For those who think about credit investing (I hope for you job), I just did the Fixed + Floating podcast with Josef Pschorn on how we think about credit and specifically how we focus on modeling losses rather than yield.
Youtube: youtu.be/HMMOrQDtw08
Spotify: open.spotify.com/episode/4jR1...
Just getting around to posting this, but since it seems to have been picked up in several places (FT, Barrons), here is our most recent piece on credit. Punchline: Private Credit has removed risk from high yield, but high yield can still send distress signals.
mailchi.mp/verdadcap/ha...
The best analyst report I've read on the US airline industry is Maurice Gallagher's 2023 Letter to Shareholders for Allegiant. Well worth the read if you want a insider summary of what has happened in the airline industry since 2001. Bravo.
ir.allegiantair.com/financials/a...
Hit send too early... Which looked at the discounts available in European equities.
Our fifth most read piece of the year was "Rule, Britannia!" by Brian Chingono
verdadcap.com/archive/rule...
Our fourth most read piece of the year was "Activism at Scale in Japan" by Dan Rasmussen, Lionel Smoler Schatz, and Yuto Kida which lookd at how Japanese companies are responding to the Tokyo Stock Exchange's directive to increase price to book ratios.
verdadcap.com/archive/acti...
Our third most read research piece of the year was "The Dispersion Delusion" by Brian Chingono and Dan Rasmussen which argues that the high dispersion of results in private equity is due to portfolio concentration and the small size of the underlying companies.
verdadcap.com/archive/the-...
The second most read research piece was "The Great Rotation by Brian Chingono, our Europe small cap fund manager, who explores the relative equity valuation in Europ versus the US.
verdadcap.com/archive/the-...
The most read Verdad research piece of the year was "Yield is not Return" by, ahem, me. This is perhaps the hundredth piece noting that higher yields (above 6-7% today or at the B rating category and below) come with higher losses that negate the extra yield.
verdadcap.com/archive/yiel...
Our (Verdad's) top five most read research pieces of the year is out. For those of you who don't follow us, we are a research driven investment firm and share some of our research by email each Monday. You can sign up at verdadcap.com.
mailchi.mp/verdadcap/th...
But this has also resulted in credit metrics that are anomolous. Debt to EBITDA by traditional measures is 6.0x which is high for a BB credit. But EV to debt is 3.6x which is very good. Debt to Sales (not a normal debt metric) is 3x! All of this rests on their very high margins.
While they's consumed about $15 billion of capital since 2011 (mostly debt), they've returned $13 billion to shareholders (my estimates) while growing the asset base significantly. This podcast is terrific overview of how they do this and the business model.
www.50xpodcast.com/episodes/tra...
As Dorsey points out, they are an acquisition powerhouse and every time they do a debt funded acquisition, they manage to grow the EBITDA. Profits to assets have fallen, but they are still high.
Edwin Dorsey's piece on Transdigm is relevant to High Yield because Transdigm is 1% of the HY index (it used to be more, but they's used a lot of loans). Including loans, there is $13.3 billion of traded debt. Huge debt, but also huge profits.
thebearcave.substack.com/p/problems-a...
That's an evergreen strategy, not a market timing strategy. And that's where the rapidly evolving quant credit world has an advantage at using shorts to isolate the long factors that are attractive. You can read our full piece here.
mailchi.mp/verdadcap/sh...
Long BBBs are also long duration but have meh returns. So shorting BBBs to get long Fallen Angels can help you build a portfolio with modest duration and more exposure to historically good credit risk.
So outright shorts or low net portfolios don't make of sense. You want to be long credit. But shorting credit to allow to you to get long other credits can work. For example, fallen angels (credit that has fallen from investment grade) have terrific historical returns. But they are long duration.
And the stuff that loses the most, low rated credit, is also the hardest to short because of the carry.
But your base rate of success is much worse than equities. You win 15% of the time versus 40% for equities.
We (Verdad) took a look at shorting credit. With spreads low, it's certainly tempting.