I’m pretty sure this company is going to burn through cash and eventually go bankrupt within a 5-10 year period (possibly sooner, not longer).
What’s the best way to profit off of this view?
*Patiently awaits Bro’s shorting advice*
Just had a look at the company profile. Seems to be heavily invested in the prolonged success of EDM festivals. Could you provide some more info on your hypothesis?
I haven’t really looked closely at this but my off the cuff view is that SFXE is a POS and is run by a clown. No position in it ever. There was a long pitch floating around that I read, but it didn’t make any sense to me and the management is terrible, so I walked away feeling like it was a missed opportunity to short when the stock was 3x higher earlier this year.
No seriously, this is the CEO:
Would not, could not invest…
Of all the things you can do in small caps, investing with bad management is the least forgiving.
HA!
This fool runs a company? Not for long.
Bromion, how would it be best to go about profiting on the mid-term demise of this company?
Your question seems easy but it’s heavily dependent on the specifics.
Assuming:
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the rebate is fairly low
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your outlook for the company is that it will continue to struggle and burn cash
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the current value of the stock is *much* higher than any potential take private value (if any)
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other negative catalysts exist
Then I would get short the common equity in relatively small size as a total % of the portfolio and then wait for it to decline. Small stocks with promotional crotch-grabbing CEOs tend to be volatile, so you really need to be prepared to wait out any vol, assuming you have conviction in your analysis – hence the small position sizing.
I don’t recommend this type of short for retail accounts for lots of reasons but specifically because retail traders are not really psychologically equipped to wait that long (in most cases) and because the buy in risk from a Schwab account is much higher (and buy ins happen at the worst possible times). If we’re talking institutional scale and you really hate this stock, it would probably be easy to stay short 1-3% of your portfolio.
Thanks!
Down 86% from my original post until today (~9 months), not bad.
http://www.forbes.com/sites/ryanmac/2015/08/24/the-fall-of-an-edm-empire-sfx/
Asking the obvious question here: did you take a short position or what?
It was too small of a market cap and too expensive after listening to Bromion then looking into it. I’ve run into this before where the cost and logistics of shorting the obvious names in a retail account makes it pretty difficult. Still a great call.
Yeah I won’t really pay over 20% to borrow stock and ideally not over 10%. I have about 100 shorts like SFXE on the book now. Or maybe 80 crap stock shorts and another 20 “real company” shorts. It’s like buying insurance on hurricane prone coast real estate. If I pay 10% and have a small position, I can in theory sit on it for 10 years before the rebate eats up my capital. In all probability, I will get paid much sooner than 10 years on any of these stocks. A 10% rebate is very cheap for something that should trade 70-100% lower – they typically don’t last for more than a couple of years (market takes out the trash eventually).
Because the position sizes are small, I can outlast any stupid price moves caused by day traders. No real investor is going to buy something like SFXE and sustainably bid the price higher.
I disagree with the premise that you always lose money short selling in the market over time because the market always goes up. That’s only true if you try to get rich shorting and take chunky short duration positions. I don’t try to get rich, I try to get paid to take out portfolio insurance. Historically my short book has compounded in the double digits annually on invested capital. This is not really possible outside of an institutional setting – to Black Swan’s point, you couldn’t really do this in a retail account for a lot of reasons. You need the right prime setup and the right capital base to make it viable.
You get rich on the long side but the short side can be a profitable hedge if done properly. It’s a rare skill though, most investors should be long only or susbtantially long only. The shorts take 3x as much work for a fraction of the return as the longs but it helps with marketing and does make money.
When they go, they go quick. I was not short SFXE. Looks like that was a good one.
Tempted to pick up some shares when it dips even lower. The brands they own have some idividual value, however I don’t see anyone coming in now. Might as well wait until they claim bankruptcy.
I’ve been to a significant number of the events they own. There’s very little to stop someone else from just duplicating the event or EDC’s roadshow to just come through a town, similar to how you now have EDC NYC competing with Electric Zoo. You also have regulatory risk around the overdoses and the fact that a lot of major headlining acts and more experienced fans have been gravitating towards smaller events because of lower ticket prices and higher returns to the artists. When I was at EDC LV, you saw some of the biggest artists (Skrillex for example) come in town for the same weekend only to play the clubs and skip the festival all together. Basically they just poach festival fans without spending on infrastructure or marketing.
These guys have just overspent far to heavily on promotion, equipment and salaries and are going to struggle to make any of that money back as the popularity fades. In my mind if the crazy ticket prices being charged now ($137 single day on a three day event) can’t pull you to positive free cash flow, you’ve majorly squandered investor capital and are super screwed when the music stops.
Also keep in mind you seem to have totally ignored liabilities. First off, these guys have a whopping $6M left on their revolver. There are also major liabilities ($320M in debt which will likely grow and $33M in accounts payable) that will have to be repaid before an equity holder would be in line. Assuming the cash balance of $52M will be burned through before they go insolvent (free cash flow was -$58M last year), that leaves them with 71% of their non-cash assets as intangible assets which are usually susceptibile to MAJOR haircuts in the event of a firesale. Focusing on tangible non-cash assets, you’ve got $186M to pay off $353M in debt and accounts payable. Good luck getting a return on that equity.
I agree they suck as event promoters. I have been to a number of their events as well and they are shit. Made Event/EZoo was amazing in 2012 & 2013. SFX came along and completely ruined the festival by being cheap and making everything tiny. I refuse to go to any of their events anymore. EDCLV when I went in 2013 was amazing, however in 2013 I felt EZoo was just as good (mainly because I lived in Astoria and could walk there, whereas getting to EDCLV is a complete disaster)
Also, I didn’t mean I would wait and hope to get some return through bankruptcy. I meant it was interesting as a takeover play, as the individual brand names have SOME value. I was saying that any potential bidder might as well not bid now, and pick it up in bankruptcy. Agreed the business is basically completely unfixable at this point.
As far as EDCLV club shows you mentioned, that for the time being is only a product of the fact that EDCLV sells out, and brings so many people to the strip that it can support all those shows on top of the festival. Same thing happens to Ultra (although it didn’t sell out I believe) and Miami. If EDCLV were to drop in popularity those shows would most likely slow as well. Vegas gets huge name DJs on a regular basis anyway however. Also EDCLV gets to add that to the pitch to the city saying look how much revenue we are bringing to the city both directly and indirectly.
Doesn’t really impact the points I made.
Nailed it. Call me Rainman.
Down >99% since I called it to $0.05, bankrupt on February 2nd AND Tomorrowworld cancelled (likely forever). So much for brand value.
Nice call. I followed this name out of interest due to attending EZoo for a few years and found it just hilarious. He made and withdrew a bid like twice, the whole thing was a disaster
The real question, BS, is did you profit from this?
Read up. It’s not the real question though. Right call is right call. This is an annoymous forum not a trading floor.
You’re killing it BS. I need more names to invest in son