Themes

After wrapping up a successful bond arb on GAP (Great Atlantic & Pacific), the current portfolio position is >70% cash, 20% SKH bonds (93) and <10% VZ stock (27.9).

I want to deploy my cash. Not to earn, but to learn. I won’t learn anything unless I’m invested and/or generating ideas. So here are some themes that I am interested in.

1) Short brick and mortar retail. The more physical stores you have and the less expertise you provide, the more I want to short you. I don’t want to short BBY, for example, because people still want electronic expertise and to walk into that store.

But I do want to short the Vitamin Shoppe’s business model because protein is protein. Their model is replaced by a setup that has warehouses instead of stores, online ordering and local delivery hops from warehouse to doorstep.

Long-term, I think that electronic retail will replace most brick and mortar due to lower costs. When this happens, it’s easy to price-compare online so economic forces will drive lower profits.

2) Short NFLX. I could write a whole post on this. Suffice it to say that NFLX is a cable company without any cables or cash. Its only leverage is a proven subscriber base of 16mm… which actually scares away content providers from giving you the deals you want. Above all, you have a P/E of nearly 80 now.

I’m still waiting on NFLX for a better price and for certain price action. Probably at 205, I won’t be able to stand it and will put a small (~10%) short on. If it sits around 200, I will short it there too.

3) Long telecom. Someday, you’ll have a TV/computer combo sitting in your living room, where you do your computer work on a huge screen, stream TV on demand or movies (Netflix meets DVR meets live TV on ‘roids), play video games (Xbox), surf the Internet and listen to music. Oh and there’s no mouse, your computer/TV tracks your movements (a la Xbox Kinect).

Surprisingly, we already have the technology. It’s a matter of time: forging consensus (content providers agreeing to platforms like Netflix or Hulu or iTunes), and for the competitive battles around standards to play out.

Actually, no – we have most of the technology. What we’re missing is the information pipeline that has enough bandwidth to deliver HD content through exceptionally high-speed internet into your home. Fiber-optics can do this. Cable is questionable. I think the landline part of VZ is well-positioned since it’s ahead of competitors in infrastructure investment and adoption. I’d like to see if anyone else is well-positioned too.

4) Long SE Asia. Vietnam, Thailand, Philippines, and Indonesia. Try to find something there.

5) Value screens through Scottrade and/or Net NWC.

So I have my themes: businesses whose models I like or don’t. Now, as a value investor, it’s a matter of finding good prices.

Possible longs: DRWI, ALU, T. Still waiting on SE Asia.

Possible shorts: CLRW, VSI.

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