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Silver Ring Value Partners, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be downloaded here. At the end of April 2022 the portfolio was very attractively priced, with the Price to Base Case value ratio at 58%. The portfolio had 14 investments plus hedges, cash at 1% and option-adjusted net exposure at 16%. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Silver Ring Value Partners mentioned Warner Bros. Discovery, Inc. (NASDAQ:WBD) and explained its insights for the company. Founded in 2022, Warner Bros. Discovery, Inc. (NASDAQ:WBD) is a New York City, New York-based multinational mass media and entertainment company with a $41.9 billion market capitalization. Warner Bros. Discovery, Inc. (NASDAQ:WBD) delivered a -25.19% return since the beginning of the year, while its 12-month returns are down by -52.13%%. The stock closed at $17.10 per share on May 09, 2022.
Here is what Silver Ring Value Partners has to say about Warner Bros. Discovery, Inc. (NASDAQ:WBD) in its Q1 2022 investor letter:
"Discovery completed the acquisition of the Warner Media business from AT&T in April, and the combined business is now named Warner Brothers Discovery. We are currently in the middle of an interesting technical event, following the spin-off special situation playbook.
The acquisition was structured as a spin-off of Warner Media, with AT&T shareholders receiving ~ 70% of the shares in the combined entity, or ~ 1.7B shares. Many of these shareholders owned AT&T for its phone business and its dividend. It appears that there has been elevated noneconomic selling as these shareholders exit regardless of price. On the other side, few if any investors want to buy the WBD shares prior to this forced selling being over.
This has caused the stock to decline substantially despite being already priced at a low valuation and reporting good recent results. The people selling aren’t likely considering either of those factors, which is what creates the opportunity. One wrinkle as compared to the usual spin-off special situation setup is that the non-economic selling is likely to last for some time given the retail nature of the shareholder base. This is different from the typical pattern where there is a quick sharp sell-off as institutional investors dump their shares quickly following the spin.
In anticipation of this situation, I had sold our equity prior to the major declines, and replaced it with January 2024 call options. I have since been using a portion of the cash generated from the equity sale to add to the option position as the stock price declines. While this does give up some time horizon, which I am usually loathe to do, both the technical selling and the question of the success of the merger integration are likely to be resolved well before then.
If I am correct and this is a much more valuable business than the market is giving it credit for, we will make a hefty profit. If I am wrong, and the combination of financial leverage, merger integration problems and secular risks are more serious than I foresee, we will have a moderate loss. I like our odds and the asymmetry of risk vs. reward."
Our calculations show that Warner Bros. Discovery, Inc. (NASDAQ:WBD) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Warner Bros. Discovery, Inc. (NASDAQ:WBD) delivered a -37.58% return in the past 3 months.
In April 2022, we published an article that includes Warner Bros. Discovery, Inc. (NASDAQ:WBD) in 10 Best Stocks to Invest in Today According to Billionaire Michael Hintze. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.