Scale of the Cycle
Categories
Global Cycle
Global Financial Cycle
Country
Financial Cycle and Business Cycle
Industry
Industry Cycle and Sentiment Cycle
Company
Corporate Cycle
Capital Structure
Equity/Debt Mispricing Cycle
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Scholars have found that firms tend to compete more aggressively in financial distress
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The intensified competition in turn reduces profit margins, pushing themselves further into distress and adversely affect other firms.
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The feedback imposes an additional source of financial distress costs incurred for raising leverage, which helps explain the negative profitability-leverage relation across industries.
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Owing to the contagion effect, in a decentralized equilibrium, leverage is excessively high from an industry perspective, compromising its financial stability
Range Resources
Pioneer Natural Resources
Event
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Saudi Arabia declared price war with Russia, sending oil price into negative territory in April 2020, and the entire energy space was killed.
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Capital flight from the space, leading to impossibility of equity raise and tremendous difficulties of debt refinancing, constraining E&P activities.
Investment Thesis
Range is primarily a natural gas and NGL producer, which benefits from shale oil companies shutting in wells.
Lowest cost producer in the Appalachia basin. Its successful extension of debt tenor in Jan 2020 ensures survival.
Pioneer has the strongest balance sheet with the best acreages in the best basin (Permian) in the US.
Entire industry undergoing a sea change in moderating growth, lower capex, and shareholder friendly policies.
Investment Result
Range sold for as low as $1.6/share. Now it sells for $24/share with a $0.32/share of annual dividend.
Pioneer sold as low as $49/share. Now it sells for north of $200/share and distributes $25/share of fixed and variable dividend.
Pinduoduo
Momo
Event
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Covid-Zero policy coupled with dictatorial leaning of Chines government and delisting risk results in capital flight and forced selling in some Chinese offshore funds.
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Delisting risk was mitigated after I learned from CLO of XPEV (a good friend) that NDRC rallied these ADR Co’s to Beijing to ask them to get rid of sensitive information on their book and prepare for US audit.]
Investment Thesis
Pinduoduo was growing at north of 60% YoY, with $10/share of net cash on balance sheet, forecasted to make $5/share of earnings.
Long-term thinking management team.
Focus on agriculture e-commerce resonates with governmental policy, while Temu is an embedded option with considerable potential.
Momo had $7/share of net cash on its balance sheet, was making $0.60/share of earnings, and distributing $0.50/share as dividend.
Tang Yan, the founder and CEO has a pristine reputation among Chinese entrepreneurs.
Ultimate relaxation of Covid-Zero will stimulate its dating app.
Investment Result
PDD sold for as low as $23/share, and now sells at ~$100/share.
Momo sold for as low as $4.2/share, we sold after the shares doubled.
Western Alliance Bank Preferred A Shares
M&T Bank
Event
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Silicon Valley Bank collapsed on March 10th, 2023, leading to complete panic among regional bank investors. A bank run further resulted in First Republic’s bankruptcy.
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Federal Reserve stepped in to provide substantial support for liquidity to prevent a wide spread bank-run due to fear of duration mismatch.
Investment Thesis
Western Alliance’s liquidity could support everything above what FDIC (federal deposit insurance corporation) insures.
This reality was clearly telegraphed by the WAL management team, but the investors sold WAL down to high single digit
Rumor of WAL’s bankruptcy led to further fire-sale, though the rumor was firmly rebuked by the Chief Marketing Officer of WAL.
M&T Bank is one of the two publicly traded banks with the strongest capital appreciation since the 80’s.
It is managed by one of the finest banker of our generation, Rene Jones.
The bank has been conservatively managed, and has deep ties with its local community enabled by its culture established by Robert Wilmers.