The Last Thing We Needed: Breaking Down The Archegos Blow-Up (Podcast)

Summary

• Extreme market conditions often beget extreme market events, and Archegos Capital's blow-up mirrors the GameStop/Melvin Capital ballyhoo that started Q1.
• There are more immediate questions that come out of this: how did this happen, and what does it mean for other stocks with big moves?
• And there are more lasting questions to address about what this means for where we are as a market overall.

Photo by Jag_cz/iStock via Getty Images

It was just a few weeks ago that we asked Hedgeye's Andrew Freedman what might be catalyzing the major moves in Viacom (VIAC) and Discovery (DISCA) shares to start the year. At the time, Viacom was steaming through the $80s and Discovery through the $70s, in a stretch where it seemed they added a few percent to the share price every day. The issue with something like that isn't that the companies couldn't be worth that much - they were both long-time media value traps, but there's certainly a case to be made that the value is there. It's that the rationale for that value hadn't really changed, and minor announcements or expected moves aside, nothing had really changed between March 2021 and, say, November 2020. So what gave?

Everybody following the market knows the answer by now, which is that Bill Hwang and Archegos Capital were behind the stocks. Employing a great deal of leverage, they became marginal buyers of the stocks and owners of a large percentage of the economic interest in those companies, as well as GSX (GSX), a battleground of a name, and Baidu (BIDU), something in between a battleground and a value trap. Which worked until it didn't, with perhaps the issuance of shares by Viacom to capitalize on the move breaking the whole strategy.

There are immediate effects of these moves, as shareholders of these names will understand. On today's The Razor's Edge, Akram's Razor and I discuss those immediate effects and how a single entity could have been responsible for so much market activity. But we also get into whether this suggests broader reverberations or the effect of leverage in a bunch of other names. After GameStop (GME) showed the power of coordinated little investors - at least that's the headline story - are copycats appearing across the market? And does it matter when indices continue to power to new highs? Click play above to listen in.

Topics Covered

• 2:30 minute mark - The Archegos and GameStop echoes
• 10:00 - The scaling of the short squeeze strategy
• 13:30 - Lone actor or market reflexivity at work?
• 16:00 - What fundamentally changed during COVID for these sorts of names
• 21:30 - The lack of an exit strategy
• 27:00 - Aftershocks of this action
• 33:00 - Adjusting to an elevated valuation environment and the leverage factor
• 39:00 - The company and prime brokers’ perspective on this situation
• 45:00 - Where do we go from here
• 54:00 - The danger of consensus
• 1:00:00 - Time to make weight for certain stocks

Analyst’s Disclosure: I am/we are long PD, TWTR, GRUB, SFIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Daniel Shvartsman is long PD, TWTR, GRUB/TKWY, and SFIX. Akram's Razor is long WDAY, PD, TWTR, and GPRO. Nothing on this podcast should be taken as investment advice.

Comments

[Fizawill]

VIACOM has pressed the woke agenda in their IP. It is a huge turn off to the fans. If they really wanted to go the Star Wars path, they should have realized that they would lose viewers and fans.

[Flex68]

What investor has an hour to dedicate to said podcast?

Who is Hedgeye ?

And what did Archegos Capital Management have to do with your longs of PD, TWTR, GRUB, SFIX ?

"Everybody following the market knows the answer by now, which is that Bill Hwang and Archegos Capital were behind the stocks."

lol

[Daniel Shvartsman]

@Flex68 Thank you for taking the time to leave a constructive comment! It’s ok if this isn't for you, though the answers you seek can indeed be found on our podcasts. ;)

[Flex68]

@Daniel Shvartsman ,

Okay.

I Googled "Hedgeye" and the result was:

"Market Insights"
Cartoon of the Day: Coinzilla

app.hedgeye.com/...

Humor in investing, and all that, I guess...... (?)

Plus an interview with Annie Duke, lol

[The Political Economist]

Bidu looks like a good deal for buyers.

[treespace]

@The Political Economist And there are tons of people selling so buying should be easy.

[Kurt Licherovsky]

This is the dip to buy. VIAC is worth $100 per share in the brick and mortar community, moreover, the power to earn millions and pay an annual dividend speaks volumes to my brick and mortar value of $100 per share.

Today's small recovery in VIAC will hopefully continue. My big unrealized losses are now small unrealized gains. A rally to 48 is imminent. The dividend yield is around 2%. In a year, VIAC will likely double in price into the $90's and make a push into the $100's.

[imeldo marcos]

@Kurt Licherovsky $70 i think.

[Tredwise]

@Kurt Licherovsky if the market doesn't crash before that.

[NZK91G]

@Kurt Licherovsky
Not sure that I agree. VIAC was $100 only because Archegos was buying up everything in sight. Without that major buyer it’s back to where it would be before they started buying. Roughly where I sold at $48-50

[nkotonika]

What do you think about ViacomCBS looks attractive at actual levels

[Daniel Shvartsman]

@nkotonika Thanks for the comment! I don't have a strong view, the stock looks to be at 22x last year's free cash flow if I got the equity raise right, and I'd guess they're entering a heavy investment cycle. So you'd have to have a view on how they come out of that cycle. What do you think?

[Crossbone]

@Daniel Shvartsman At 44 and pre capital raise the P/FCF Ratio based on 2020 numbers was 14.38 times. How can we trust your analysis when you have no clue about the stocks you are talking about?

[Daniel Shvartsman]

@Crossbone I meant EV/FCF, should have mentioned.

[GS Analytics]

"nothing had really changed between March 2021 and, say, November 2020. So what gave?"

Discovery plus gained better than expected traction with 12 mn paid subscribers by February end, retention was much better than expected and they said that it is very likely that their long term OIBDA margin targets will prove conservative.

[Daniel Shvartsman]

@GS Analytics Thanks for the comment! We talked about this on my other article yesterday (and you didn't respond ;) ). I don't think the trading here has been rational, even if you can argue that $DISCA is worth more, and it seems hard to deny that non-fundamental behavior drove a lot of this, which is the broader point.

[GS Analytics]

@Daniel Shvartsman Before the company's Discovery plus launch investors were worried about headwinds from consumers moving away from cable. That explains extraordinarily low valuations at that time $30 last year. With the kind of traction Discovery plus is seeing and management's commentary that consumers are spending more time watching content on app versus linear plus app is likely to see higher ARPU vs linear, there is a very strong argument for growth now.
Remember Facebook in 2012-13, investors were worried about people moving away from desktop and that caused stock to correct to $18 post IPO. Once it became clear that app can be monetized better, the stock proved to be a multi bagger. Same with discovery plus. Also remember it is a leader in nonfiction content.

[Daniel Shvartsman]

@GS Analytics It could be, and I think that supports the underlying point: the stock is down since the February earnings call. Price movements here have been acutely untethered to fundamentals.