes of streaming, 10M monthly active users, a library, a content creation business, and a content distribution business be worth more than today’s share price? I think so. Downside could be 100%, but it is likely a lot smaller, and if Bill continues to grow profitably with limited capital, upside could be very substantial. Heads we lose a little, tails we win a lot alongside an operator who owns the majority of the company and has exceeded expectations over the last two years.”
Chicken Soup for the Soul Entertainment, Inc. is a media company that produces and licenses a variety of video contents not only in the US, but internationally as well. The company has a market cap of $109.29 million. Year-to-date te company’s stock gained 16.8%, and on May 7th it had a closing price of $9.11.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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