“You don’t want to be on the wrong end of a short call by Kevin Kaiser of Hedgeye Risk Management,” Bloomberg wrote recently. A series of Kaiser’s short calls, from Linn Energy to Breitburn Energy Partners, have resulted in bankruptcy.
Kaiser’s latest short? Macquarie Infrastructure Corp (MIC). It’s a $6.4 billion collection of energy and industrial businesses.
In the days following the announcement of Kaiser’s short call, MIC shares fell almost 10%. It’s not looking up either. “It doesn’t take a lot to go wrong for this to get really ugly,” says Energy analyst Kaiser. He continues:
“I think probably a key tenet of the bull case is betting on management and the company’s capital allocation strategy. I think that’s poorly thought out.”
Here’s why:
- The existing businesses are clearly mature—there’s not much growth.
- The company relies mostly on acquisitions to grow.
- MIC has an aggressive dividend payout, over 150% of their earnings and free cash flow.
In other words, the stock is highly-sensitive to changes in U.S. economic cycles since they’re largely acquiring growth by tapping capital markets. Kaiser has seen this before. He explains how he thinks this plays out.
“So with this capital asset allocation strategy, like any other company that does this, what tends to happen is you buy when times are good. You buy when your stock price is high. You buy when asset valuations are high; when profit margins are near peak.
And then when capital market cycles roll over, you have to hunker down because your stock price has gone down, your leverage is high and you had to cut your dividend.”
Many investors are long MIC because they believe management can create value simply by deploying capital.
As Kaiser says, “I’m not so sure about that.”
