Welcome to Weekly Briefing #2 from the Unexpected Value newsletter.

In this section I provide a recap of some of the best investment ideas that I’ve come across and give some thoughts on the overall market.

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Wretched Excess

It’s been a few months since Charlie Munger referred to the ‘wretched excess’ of financial markets and global stock markets are still heading higher.

Last week, the S&P 500 gained 0.5% while the Nasdaq moved up 0.47%. Gains were also seen in the Dow Jones, DAX and EuroStoxx.

These modest moves mask the rampant speculation that is going on in other areas of the market. Meme stocks in particular saw huge price swings. They were led by AMC which climbed above $70 a share. At one point the stock was worth more than $40 billion. There were similar moves in GME, BB, BBBY and others.

Margin Debt Reaches New Record

The following chart shows FINRA investor margin debt. This plots how much money is owed by brokerage customers for the purchase of securities. There has been a surge in margin debt since the beginning of the pandemic. 2020 was the first time on record that margin debt has gone up during a recession. High levels of margin debt has a habit of coinciding with market tops:

Another chart I came across this week shows how Morgan Stanley’s market timing indicator has advanced to an all-time high. This indicator successfully peaked before the 2008 crash and dotcom bubble. This is another ominous sign that stock markets are pricing in too much optimism.

Our Outlook

There is no doubt that stock markets are frothy and exhibiting signs of exuberance. The hype in meme stocks is bound to end badly for some investors. There are also 4 major events coming up that could spark increased volatility:

1. ECB meeting on 10th June

2. US Inflation on 10th June

3. FOMC meeting on 16th June

4. SEC bitcoin ETF decision (could come at any time)

Considering the state of the market, it’s sensible to take a defensive stance here and keep some cash on hand in case we get a correction. That said, timing the market is difficult and not every area of the market is overvalued.

We will continue our strategy of monthly investing in quality companies. We will simply do so at a slower rate and make sure we have some cash to take advantage of any future dips.

I will now turn to some of the more interesting ideas I’ve come across in the past week.

Pershing Square Tontine Holdings (PSTH)

PSTH, the SPAC run by Bill Ackman, took a tumble last week as investors responded to news that the company will take a position in Universal Music. Investors were disappointed that the target was not a higher ticket name such as a Bloomberg or Stripe. The actual details of the transaction are complex with the deal being split into three parts:

1. Around $4 billion will be used to buy a 10% share in Universal Music valuing the company at around 40 billion dollars (or 35 billion euros).

2. The money left over, around $1.5 billion, will be used to scout another, smaller deal, free of the 2-year obligatory SPAC time horizon.

3. Apparently PSTH will also roll over into another entity which will look for yet another deal. However, Ackman won’t need to raise funds until the deal is finalised.

We own a small position in PSTH and it was disappointing to find out that Ackman had chosen Universal. However, after some consideration, Universal is not so bad after all.

The company has a huge back catalog and the rise of streaming has given the company a new source of growth. Last year the company reported €7.4 billion in revenue and €1.3 billion in EBITDA meaning the deal puts the valuation at around 4.7 times revenue or 26 times EBITDA. As you can see from the chart below, Universal earnings have moved higher every year since 2014:

Music streaming and subscriptions are giving Universal a new lease of life. As the next chart shows, streaming now accounts for 52% of Universal’s sales and has been growing at 26.8% a year since 2016:

This is what Bill Ackman had to say about the deal:

“The total addressable market is every person on the planet. Every time a song gets played on Spotify, Apple, Peloton, YouTube, the artist gets paid, the songwriter gets paid and Universal gets paid… Don’t forget that we have the technology.”

Universal Music is profitable and showing healthy progress in the new era of music. Considering that PSTH also has $1.5 billion left for another deal, I think these shares are worth holding on to. Maybe Ackman is considering something a bit more exciting with the leftover cash pile.

Solutions 30 SE (SLUNF)

Solutions 30 is a European IT services company that provides support for new technologies across telecom, IT, energy, retail and security. The company is based in Luxembourg and has grown revenues every year for the last 10 years according to financial statements.

However, a report from short seller Muddy Waters highlighted questions about the company’s financials. When it emerged that the company’s auditor (Ernst & Young) refused to sign off the company’s accounts, the stock price tanked. The stock is now down -80% since December:

It’s highly likely that Muddy Waters has now exited their short after such a big move down and there isn’t any value in shorting the stock here.

If Solutions 30 is able to clear its name and get its financials audited, then shares have massive upside. If not, Solutions 30 could be going the same way as Wirecard. (Wirecard has effectively gone to zero after the company reported inflated revenue figures).

Limelight Networks Inc. (LLNW)

Limelight Networks provides content delivery (CDN) services acoss the globe. It’s technology helps companies host and deliver content such as websites, apps, videos, music, APIs and more. The stock should have been a huge winner of the pandemic, however, poor management decisions and competition means the stock price is down -40% on the year.

Seeking Alpha analyst Vince Martin put an interesting article out suggesting that Limelight might finally be worth looking into. There are two main bull points.

Firstly, Limelight has a new CEO Bob Lyons who has put together a more logical strategy for a turnaround. Lyons has been aggressive on cost cutting and recent data indicates that performance is improving.

Second, Limelight possesses a rock bottom valuation compared to it’s peers. The stock trades at just 2x revenue compared with 15x for Fastly (FSLY) and 6x for Akamai (AKAM).

Limelight Networks is a company that I looked at previously based on it’s low valuation. The company is also a potential takeover target for a technology name like Microsoft. This is a contrarian play that I’m going to take another look at.

That’s it for this week’s review. I’m working on our next deep dive and I’ll be back with more ideas soon.

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Disclosure: I am/we are long PSTH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.