TMFDeej (99.47)

An overview of Jockey Investing, what it is and how to profit from it

March 14, 2013 – Comments (8) | RELATED TICKERS: AL , STTYD , BRK-A

I've been meaning to write a blog post on Jockey Investing for a while now.  Whether you know this specific term or not, probably everyone who invests for themselves knows what it is.  The ultimate example of "Jockey Investing" would be the purchase of stock in Berkshire Hathaway in the 1960s and rising Warren Buffett's amazing compounding machine for the next several decades.  In short, jockey investing is attempting to find a smart allocator of shareholder capital that can create exceptional returns in a stock for investors, ideally early in the game.

I have become increasingly fascinated with finding jockey investments lately.  I think that they can make a very interesting part of a special situation investment portfolio.  I currently own a number of this type of investment in my real world and CAPS portfolios.

Courtesy of the outstanding Special Ops service here at The Motley Fool, I was able to hop aboard the Stuart Tanz train at  Retail Opportunity Investments Corp. (ROIC). They also introduced me to Richard Heckman and Heckmann Corp (HEK), which recently announced that it was changing its name to the more descriptive Nuverra Energy Solutions.  The gains haven't come at HEK yet, but I strongly believe that they will. I have actually owned HEK here in CAPS from very early on, 2010, before the company really even formed its current business model.  I didn't exactly what HEK was going to do, just that Richard Heckman had proven to be a very successful business man in the past and I wanted to see if he could create value again.

A third and last, jockey play that I was introduced to by Special Ops is the Canadian company Sprott Resource Corp. (SCPZF) where the company's CEO Kevin Bambrough and Chairman of the Board, Eric Sprott, are wisely investing shareholder money in natural resource plays and paying them a massive, monthly dividend to wait for the market to realize what a good job they're doing.

Recently I have found two new jockeys that I have put real money behind.  The first is Steven Udvar-Hazy.  This gentleman successfully started a company called International Lease Finance and sold it to AIG for big bucks a number of years ago.  Mr. Udvar-Hazy is attempting to recreate this magic with a new company called Air Lease (AL).  Air Lease is an airplane financing company that went public in April of last year at a higher price than it is trading at today.

I am personally somewhat familiar with the airplane leasing industry from my previous foray into International Lease Finance distressed bonds that I purchased during the credit crisis. I can tell you that massive recessions are not kind to highly levered airline leasing companies :). I was sweating my investment in the bonds at the time, but things eventually turned OK.

Air Lease seems to have a decent tailwind (get it ;) ) in that the terrible airline industry is doing about as well as it is ever going to right now. Add to that the need for air carriers to purchase more efficient planes in today's relatively high cost fuel environment and there should be plenty of business for AL. Historically low interest rates don't hurt either.

In fact, Air Lease has significant orders on the books already for new planes over next three years.  Just two weeks ago, it placed an order with Boeing (BA) for 10 new 777s.  Most, if not all of these planes, have already been contracted out to airlines.  These orders alone should cause the company's earnings to rise from $1.20 in 2012 to $2 in 2013 and $3 in 2014. That's some pretty solid visibility into excellent earnings growth. At a multiple of only 15 times that 2014 earnings estimate, down from the 21 times that AL trades at today, the stock would be a double from its current level.

So what could go wrong? Well, the main thing would be another recession that would cause airlines to cancel these orders before they take delivery of the planes. If you're optimistic about the economy, as I am, then this shouldn't be an issue.  Rising interest rates probably wouldn't help, but International Lease Finance did very well in the past in a much higher interest rate environment than what we have today.

This idea comes courtesy of John Osterweis of Osterweis Capital via an interview that he recently did with the excellent publication Value Investing Insight.

Another recent real money jockey investment that I made was in another Canadian company called Sandstorm Metals and Energy (STTYF).  I call it Canadian because that's where the company's headquarters is located, but this is really a global resource company with investments on a number of different continents.

This one is a real puzzler to me.  It looks like it has the potential to either be a 10-bagger or go to zero.  The jockey here is the company's CEO Nolan Watson.  He is fairly young, yet he has experienced a tremendous amount of success with two other companies already, Silver Wheaton Corp. (SLW) and Sandstorm Gold (SAND).

By the age of 26, Watson was named the Chief Financial Officer of SLW, becoming the youngest CFO of any NYSE listed company.  Over the course of the next four years, he helped the company raise over a billion dollars to fuel its growth.

Upon leaving SLW Watson created another successful company, SAND, which has seen its stock soar from $3.45 in 2010 to the $9.74 it currently sits at.  Not that long ago before the price of gold took a little dip, SAND was trading for over $14/share.  That's a solid triple in a few short years.

Watson's latest venture, and the one that I am specifically interested in has not been that successful thus far is Sandstorm Metals and Energy.

The well-respected Roumell Asset Management did a short, but interesting on the company write-up in its letter to investors a couple of quarters ago:

http://www.roumellasset.com/pdfs/update_3Q2012.pdf

Watson certainly made some missteps in some of Metals & Energy's early investments, causing some investors to lose confidence in him and the company's share price to plummet to a mere $0.39/share.  I know that a low share price in itself doesn't in itself matter much, but you don't see too many stocks that are trading at $0.30 to $0.40 per share.  I could buy ten thousand shares of the thing and feel like a real big wig without spending all that much ;).  Fortunately, judging from a recent interview that I read with him, he seems to be learning from his mistakes and making adjustments.

In short, STTYF plans to make money by financing early state resource ventures in exchange for a contract to purchase a portion of its future production of metals, coal, natural gas, etc... at below market prices.  The main thing that gives me pause about this business model is that it almost reminds me of a First Marblehead (FMD) type of business model (remember that mess), in that the company is laying out cash today with the promise of a potential income stream at some point down the road.

So that's my two recent jockey purchases in a nutshell.  I'd love to hear others' thoughts on any of the companies that I've mentioned, or other potential jockeys to invest alongside, such as Sardar Biglari (BH) or Michael Smith (MIL).  Who do you like and why?  I know what we aren't going to find the holy grail of investing, the next Warren Buffett, but I'd gladly invest alongside someone who's half as good.

Thanks for reading everyone.  Have a great evening!

Jason