finance
This is a podcast about finding undervalued stocks, deep value investing, hedge funds, shareholder activism, buyouts, and special situations. We uncover the tactics and strategies for finding good investments, managing risk, dealing with bad luck, and maximizing success.
Tim Melvin discusses the ongoing consolidation in the community banking sector, noting that the number of banks has dropped from 18,000 to about 4,400, and predicts it will eventually fall to 1,000 or fewer. He explains that despite negative headlines, the remaining community banks feature solid capital levels and good credit quality.
Tim Melvin highlights Hoyne Bancorp, a recent thrift conversion out of Illinois, as an example of the kind of small bank he loves to buy. He notes the bank boasts a 34% equity-to-asset ratio and trades at a discount to tangible book value.
Tim Melvin argues that casino REITs like Vici Properties are deeply undervalued, trading at about 80% of internal net asset value with strong dividend yields. He points out that they maintained rent payments through COVID and the great financial crisis.
Tim Melvin discusses Blue Rock Real Estate Fund, noting it was listed as a closed-end fund following institutional redemption requests. He points out that it trades at a steep 45% discount to net asset value while offering a high double-digit effective yield.
Tim Melvin analyzes current credit markets using methodology from Dan Rasmussen at Verdad. He notes that while overall spreads remain tight, lower-tier credit like triple-C paper is facing severe stress with yields reaching 18%, signaling potential trouble for lower-end borrowers.
Jonathan Boyar of Boyer Value believes the market has overreacted to AI's potential disruption of companies like Booking and Airbnb. He argues that these platforms have strong competitive advantages and handling complex travel logistics, which AI alone cannot replicate. Boyar suggests the current stock prices present an opportunity for long-term investors.
Jonathan Boyar discusses QSR (owner of Burger King, Tim Hortons, Popeyes, and Firehouse Subs), noting it's facing consumer headwinds like rising costs and competition. However, he highlights that Burger King North America's turnaround seems to be working and praises CEO Patrick Doyle's leadership, who previously succeeded at Domino's. Boyar believes QSR is a cheap stock with potential for improvement.
Jonathan Boyar points out a significant valuation disconnect for MSG Sports, which owns the Knicks and Rangers. He notes the enterprise value is $10 billion, while a minority stake in the less prestigious Islanders sold for $3 billion and the Lakers for $12 billion. Boyar explains that MSG plans to split MSG Sports into two separate companies (one for the Knicks, one for the Rangers) to highlight their individual valuations and potentially sell minority stakes to buy back shares.
Jonathan Boyar notes that Pool Corp, a supplier of swimming pool products, has seen its stock price drop significantly from its COVID-era peak of 55 times earnings to a current 15-16 times earnings. While acknowledging the stock got ahead of itself, he believes the business is fundamentally sound with good management and low leverage. Boyar suggests the current valuation makes it worth considering, especially for long-term investors.
Jonathan Boyar discusses Markel, acknowledging it as an attractive investment with a reasonable valuation (1.2 times book value) and potential for improvement, especially following activist involvement. However, he cautions against calling it the 'next Berkshire Hathaway,' emphasizing that Berkshire is unique. Boyar notes Markel missed the recent hard insurance market but appears to be turning around its underwriting, with promising combined ratios.
Jonathan Boyar views Uber as an 'unbelievably interesting name' trading at a below-market multiple despite 20-30% annual growth. He believes that even with competition from autonomous vehicle players like Waymo and Tesla's Cybertruck ambitions, Uber will thrive. Boyar's thesis is that a hybrid mix of AVs will persist, and users won't want multiple apps, making Uber the go-to platform with its delivery business adding further value.
The discussion highlights Nike's significant stock decline, down about 80% from its peak, attributed to self-inflicted issues like alienating retailers and product missteps. While acknowledging the brand's power, the conversation notes that athletes now have more direct-to-consumer power, reducing Nike's leverage. Despite challenges, the potential for a turnaround exists if the valuation becomes compelling enough, though dividend cuts are a potential concern.
Ian Cassel announces the relaunch of his Micro-Cap Club community, built on a new platform after 15 years. The relaunch aims to modernize the site and introduce new features and incentive systems. Cassel views the club as a recruitment engine for quality investors, with new applications hitting new highs.
Ian Cassel discusses the success of the recent Vegas conference, held at the Bellagio, which aimed to elevate the perception of micro-cap investing. The key performance indicator for the event was the average number of one-on-one meetings each presenting company had with investors, which averaged 16-17.
Author Ian Cassel discusses his new book, 'Stock Picker,' which he aimed to make readable, digestible, authentic, and personable, rather than an instruction manual. He emphasizes that the book's goal is not to teach readers to invest like him, but to help them invest like themselves.
Ian Cassel explains how to distinguish between fanatical investors and promoters by observing their response to data. Fanatics are obsessed with their thesis and dismiss contradictory evidence, while promoters are more focused on selling the stock, potentially misrepresenting information.
Ian Cassel believes the micro-cap space has shrunk, citing a lack of high-quality small companies going public. He suggests focusing on the quality of businesses rather than the volume of micro-caps, ideally companies that do not need to raise external capital.
Ian Cassel emphasizes that his Micro-Cap Club community welcomes all investment styles, contrasting with places like Value Investors Club that may favor specific approaches. He believes every investment flavor has 'goat investors' and aims to represent a variety from story stocks to deep value.
Ian Cassel notes the international growth of his Micro-Cap Club community, with approximately 25% of users from Europe and 10% from Australia, indicating an expansion beyond the US and Canada. He aims to pool quality investors to elevate the micro-cap investment class.
Investor Zeke Ashton drew parallels between the current AI market frenzy and the dot-com bubble of the early 2000s, noting the similar 'have to be there' mentality and the sheer scale of potential market sizes being discussed. He highlighted that while the dot-com era's speculative numbers seem small now, the current AI market's projections for companies like SpaceX and Anthropic are orders of magnitude larger.
Zeke Ashton expressed concern over the current scale of capital being deployed in the AI market, comparing it to the dot-com bubble but with significantly larger numbers. He noted that while Nvidia's valuation might not seem excessive on a trailing PE basis, the sustainability of its revenue depends on AI becoming a 'killer app' that justifies the massive investment.
Investor Zeke Ashton emphasized the critical role of risk management in his investment philosophy, stating that it's a dual responsibility alongside risk-taking. He draws lessons from his early career in risk management consulting and his experiences navigating market crashes like the dot-com bubble and the 2008 financial crisis.
Zeke Ashton highlighted his success in protecting capital during the 2008 financial crisis and recouping losses by September 2009 for both his hedge fund and mutual fund. He contrasted this with the broader market, noting that the S&P 500 took about five years to recover to pre-crisis levels.
During the discussion, the speculative nature of different market eras was debated, with Zeke Ashton suggesting that today's AI market, while having companies with seemingly unlimited demand like Nvidia, has even larger numbers and potentially greater risk than the 2000 dot-com bubble. He pointed out that while 2000 was 'profitless speculation,' current AI companies have booming revenues, but their long-term sustainability remains a question.
Matthew Sweeney of Laughing Water Capital discusses the evolution of his investment philosophy over the past decade. He notes a personal shift from feeling pressure to build and participate in market trends to a more established confidence in his own process, even when it differs from the prevailing market sentiment.
Matthew Sweeney explains his preference for investing in small to mid-cap companies, generally above a $1 billion market cap. He believes larger companies tend to have better management teams, more focused boards, and more engaged shareholders, which contributes positively to governance and overall returns.
Matthew Sweeney defines his value investing approach as identifying businesses that are mispriced relative to their intrinsic worth, going beyond simple quantitative metrics like low P/E or P/B ratios. He emphasizes understanding a business's true earnings power, often by analyzing factors not immediately apparent in gap financials.
Matthew Sweeney outlines his investment process, starting with identifying a "good business," defined by quantitative metrics like returns on capital or qualitative aspects like long-term stability. He also prioritizes partnering with management or boards who own significant stock and ensuring the business can weather economic cycles through a strong balance sheet or recession-resistant cash flows.
Matthew Sweeney highlights the importance of understanding why a business is cheap, focusing on discrepancies between quantitative financial screens and a qualitative businessperson's assessment. He cites companies investing heavily in R&D as an example, where current earnings might appear lower due to strategic spending, but future earnings power could be significantly higher.
Matthew Sweeney describes 'doing nothing' as one of his specialties in investing. He elaborates that once a business is identified that meets his filters, the strategy is to sit and wait, allowing the business to perform without unnecessary intervention.
Matthew Sweeney discusses the concept of 'business inertia,' suggesting that companies in the $1 billion to $2 billion market cap range generally exhibit more stability and predictability than smaller companies. He notes this can translate to lower customer concentration risk and more predictable revenue and margins.
Matthew Sweeney emphasizes that a 'good business' for him means one that is fundamentally sound, potentially with strong quantitative metrics like high returns on equity. He also favors businesses with predictable, long-term relevance, giving 'fire prevention' as an example of a service that will always be needed, regardless of external changes.
Chris Mayer, author of '100 Baggers', discusses his new book, 'The Investor's Odyssey,' which explores the principles of long-term investing. He uses a story about an early Berkshire Hathaway investor to illustrate the power of making a single decision and sticking with it, leading to significant wealth accumulation.
Chris Mayer explains that the 'siren call' in his book refers to the constant barrage of media and financial news designed to make investors feel compelled to take action. He argues that this pressure often leads to detrimental decisions, as financial media typically emphasizes short-term events over long-term value.
Chris Mayer advises investors to avoid common detrimental habits such as checking stock prices frequently, which can exaggerate perceived volatility. Instead, he advocates for focusing on a business's essential performance metrics. Mayer also suggests reducing media consumption to avoid distraction.
Chris Mayer predicts that Artificial Intelligence (AI) will significantly disrupt a large number of businesses, including many currently considered sound. He estimates that the full impact will take about five to ten years to propagate widely, though some individuals are already adopting AI more extensively.
Ralph Molinaro, a small-cap activist, shared his experience with Park America, a regional safari park operator. Focus Compounding, an investment fund, initially invested in Park America in early 2020, attracted by the local economies of scale and high returns on assets at the Georgia park (50-70%). However, by 2022-2023, a change in dynamics and a power struggle involving other shareholders led to Focus Compounding gaining 40% ownership and control of the board, with Molinaro joining the management team for a year to help turn the company around.
Ralph Molinaro described his unexpected career trajectory into activist investing, which began after graduating in 2019. Initially having no interest in the stock market, he was inspired by a college mentor who introduced him to value investing, particularly in small-cap and micro-cap companies. This led him to Focus Compounding, where he eventually became involved in activist campaigns.
Focus Compounding was attracted to Park America due to its regional safari parks, particularly the Georgia location, which was described as a 'cash cow'. This park alone achieved return on assets between 50% and 70%. This strong performance in Georgia suggested potential for similar success at Park America's other locations in Missouri and Texas.
Focus Compounding initially held 20% of Park America, increasing to 40% after the founder, who was also CEO and chairman, passed away. A conflict arose between shareholders, leading to the founder being ousted. Focus Compounding then used its increased stake to gain control of the board through a proxy fight at the annual meeting, after failed negotiation attempts.
Ralph Molinaro shared that he did not initially aim to be an investor, but his entrepreneurial program in college exposed him to value investing. He learned from a mentor that investing in public companies is akin to being a business owner. He focuses on small-cap and micro-cap stocks, avoiding index investing.
Meb Faber's new coffee table book, "Investing in America: The Rise of a 250-Year Bull Market," was released on July 4th. Faber explained that the inspiration for the book came from discussions with his son and observations during COVID-19, leading him to create a visually appealing book that traces market history.
Meb Faber noted a shift in investor behavior, particularly among younger generations, catalyzed by events like the COVID-19 pandemic and the rise of meme stocks. He observed this trend leading to increased interest in prediction markets and zero-day options, drawing parallels to his own early experiences with online trading platforms in the late 90s.
Meb Faber discussed his approach to writing his new book, "Investing in America," aiming for a "picture book" style to cater to visual learners, a learning style he discovered is shared by a significant portion of the population. He mentioned this was inspired by a realization about his own learning preferences and the desire to make complex financial concepts more accessible.
Meb Faber shared insights into the publishing of his coffee table book, "Investing in America," noting that the publication date was July 4th. He mentioned potential shipping delays due to "clogs in the system" but expressed optimism about the final product, which he aimed to make as high-quality and visually appealing as possible.