Elon Musk's Crazy Twitter Tweets, Amplify's Oil Spill And Kohl's Retail Dumpster Fire

Summary

• Want to look smart… or actually make sense?
• Time horizon arbitrage.
• Three ways to maximally embarrass myself.
• Looking for a helping hand in the market? Members of Sifting the World get exclusive ideas and guidance to navigate any climate. Learn More »

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Throughout my 20s and 30s, I mostly worked out on Excel - building my career, my business, and investment portfolio. Only well into my 40s did I get serious about fitness. I had thought a lot about starting but took years between the time I first wanted to try something and the time I showed up. I wasn't fast enough to try trail running, strong enough to try CrossFit, tough enough to try Jiu Jitsu or MMA, or flexible enough to try yoga. I knew I wanted to do each, but I'd look stupid. I really wanted to try out yoga, but there would be all of these young moms with balance and flexibility, and I'd be the one bald old dude with neither. My solution became my mantra - just show up and "just look stupid". If it was what I was supposed to do, I should just start without thinking about it too much. I revealed my lack of speed, strength, toughness, balance and flexibility. And improved each 1% each time I did. I was willing to look stupid, but after a while didn't look quite so stupid anymore. Or care what I looked like.

When approaching an idea, I first ask if my source is honest (no need to go further when I'm being lied to) before asking if he's smart. Once I've narrowed down the world to the overlap between honest and smart, I have a third circle to my mental Venn Diagram - is he trying to look smart or actually make sense. A lot of high-priced helpers are able to put together lucrative careers just trying to look smart. But what I look for is someone indifferent to looking smart if the idea actually makes sense. Because these two are so often in tension, a willingness to look stupid, at least for a while, can be where some of the best ideas are hidden in plain sight.

Where are there some ways to look really, really stupid in today's market? What has been discarded by everyone who wants to look smart? These could offer some attractive time horizon arbitrages. They could easily be debacles in the days and weeks ahead. They could also be triumphs in the months and years ahead. If you have a boss that could fire you for embarrassing positions: don't read further. If you have an audience that can comment on your short-term performance: close this tab. If you operate with aggressive leverage in a margin account, these could ruin your life. But these ways to maximize my pain and humiliation in the short-term could also have a very positive expected value if you can hang on for the long-term and control your destiny. This will get noisy, so you'll need strong hands. Can you begin something today that you end only at the time and place of your choosing? Then read on.

Twitter

Twitter's (TWTR) erratic buyer, Tesla's (TSLA) Elon Musk, has essentially told us that he doesn't want to buy it for $54.20 anymore. The current IRR is over 50% if the deal closes by the second quarter of next year. The market-implied probability is right around 1 in 2. I love looking at market-implied probabilities to frame questions, but it is circular to use them to answer questions. Yes, the downside is in the low $20s. Yes, the stock price is in the $30s. But that is the opportunity. The market can't tell you what to think. If the market is always right, then just buy the S&P 500 (SPY) and be done with it. On literally every idea I've presented publicly, at least one commenter weighs in that I can't possibly be right if the market price is right. Stipulated. In fact, it is a tautology. It is worth the $0.01 per pageview that I get for that commenter but a little more. Investing is often the practice of finding gaps between superficial appearances and a deeper substantive understanding.

In the case of Twitter, that gap is gaping. Elon's crazy tweets are followed by millions, but fewer people have taken the time to carefully read the definitive merger agreement commitment that he recently signed. Unless things change, he owes each Twitter shareholder $54.20 for each share that we own. If he fails, he can explain it to a Delaware judge who is among the few people who will carefully read a contract but may or may not keep up with crazy tweets. How can I look really, really stupid? If Elon successfully walks away after essentially telling us he will. How can I make money? Three ways. First, the deal could close on current terms with or without the intervention of the Delaware court. From here that is a bonanza outcome even if the outcome is pushed into next year. Secondly, Twitter could capitulate and re-cut, maybe to something closer to $45-50 per share in return for an even tighter commitment for the buyer to close. Disappointing, but a solid outcome prospectively. Thirdly - and again this is for no boss, audience, or leverage - the deal could break, shares could trade down to the $20s as arbs dump their positions, and you'd be left with one of the most important and undermanaged franchises in social media. It will occur to someone that they can fire half of their employees, cut costs to the bone, and far better monetize the site. If they manage to goof up this deal, management and the board will lose all credibility and shareholders may need to take over. But they will be left with a company that is so bad, it is good. Good in the sense of easily improvable. And longer term, that is probably worth at least twice as much as where it would initially trade post-deal termination.

Amplify

YHOO

Of all the states to spill oil upon, California was probably the fiftieth best in terms of avoiding political drama. Unfortunately, that is where Amplify Energy (NYSE:AMPY) had a recent oil spill. As facts emerged that the spill was the fault of an anchor drag and not the pipeline company (and as commodity prices spiked) the share price doubled. But if they can get the pipeline back online this year, the share price should double again. It is actually a very good investment, but another way to practically maximize short-term pain and humiliation as politicians attack the company and try to delay regulatory approval while commodity prices have time to cool off. It will get noisy and volatile. This one could be bait for angry anonymous internet trolls to come after me (I'm pretty safe when it comes to a boss or excessive leverage but less so when it comes to an audience). But with or without the Beta pipeline coming back, Amplify offers amazing exposure to energy commodities. They can roll off hedges, make enough money to completely pay off their debt, and monetize assets within the next year. If they do, their stock is worth at least $15 per share. This is not ESG. It is not green energy. They spilled oil on Huntington Beach, California. And if it is a disaster, it will look, in hindsight, like an obvious one. Virtually everyone (but me) will have known and they will all remind me.

Franchise Group and Kohl's

Franchise Group (FRG) is in talks to buy Kohl's (NYSE:KSS). I own both. Everyone else appears to have walked away from Kohl's. We are in a weak equity and credit market, retail has been a dumpster fire this year, and unlike Twitter, there is no definitive agreement. Potential buyers can walk and all but one have. The three weeks of exclusivity wraps up within a few days, after which the last buyer might walk causing the target to plummet. It is completely obvious to almost everyone but me. But given all that, the market appears to have overreacted. They could get the deal done at the originally contemplated $60 per share, they could take into account the intervening market conditions and renegotiate something in the $50s (I'm on both sides of this, so have complicated incentives). Or Kohl's shareholders could replace the board and re-auction the company next year in what could be a more benign market environment. In any event, if you have enough time and are willing to look stupid for a while, both this buyer and seller are extremely interesting today. Oh, and FRG's CEO is a deal genius who has repeatedly bought things that no one else understood, refinanced them, took out more cash than he put in, then freerolled their rebounds. That has made him pretty rich. But Kohl's is on a scale that could make him very rich. I bet on him a long time ago at a much lower price, but am still happy with that bet today. KSS is worth at least $55 per share to FRG, and FRG is worth at least $60 per share with or without it.

Conclusion

There is a tension between maximizing certainty and expected value. Want some certainty? Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) will close their acquisition of Alleghany (Y) and Mr. Buffett won't post any crazy tweets about it. But holders will get paid a yield of 5% while Twitter holders could get paid a yield of over 50%. Berkshire holding Occidental Petroleum (OXY) is a sensible way to get some energy exposure without embarrassment (I actually own and like their OXY.WS warrants) but without anywhere near the upside as Amplify. And staying completely away from retail this year is a way to not incense your boss, readers, or margin clerk. But if no one is looking at what you do with your own money and it's money that you can afford to lose and don't need anytime soon, the above ideas with highly uncertain outcomes have highly positive expected values.

TL; DR

If you don't have a boss, audience or leverage: buy TWTR, AMPY, FRG, and KSS. If you do and if you're reading this on paper, burn it. If you're reading on a desktop, close the tab. If you're on your phone, then hurl it into the inky black waters off of Huntington Beach. These are messy situations with near certainties to offer opportunities to panic out of them lower. If you have to sell if they collapse, then don't buy them.

Disclosure: I/we have a beneficial long position in the shares of TWTR, AMPY, FRG, KSS, OXY.WS either through stock ownership, options, or other derivatives. 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.