Lessons from Intrawest

Brandon Snow's picture

One of the mistakes I can look back on from early in my career was with a stock called Intrawest. I started covering the company in 2004 and felt that it was not particularly well managed at the time and that its stock was overvalued. It spent most of 2004 between $20 and $25, but began moving higher in 2005. I remained negative while the portfolio managers I worked for (namely Alan Radlo) were on my case as the bull scenario was playing out and the stock continued to rise. The bull thesis centered on the value of “irreplaceable” assets and the real estate pipeline. I remember fondly having daily arguments with Alan about the quality of the company and, in my view, the absurd valuation people were placing on the company’s real estate development potential. Markets were frothy and tolerance for taking risk was high. It didn’t take long before I was proven wrong. The stock closed the year at $33 per share and in September 2006, Fortress Investment Group announced it would buy the business for $38.78 a share, a 32% premium to the market. The deal was funded with $1.1 billion in equity and $1.8 billion in debt ($2.8 billion in total), well above my view of fair value.

With the U.S. housing bubble bursting and the emergence of a global financial crisis, this deal turned into a mess. Lenders ultimately took control and at one point even threatened to hold a foreclosure auction of Whistler Blackcomb during the 2010 Winter Olympics if Fortress couldn't refinance the debt! At the end of the day, the company was able to refinance with an additional equity infusion. However, it had to sell the crown jewel, Whistler Blackcomb (WB), plus a few smaller hills at fire-sale prices, and ultimately accept significant losses.

Intrawest has recently announced an IPO. (The ticker is SNOW by the way, a personal reminder of me being wrong in 2006.) Intrawest now looks a bit different and includes a number of ski hills (Mont Tremblant, Steamboat, Blue Mountain, etc.), as well as adventure skiing and real estate components. Its leverage post-IPO will be reduced dramatically from 12 times D/EBITDA in 2008 to five times pro forma for the IPO. (I have no opinion and offer no opinion on the merits of this IPO.)

There are a few takeaways from this story I would like to share:

1) While I turned out to be correct in hindsight, I was wrong in 2006. Private equity was the marginal buyer at the time and ignoring the dynamics of a given market is a mistake. It’s always important to understand who the net buyers and sellers of assets are because it can play an important role in appreciating motivations and price sensitivity.

2) Markets have healed. Intrawest was a poster child of both the private equity and housing bubbles. Intrawest, along with these areas of the economy, have worked through their substantial issues over the past five or more years and have become viable again.

3) Not so bubbly, but we’re watching. Broadly speaking, we are in a far more reasonable place today. Leverage is lower and financing terms are more reasonable, but that doesn’t mean we are not keeping a close eye on these trends.

It’s always important to reflect on past mistakes and previous cycles as it helps to better frame where we stand today. We view the markets as fairly valued overall. That being said, at Cambridge we do not invest in the overall market but rather specific opportunities. While digging up new ideas has become more difficult in certain areas, other areas have been providing some opportunities more recently. We’ll leave this discussion for a later blog.

Comments

Submitted by Carey Vandenberg on

Although you might have been wrong by not riding the trend of Intrawest's stock price through 2006, I'd suggest that you weren't wrong from a risk perspective. It was obvious that Fortress paid too much and thus Intrawest was overvalued. Sure, you could have made money on it when virtually everyone else was ignoring the fundamentals, but it seems to me that you were very sensitive to the risk of the company and the projections. This is what financial advisors such as myself value highly - the discipline to look at things independently and see risk when it may not be very evident to the masses.

Brandon Snow's picture
Submitted by Brandon Snow on

That's a very good point and I want to make two observations:

First, at the time I was an analyst with a firm that focused very much on relative performance and my job was to find stocks that beat the market, so within that structure and with my job title, I was wrong.  

My second and more important observation is, there is a big difference between process and outcome. I am very much ok with being wrong as long as our investing philosophy was applied appropriately. I know my process and analysis on Intrawest was solid but in the end I was wrong because someone paid more for the asset than I thought it was worth. Our job as investors is not being 'right' about everything because there is too much uncertainty when investing (after all, no one can predict the future!). Our job as PMs and analysts is to apply a consistent process to investing, knowing that we will often be 'wrong' but also that our sound investing discipline will allow us to do what we are paid for over time, which is to deliver the best risk-adjusted returns possible. Our investment philosophy at Cambridge is much more focused on understanding the risks when making an investment, with a view on protecting the downside. Rest assured, if the same situation was to occur today I would again be 'wrong' and I would be completely fine with it.

Thanks for the insightful comment.

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