I’ll be busy the next couple of weeks putting together a grant application to the NIH, so there will be a slowdown in my research into actionable ideas. I have decided to use the time to liquidate some of my existing holdings into the rising market, and to learn from any mistakes if any. Liquidations tend to take cognitive time, since all the heavy analytical work has already been done at the purchase.
First up on the chopping block is NOOF, a position which I have recently liquidated at a loss of around 20%. NOOF is a microcap producer of adult-oriented TV programs for content companies such as HBO. The original thesis was that the company was very cheap (see here for an old VIC writeup), and that revenues were recovering from a trough in 2009, and there was a possible privatization of Playboy that could be a catalyst. I applied a multiple of 10 to projected free cash flows of at least $4M, with $17M excess cash on the balance sheet at that time, to give a cap of $57M, or around $2.90 per share. Since then, revenue has gone further down, presumably from Internet competition, and the company has ramped up capital expenditures to produce new programs, resulting in cash flow dropping to nearly nil. Furthermore, the privatization of PLA has come and gone, and there are signs that cable and satellite operators are increasingly choosing to drop pay-per-view mature content from their networks. In the face of poor current financial performance, lack of a catalyst, and adverse secular trends, I decided to bail out of NOOF at a small loss while the opportunity still exists.
The lesson I learnt from this mistake is that fundamental secular trends always dominate. I failed to anticipate the speed of revenue erosion from internet competition. And I did not fully comprehend how capital-intensive the business of producing content is, and that the cash flow during the trough years of 2009 and 2010 was boosted temporarily by a near cessation of new programming production. Henceforth, I will think twice before investing in a sunset industry.
Disclosure : I have no position in NOOF
