Ladies and gentlemen, welcome to the Business Brew.
I am your host, Bill Brewster. As always, this episode features
Dylan Morello. I found Dylan through the
Twitter machine. He was posting a lot of
interesting ideas. And when I say interesting, I
mean things that I don't see people talking about all the
time. This particular conversation is
going to talk about a lot of companies that I do not follow
and don't have any expertise in. But what I liked about Dylan's
approach is when they said, hey, Mr. Buffett, if you had to
generate 50% returns or whatever.
What would you? Be focused on and he said the
nooks and crannies of the market.
I think Dylan is focused on the nooks and crannies of the
market. I have not seen his returns.
I don't know if he has any audited returns.
I just think he's an interesting guy to talk to.
So should you find this conversation interesting, feel
free to follow him at ragingbullinvestments.substack.com.
I think that could be something interesting to take a look into
some of his ideas. These are micro caps, These are
small. These are my perception of the
riskiest thing possible for a naive investor to get into.
So do not listen to this conversation and go out and make
any dumb financial decisions. Also, we talk a little bit about
Seaport Entertainment Group. It's a spin off of Howard
Hughes. We talk about why Bill Ackman
may have backstopped the rights offering.
A subsequent conversation with my man Francisco brought out the
point that I should have thought of at the time that backstopping
the rights offering increases the probability that the rights
offering gets done because it gives people confidence that the
money will be there. So that's obviously a component
to this. I didn't mention that and
mention it now. Anyway, this intro has gone long
enough. As always, none of this is
financial advice. Do your own due diligence.
Please consult your financial advisor before making investment
decisions. All of this.
Is for entertainment purposes only and enjoy the episode.
Before this music drops, I do want to give a shout out to my
editing team at Speech Docs. You can find them on Twitter at
Speech and Docs's docs. Dax and his team is are
fantastic. I moved from the podcast
consultant to Speech Docs and the transition has been, I would
argue, seamless. All I can say is that Dax and
his team offer incredibly good value and they're very
responsive and I very much appreciate what they do on the
back end of this show. So if you are somebody who is
thinking about starting a podcast, please consider Dax and
his team at Speech Docs. That's SPEECHDOCS,
ladies and gentlemen. Welcome to the business Brew.
I am thrilled to be joined by Dylan Morello this episode.
I found Dylan through his pseudonym on Twitter.
He is on on the Twitter machine and found him throwing out a lot
of ideas that I don't typically see on Twitter.
You see a lot of tech focused compoundary type ideas and
Dylan, you see him a little bit more special sit slash asset
based. I guess if I were to summarize
what I've seen you come up with over the last call it seven
months or eight months or so. So anyway, thank you for saying
yes to coming on. Well, thanks for having me Ando,
Appreciate it. You want to give people a little
bit of your background. Yeah, sure.
So I somewhat of an unconventional background for
who I've arrived at, although perhaps less conventional these
days, but with the law school route and about as purely as one
could do it. So I did undergrad law school,
then I clerked at a Court of Appeal and I got a job at a New
York law firm as a commercial litigator and pretty quickly
thereafter realized that was never going to offer me the
lifestyle that I wanted. And by quickly I mean like on
day one and. You didn't like the the
lifestyle of constantly being on call and having them work all
the time? Exactly.
And like you're not fully passionate about the work it
entails, then all you see that's not manageable.
They, the nature of the profession is that so you kind
of get trapped, right? Like you've, you've done all
this work, you're incurring debt, then you get a pretty nice
paycheck. And so it does take a little
bit, it's a bit of a challenge to get out, I would say.
So pretty much early on in my litigation career, I already
kind of pivoted my mind to being like, well, what is my best exit
front of us? And I had always, I had had an
investing interest dating well back before that.
Like I did do some Business School classes and I had an
economics degree in my other grad and whatnot.
And so, like, my mind had already been on the subject of
investing a little bit kind of in the decade that passed while
I was an attorney. But kind of in the latter years,
I really started to pick it up and get deep into it and then
put myself in a position where I was able to quit the legal
profession entirely, which actually was a recent decision.
That was January of this year. On my phone was that.
Honestly, I had no regrets at all about it.
Honestly, I wasn't fully sure what was going to happen.
And it's, it's snowballed. I mean, on into being on this
podcast 8 months later, right? But there's been a lot in
between. There was an exit in January and
I had had some investing success on my own for the years that
preceded it, which was kind of what enabled me to leave.
But sort of at the tail end of that, I'd started the sub stack,
which I've been working on and that got traction relatively
quickly kind of through Twitter. And that has just kind of
compounded into this, right. And so now I'm actually at the
at the sort of back end of starting a small fund which is
launching it within the next six weeks probably.
And so, yeah, it's happened really quick.
And as I was kind of saying to you before we hit go on, on the
recording here, like I launched everything with anonymity
largely for the purposes of kind of having enough confidence and
also letting the ideas sort of speak for themselves, right.
And so Wet launched a Twitter account with the pseudonym.
And I think because my background was completely in the
dark, it really, like, led the ideas to getting a lot of
attention because no one knew who the author really was.
I mean, a lot of people obviously do that on Twitter.
That kind of helped me position myself to get to where I am now.
Yeah. And now it's just completely
full time, although it's sort of been like this for a couple of
years, I'll say. And by that, I mean, just
constantly looking at ideas, doing investment research,
running my own account. And obviously the funds going to
be pretty small at launch. So I'm not expecting all that
much of A lifestyle change from the last year or so.
And we'll see where it takes us. And obviously there's definitely
another angle when there's some other people's money involved.
Yeah. But given, given the mandate and
the size of the fund, I don't think it's going to be that much
of A change at this point. Is there a market cap you like
to play in or are you pretty agnostic?
Definitely smaller, but I'm I'm definitely not one of these guys
who's like only the must go liquid tiny thing possible.
Although there are things in my book that are some 50 mil and
quite a liquid, but there's also some 1 to 5 billion market caps.
Not really anything bigger than that, although maybe like a cafe
will grow into something big. Yeah, so you on Spotify, but
that was that was a one off. That was, yeah, I mean, when I
was buying Spotify, which has actually turned out to be a
pretty big home run, but it was trading down at like 75 and I
think the market cap was maybe 15 billion.
So and it just kind of had a a quirky angle to it, but it's not
usually where I'm looking. The thing that's enabled me to
kind of get to where I am, because this seems like pretty
trite, but there are a lot of undiscovered and overlooked
things when you go small. And for someone who's willing to
put the time in and turn over the rocks and beyond can
probably spend way too much time on the computer, frankly.
But if you're willing to do that, there are certainly things
out there where you can actually get an edge.
And given that the size of the account I'm running is not
prohibitive, it makes sense for me to fish there right now.
I guess when I hear market caps that are that small, one of the
things that I like to say or that I like that you said is you
said I'm not one of those guys that'll only fish in that pond.
There's sometimes I'll read a pitch on a micro cap and I'll be
like, does this person like this because they like it or do they
like it because it's a micro cap?
And I think sometimes the micro cap mind can see things that are
not there simply because things are small.
And it's like I, you know, I don't know that there's really
any better value than something large.
I kind of simply agree with that and you also get into a
situation where you might just not have any incremental buyers
for it. So it do you think there is a
sweet spot when you start getting from the 500 mil up
range where there's more liquidity and there's just kind
of there's more of an angle in which you can get some momentum
in the stock. Although if you do get that in
something very small, it can obviously go parabolic, right.
So yeah, it's a trade off, but I don't really orientate myself
with those kinds of parameters when I'm looking at ideas,
right? Like it's not so much like size
or liquidity, it's more of like a mental model that I have,
which is and you're learning to invest and like studying value
investing. There is this sort of dichotomy,
if not contradiction between like the sort of Ben Grahamy net
net early Buffett stuff and then the stuff that Buffett kind of
did post monger, which I think is it, it creates some tension
for value investors. And some guys are like I'm deep
value and other guys kind of as you said at the at the outset
here, kind of looking more at compoundary sort of things.
And what I try to look for in the ideas are things that
perhaps can offer some harmony between that tension, right?
So if there is deep value and some kind of qualitative aspect,
which is really interesting, for example, like some competitive
advantages, a big runway. Now, the only time you really
ever find that bridge between those two ideas is where there
is like some profound misunderstanding as to what's
going on with the business, which is kind of why I end up.
In the small stuff. Because you're just more likely
to find the qualitative aspect of the investment being
overlooked, right? Like anyone in for the most part
can look at the financials and tell you this looks cheap,
right? But then the question becomes
like, what's the insight? And so you get a lot of that
either in small stuff or that the other angle.
But she said at the beginning is sort of hard assets.
And I don't know if it's so much that I'm looking for hard assets
as much as hard assets maybe have somewhat gone out of
fashion. Yeah.
I. Think there's some truth to
that? That's maybe what's leading me
to investing down that road, right.
It's not like I'm necessarily after hard asseting, but like I
do have some super asset light things.
But I think just because of the the dynamic in markets, right,
when you get that real negative sentiment is where you can sort
of find that opportunity where there is D value with quality,
right? And and I know like we've talked
about this before, but some of the real estate names, right?
And I know you had a a series of podcasts about that, but you
know there are some. Real estate, well, that was
multifamily. That's kind of easy to get your
head around. I mean, then you get into office
and like, well, the value guy and me loves office.
The part that recognizes that I don't do office is a specialty
tempers my bias towards liking things that are hated.
But like fundamentally and and I don't, I don't think this is a
unique thought to me, But like, I just I remember millennials
are not going to move to the suburbs and I remember malls are
dead and now office is dead. And I just, I've, I've seen too
many narratives on real estate be wrong to be like, Oh yeah.
For sure. I think that's right.
And so you're fading like when I think there's a raw consensus,
but there's also, I am three, I am 3 publicly traded real estate
companies. And all of them, I think what
makes them particularly interesting is that they have an
office component, but they're also not just office real estate
companies. And I think just a touch of the
exposure to office is enough to put people completely off the
idea. Yeah.
I do too. And so there's been an
opportunity in some names, I think to buy some really high
quality multifamily offices or some multifamily real estate
with kind of a call option on the office portfolio working
out. And that seems to be working
really well so far. But it's early in the game.
And maybe I'm wrong, but I mean, I like what you say about
there's always this kind of narrative around an asset class
that turns out to not work out, right.
And so I think. Yeah, I think that's.
Right as we get some insufficient office probably
does all right, right, Especially if rates are coming
down. Yeah, I just, I mean like
there's clearly crappy office and there's clearly oversupplied
office. But I guess my bias would be
that I've seen enough people say things like, yeah, I like this
idea, I like this stock, but I can't own it because if it goes
down, my clients are going to call me and I can't, I can't say
I lost money owning office today.
I'd rather just wait for it to turn.
And and I think there's some merit in that, right?
Like the the pro side of that is you're not buying falling knives
that, you know, kill you. The upside is or, or the
downside is I, I, I do think it distorts behavior in, in ways
that are not right business like yeah.
And I've like up to this date pre launching the fund, I've not
had to deal with any incentives like that right.
And even once this vehicle gets going, I hope that I've
established the right narrative with the LP's that like we are
going to be trying to do things differently and not have a the
kind of compulsion to follow the masses, right?
Like if we lose money on office, So what?
Hopefully on net, those contrarian bets will end up
paying off, which I think they tend to do.
And as you say, you can't just go and buy every office out
there. Some of them are not good.
But that's kind of the point of stock picking, right?
Like if you're going to go identify something where there
is a broad negative sentiment around the entire asset class,
but inevitably there are going to be some.
They're really strong, right. So in each of the three
companies, I I think there's just a broad base disregard for
those kinds of companies, which causes people to not actually
look very closely. Yeah, two of those, the
companies are not micro caps, right?
I mean, they're more in the small cap range.
They're they're liquid. People know about them, but I
just don't think people are willing to look at them.
And also, it's funny, I spoke to Bill Chen recently, who I know
has been on the pod, and he said something which struck me, which
I think is definitely correct, which is that it's a lot easier
to see the value in these names when you weren't watching them
go down precipitously, right? I never lost money on these
names on the way down. I was up looking at Reit's post
2020 when they started collapsing.
And so I think when you can come at it with fresh eyes, it can be
a little bit of an edge there. Whereas I think if you were
looking at these names, not even necessarily involved, but just
watching them fall, you might be thinking, well, I thought that
was attractive then and look what happened, right?
And so you can get in your head a little bit.
So yeah, I think I think that's kind of helped me maybe get
ultra bullish on this kind of stuff.
And who knows, I could be wrong, right?
But I do find that a lot of the kinds of guys closer to the real
estate industry tend to be more skeptical, and I think that's
because of what's happened recently, right?
Yeah. And I think there's a few guys
that I follow and I think they've been through O eight O
9. And I think maybe one of the
better pushbacks that I've heard is that this is really just a
rates play. I don't know how much of that is
reality in any given circumstance, probably the asset
class as a whole is, but there's some guys I think that have some
valid pushback. But I think the general
consensus I I'm not sure I I buy into yeah, yeah, which to your
point goes to the hopefully to goes to the stock picking
ability, right? Try to try to not open Class C
office. In over supplied markets for
sure. Yeah, there's supply constrained
markets with quality assets and there's buildings that are
pretty clearly trading at a big, you know, companies trading at a
pretty big discount to their asset value.
But the baby's just been thrown out with the backlogger, right.
So I've, I've spent a lot of time there and that's, that's
just the realistic side. But it is kind of a, a broader
thing that I'm trying to do when I'm looking for ideas, which is
honestly pulling up the stock charts of the sectors and being
like, this looks ugly. What's happened and figuring out
if that makes sense, right? Like another sector that I spent
a lot of time writing about and have a decent chunk of My
Portfolio invested in is actually cannabis, which is
probably the most hated. Those companies, if I even bring
them up, people start laughing like they don't, they don't even
want to hear it, which gets me interested, right?
Because when people, I, I own one cannabis company that trades
at net cash and it just grew its revenues 40% year over year and
it's cash flow positive. And these are Canadian based
companies. And there's this really
interesting dynamic there, which is that there's an excise tax
that gets charged on revenue. So on the top line, you're
paying a tax and when that tax was initially contemplated at
the legalization of cannabis in Canada, so going kind of back to
like 20/17/2018, they priced it with the idea that cannabis
would go for about $10 a gram. And so basically the tax is the
lesser of $1.00 or 10%. What's happened is cannabis
prices have collapsed because of a flooding of the market, right?
That's a capital cycle. And so you've had what people
expected to be $10 a gram go down like 5-6 dollars a gram.
And the problem is, is you're paying a dollar of tax on maybe
a 5 or $6 sale. And so it's eating up a huge
chunk of the top line of these companies.
And notwithstanding that, really punitive.
Tax that they have to deal with they're starting to make money
and so you kind of start thinking these are pretty robust
companies that are able to you know still eke out a little bit
of a profit when they're losing 1/3 of the revenue to the
government before expenses. And what happens if and when the
government gets some reason and reforms that tax, right?
Like if they, which has already been tabled before the
Parliament in Canada. And so I would say it's a ripe
fruit for a new Parliament to reform, in which case these
companies will immediately start gushing cash, right?
And so, but you look at these things and like, I think they're
pretty quality businesses. Like they've established a big
brand power. What's kind of interesting about
some of the like there's actually 2 specific, it's called
organic Ram and Crass Group. And both of them have major
shareholdings by the big tobacco companies.
Yep. And so that gives them a huge
competitive advantage, right? They have a much, much lower
cost of capital because if you're a cannabis company
without that, you're not really able to raise in the capital
markets and you've got the existing distribution networks.
So I think they're pretty good businesses, but you know, they
traded cash and so I think that's another example of sort
of what I'm looking at. You had said that the tax was
the low. I think you said.
I don't mean to put words in your mouth, but I think you said
the lower of a dollar or 10%. I think you meant the higher,
right? Yeah, yeah, yeah.
So anything below $10, you're paying a dollar.
Yeah, I think something you're paying, yeah.
Yeah, I don't know. I mean, I, I dabbled in the
cannabis stocks. I, I owned a lot of the
collapse, which was super fun, but thankfully it wasn't a big
position. But yeah, I, I guess the thing
that has made it tough for me in the States is I used to think
that the retail distribution would be a, a durable advantage.
And I'm not sure. I still believe that.
I'm not sure. I don't, but I'm not sure I do.
So it's one of those things that's kind of tough.
I just kind of wonder if it should have been in my too hard
pile because I still can't quite answer that question.
I've sort of taken the opposite approach, if I understand what
you mean, which is that in Canada be retail distribution
and production are held by different companies, right,
Somewhat alcohol industry in the US And I do think that
specialization is actually a competitive advantage rather
than having a manufacturing segment, a retail segment, a
distribution segment, I think particularly in the US, right,
because as if you were dabbling in the sector, you're not able
to really expense yourself at this point, you know, spend
there's nothing, right. And so you're really constricted
and you can't operate across Interstate lines.
And so I think it's created and this is part of kind of the
larger thesis with the with the large Canadian producers is that
I think the American cannabis companies have been sort of
artificially constricted in the way that they've developed.
It's just not a business doesn't organically develop such that
they can't touch another state and that they kind of
integration like that. And so I think when the time
comes, right, because these Canadian producers can't operate
in America right now and the reason that BTI and Altria have
taken the position in the Canadian companies is because it
would jeopardize their US listing and I think have a full
host of other legal issues. And So what I think happens is
when the time comes in the US where there's rescheduling or
legalization, I think the big tobacco players are going to try
to position themselves in cannabis through these Canadian
own entities. And because there's already a
pre-existing infrastructure by the tobacco companies in the US
that might just instantly give them a competitive advantage vis
a vis the Msos, which are operating within single state
lines and don't have that infrastructure built out.
Isn't. So that's kind of like the
larger picture thinking there and that might never happen and
could be down the road. But I do think that's sort of
the mega bull case with these companies is that they get
positioned through the big tobacco companies in the US and
take the market. And they still have a sense that
over time and, and this is I think where the bulls and bears
and Canada's really differ, which is I guess it's a
commodity. And so maybe you're going to
have this sort of inherent cyclicality.
But in another sense, like you don't get that with tobacco and
beer, for example. You have what is more an
oligopolistic structure dominated by brands, even though
the underlying product is somewhat of a commodity, right?
Like, does it really matter if you're drinking Budweiser or
Miller, right? Like, maybe maybe marginally,
but at the end of the day, it's just kind of an OK beer.
And I think people are sort of paying for the brands.
And so you might get a situation where there's price lapse and
realization just cuz there's maybe four or five players doing
all the cannabis in the country. Yeah.
And who better to do that than the tobacco guys?
Well, certainly to the extent that you want C store
distribution. Yeah, like, yeah, I mean, like
the branding in Florida is non existent because it's all
medical. So everything has to be in like
a white container. Although they've started to kind
of brand some edibles but nothing like out West.
Right. Yeah.
I'm based in New York and I don't think I've said it on the
recording, but I'm initially from Canada.
And so I've seen the dispensaries in Canada versus
what's on offer in New York. And what I will say and what I
find really interesting is that Canada wide you will see
domination by certain brands already within the dispensaries.
Whereas I walk into a dispensary in New York and there is just a
multitude of products that don't really stand out to anyone and
there is constant turnover of inventory.
Do you have something else in there next week?
And so I don't think at least in New York and I, I would assume
it's kind of true throughout the country as I don't think there's
really been much development of real brand power.
Yeah, I think that's right. Until the extent you want
actually economic profits in this industry, I think you're
going to need to establish brand power.
And that's, and that's more easy to do through edibles.
Like the example I sort of give people is, and I have spoken to
to some older folks in Canada about this, right, who maybe
they didn't grow up consuming cannabis at now that it's been
legal in the last five years. I sort of opened their mind up
to it. And there's this underlying fear
that maybe I'm going to get too high or get the spins or I don't
know what it's going to do to me.
And so there's an apprehension about consumption.
And what I found that happens is they try a certain brand of
edibles and they say, this one makes me feel actually pretty
good. And because they've now gotten
comfortable with that specific brand, they just keep getting
the same one every time, right? Because they don't want to take
the risk that another product is going to give them the spins or
whatever. And so interesting by nature, it
kind of has that inherent tendency towards a brand, at
least in the edible space, because you are sort of at the
whim of the producer, right? Nobody wants to get sickly high,
no? And edibles are a train that
once it starts, you can't. Hop.
Off exactly right. It's not one that you.
Just say, OK, I've done. Yeah, exactly.
Yeah, I don't know. It's very interesting.
I think that the people that own Glass House would argue that in
the US this brand stuff is too hard.
So just go with the lowest cost producer that can do it at a
decent price. I think they've done pretty well
off the bottom. Certainly not off the top, but
but nothing did in that particular space.
That may be another one where people are so hurt they don't
even want to look. I think that's for sure, right?
Like so so turned off by it, right?
I mean. I'd suspect that actually did
OK. Glass House.
Interesting. Some of those, some of these
companies are like, if you look at the financials, they don't
look that bad. Yeah.
But the stocks are just so blown out, right?
And there's another element to this, which I think if you're
running institutional capital, not only do you have that like
fear of what are you doing, you just lost money on cannabis,
like obviously, but you also have a sector right now that is
particularly prone to meme like movements, right?
Like you'll just be 50% runs in a day and that moves in the
other direction based on virtually nothing, like a little
bit of signaling from the government.
Oh, interesting. And so I think until that
subsides, it might be untouchable for most people.
And I mean, yeah, there was when rescheduling was given the go
ahead by the Dai think it was maybe in May or something.
And you can look at the charts of all these things.
Yeah, I saw everything ripped. Went flying and they retraced
the entire game, right? And nothing's really changed
other than things tend to move slower than investors expect, I
think. And so all the games were just
getting back, right? So that's frustrating.
And he's somewhat uninvestal. Yeah, that's, that's like Will
Thompson's been on this program a couple times and he talks
about mining. There's a thing called the
Alessanda Curve. I, I hope that I said it
correctly, but it's basically like when there's a discovery in
a mine, the stocks rips and then it takes a while to develop And
it's like people just get bored of the time between the news and
when it actually develops and they just sell the stock.
And it's kind of like a, it's not like a through of
disillusionment as much as it is just kind of people get bored.
If I find that dynamic fascinating, lack of patience, I
don't know how pervasive that has always been historically or
if that's magnified more now than it has been in the past.
But I don't know if that's limited to mining.
Like I, I see this in all kinds of things where you get
excitement. And then one thing that I've
been pretty heavily invested in for a while is offshore and that
sector has ripped. It's been a huge success.
But there have been some comments from the company's this
quarter suggesting not that there is a slowdown in day
rates, but that these projects have been kind of pushed out a
few months. And so you might get some
weakness in the next quarter. And then at least what they're
saying when we don't know if this will actually pan out, but
the guide has been that nothing's really changed.
We're just kind of moving things out three or four months and the
stocks have collapsed, right? And so it's like, it's like,
does that three months really make that much difference in the
grand scheme of your IRR owning this thing?
And perhaps if you have quarterly performance mandates,
it makes a difference. But if you don't, presumably
that's an opportunity to just hold your breath for three or
ten months, right? Like what what really doesn't
matter. But I do find that dynamic
fascinating. And I think that's another edge
for, you know, someone without those mandates or someone
running APA. It's just like simple time of a
drage, like just waiting it out a little longer than people are
willing to because there is a lot of patience inpatience.
Cannabis is for sure the worst of those.
But I mean, it's, I think it says a lot about the people
owning cannabis stocks, right? Yeah, they should be more chill,
man. You'd think they would be.
Yeah, just let them play out, see how it goes.
Yes, No, I, I mean, I, I hope, I don't know, I hope the Canada
Spark, it continues to develop and I, and I hope that the
government gets out of the way 'cause I, I haven't talked about
it in a while, 'cause I didn't want to be known as like a weed
podcast necessarily. But I do, I do think, I mean,
look, it's a lot, it's a lot better for society than a lot of
the things that are allowed to exist today.
So the idea that it shouldn't be allowed to exist, I think is
asinine. I'm OK with people that say none
of it should exist. That's like logically, you know,
that's consistent to me. Sure.
But once you let alcohol out of the bag, I think the idea of not
letting marijuana out of the bag is silly.
I think I saw a statistic. I might be butchering this, too,
but I think it was that. And there are more people
smoking cannabis daily in America now than drinking.
Oh yeah. And there are some slides if you
go through some of the MSO decks, like looking at the size
of the market in five years, right?
And we're looking at something that's it's on parallel with
tobacco and like a little bit smaller than beer, for example,
right. Like there is huge demand here.
If the government does get out of the way, you'll get an
organic consolidation, I'm sure. And if they don't, it's kind of
a win win because, and I'll just put it back to the Canadian
environment here, but that excise tax is essentially just
killing all that we can. Yeah, you can't be small and
compete, right? So you're forcing.
Consolidation, they're almost accelerating it.
And that's what I really think about the setup, right, is you
almost have a capital cycle that works out either way.
Like either you cut the tax and these guys can start making a
profit really quickly, or you don't and there's only going to
be two companies left. Because like if you can look at
the statistics, but like the Canadian bankruptcy fireways are
dominated by cannabis companies because they they simply can't
survive. And I was writing about this
last week, but it is it has, this is purely anecdotal, but it
has to be true. It must be the cheapest product
in Canada for what you get like is cheaper than it was 20 years
ago. Oh yeah, right.
And so if you just think about what that means to the upside,
right, Like if you start getting real price rationalization
because the the high cost guys are exiting the market pretty
quickly, everyone's you know, everyone's heading to the exits
and you start getting price tick up and there's a lot of reef for
that price to run. I don't think you see any volume
declines. And so these companies I think
and they also kind of have embedded operating leverage.
I think these companies can have financial profiles that people
are completely asleep at the wheel on right now.
And then again, if you get the the loss of the government
intervention with silly things like this excise tax, you might
be looking at some like really large cash flow producing
companies that are trading at net cash, right?
I don't know. But on the downside and then
kind of what I find interesting and why it's asymmetric is like,
I really know how you lose money with.
So Kronos Group, for example, which is my largest cannabis
clay is an $850 million market cap and it has $800 million of
cash. I ended up burning cash.
And so you have a huge downside protection even if this doesn't
work out. Yeah, unless they go out and
spend the cash somehow, right. Like if management gets bought,
I guess the thing that gives me confidence layer is the sector
evaluation is so depressed that they can basically go out and
buy anything. Like you obviously take a risk
of incinerating cash anytime there's cash on the balance
sheet. But like yeah, but given where
some of these. Do you worry about management
just paying themselves a ton? I feel like screw it.
Like do you ever worry that the management's just like I'm, I'm
just, we're not going to make like the stock isn't ever going
to work. We're just going to pay
ourselves a bunch. That'd be a whole lot. 840
million to just extract. From an entity would be a whole
lot. The history of that money is
from Ultra, who own 42% of the company.
So I'm stealing from the mob. And have half the board and it's
best. It's been a complete loss for
Altria, right? Like I think they implied
valuation. I think they bought in at an 18
dollar share price and stocks at what 240 now.
So I think they gave Chronos Group maybe 2 1/2 billion
dollars and now it's down to 800 mil.
But I don't think being a Long story short is I don't think
that there's much appetite for them to go just light the cash
on fire and start paying themselves like they have to do
something with it by mandate because I think, but for Altria
having provided that cash, I get that casters is there
organically. The thing that would make most
sense to me is just a huge tender for shares, right?
You're trading at cash, you have so much excess cash buying just
buy back all the stock. But I just think it's earmarked
for other reasons, right? And what you might start seeing
and what I hope we start seeing is kind of start rolling up some
of the smaller producers, right? And again, just accelerate the
consolidation because you do have a ton of subscale players
that are still left. Interesting.
So it looks like what's going on here is they're making up their
SG and A. So gross profit minus SG and A
is being made-up in interest income.
Is it Yeah, cuz they're, yeah, exactly.
They're in so much interest in the cash balance.
But I mean, so if you pick all the financials, you can see how
long there's there, I don't know where you're looking at this,
but there's, there's a gross revenue line and a net revenue
line, right? Yep.
France between those two is the excise tax.
Yep, 33 million on 1/20. That's a huge chunk of money,
right? So, yeah, if you look at
Organogram OGI, which is I think the closest company you'll find
to Cronos Group, they actually produced a GAAP profit last
quarter. And you have I think something
that would be close to a 50% EBITDA margin if you got rid of
that tax, OK. So I think ahead and I just say,
is there like, is this tax sustainable, right?
Because yes, it generates a fair bit of revenue for the
government, but at a certain point, if you keep it going,
you're just going to kill the entire industry and lose that
tax revenue. So it doesn't seem to me like
that can be sustainable. Maybe it goes for a few more
years, but at some point you're just going to kill the revenue
at the source. I extinguish the entire
industry. And so the government, even if
they don't like do us a favor, are going to have to just do
that out of, you know, purely selfish reasons at some point.
And if you own a company like Crown Ass or Anagram who can
survive for years with their current cash balances, you're
kind of waiting that out, right? Like.
There's no assuming interest rates continue, but but to your
point, even if interest income was off the balance sheet, if
the income statement you still have 10 years, well call it 8
years a runway on, on. Crown US and just, you know, to
go back to the pricing thing, right, like prices are.
All time depressed, right? Like this is like a commodity,
like you think like an oil company sell a, a barrel at like
40, right? And still kind of eating out of
profit, like not losing money at least, right.
And so I don't and things can always go lower, but it is
absolutely ridiculous the price of cannabis, right?
Like you can got you can, you can get like poor quality ounces
of wheeze at a dispensary in Canada for like 50-60 dollars,
right? So yeah, we're talking oh, for
an ounce. Yeah, that's a.
That's a whole lot. Quantities that didn't punch
people for a couple months, right?
It like, yeah, it's not not sustainable and they're still
doing OK. So I just see a ton of levers to
pull on the upside. And then the worst case scenario
is, yeah, maybe they start burning cash and like it doesn't
work out, but they trade at cash.
And so the downside is minimized, right?
Like I've, I've learned to be extra careful with the idea that
you have as strong of a margin of safety as you think you do
sometimes. But in a context like this, I
mean, it's not the kind of thing where you're going to lose half
your money buying at these valuations.
Yeah, right. So whereas the upside could be
multiples. Yeah, well, and I guess in
theory, even if you can lose half your money, if the upside
really can be multiples, you can, if it's position sized, you
have confidence then then it can work, right.
Exactly. I don't have a good answer for
why I haven't followed along for it going on recently.
Yeah, but. I mean, it might just be that.
I mean, you're not allowed enough following it, right?
Like almost no one is. Yeah, yeah.
Although. People will learn I'm pitch
less, right? Like they actually just roll
their eyes and like. Yeah, I would.
I would not roll my eyes that that I know is foolish, but I
also I don't know, it's weird. Like I said, I got to the point
where I was like, why isn't this sold in C stores?
I is the retail, I guess I'm maybe part of my problem is I'm
looking at it from A to US centric and maybe even East
Coast centric problem. I mean, maybe the people out
West have a much better feel, yeah.
Yeah, the US landscape is more complicated at the time, Yeah.
You got a whole lot of states that really need to rely on the
revenue. Florida's still trying to keep
it be like prescription based. And then I don't know.
I've had my license lapsed twice and the last time I did it, I
was like, I don't even know if I want to go like mess around with
the doctor anymore. Like doctors quack.
They're going to charge me 200 bucks.
I don't know. It's almost not worth it.
Sure, it's annoying. I have to like look at this
person and try to take them seriously.
And I'm like, you're an idiot, right?
Sorry if you're listening. As as the demographics of the
country as the millennials get older and Gen.
Z gets older, I just, it's hard to envision there not being an
appetite for this legal at a national scale.
Maybe I'm long about that assessment, but I just, I can't
see such a convoluted regulatory landscape persisting for that
much longer. You either just you either just
legalize it or you don't. But like the way it's operating
right now is completely insane, right?
Like you can't navigate the infrastructure of this.
It's terrible for the companies, it's terrible for investors.
Capital markets largely closed to these companies, right?
Like there's just it doesn't need to be this way.
And I think that there is more than sufficient political will
to get rid of these barriers. I don't know.
It's interesting because and not to talk politics, right, but
like, it's, it's not really a favorable environment for either
party because you have, on one hand, Democrats kind of being
increasingly focused on regulation and the
administrative state. And then for the Republican
side, it's just kind of like a sin, right?
There's still that evangelical taint which is evangelical wing
of the Republican Party, which is really not interesting as in
see what's happening in Florida which is not even really
evangelical. All right.
But you have kind of both sides that make this way locator than
it needs to be, but hopefully one day.
Yeah, but it's kind of why play the Canadian ones, right?
It's another reason for it, which is that it's already legal
in Canada and there's no way we're going back on that.
Is that why you guys can't? Build enough housing.
Everybody's always Stoned is moving too slowly.
Yeah, they're like, come on, man.
I don't want to build stuff though.
So when you're messing around and I shouldn't say it that way,
I shouldn't say messing around. When you are researching these
smaller cap companies, how do you get around the public
company costs that that is necessarily associated with
being smaller and how do you think about some of the
incentives and some of these smaller names?
Yeah, it's it's a good question and it really depends.
Sometimes you do see, sometimes the lack of scale can make it
interesting for more of like an event driven setup where you
think, hey, this thing is going to get taken out right.
Like if you have a company where there's a real product there and
it's pretty good and the underlying economics look
attractive, but then you have this bloated like corporate SGNA
expense, which is kind of what's even bloated, but it looks
bloated because it's so large in relation to the rest of the
company. That might kind of be a signal
actually where you're like, hey, maybe this is going to take in
private. And I've had that happen before
and I do own a couple names right now.
Or like, I think that's kind of the base case of how it plays
out because it's interesting when you go really small, you do
see a lot of companies where you wonder, how did this even end up
public, right? Like, why are you public?
There's always some kind of interesting story there, right?
Maybe it's a maybe it's just a fall from grace and it's now
tiny. Yep.
Or it, the law like kind of SPAC, the dynamic stuff like
that where you're like, how the hell and or sometimes it's like
really, really old companies that went public for whatever
reason. It's not even that easy to
ascertain, right. And that can create an
interesting way of looking at things where you do kind of look
at the incentives and you say, why are you here?
And sometimes it's a problem, right?
Sometimes it is just someone paying themselves an egregious
salary and there's nothing you can really do about it because
like have control of the company like that.
Yeah, but then you just passed. Then there then there are these
opportunities. I mean, to talk about things
that have fallen from grace, right?
Like that my largest position right now and it's really turned
into a big winner is this Canadian company called Cypher
Pharmaceuticals. And if you look at the stock
chart on that, it went like, I think it felt like 90%.
And it's actually kind of it's starting to come all the way
back up. You just see this U-shaped chart
and, you know, basically what happened was a series of poor
acquisitions and a paddock Cliff for one of its products.
And then you had the founder son step in as CEO kind of at the
bottom. He's completely turned the
company around. And so there you had a setup
where this is a tiny company, but only because of a bunch of
things that have gone wrong here and it's actually rather good
business. And so you're kind of you're
starting to see it now like I think it's maybe the market caps
300 mil or so. It's just getting bigger and
those concerns about like public company costs start to get a
sway and obviously the larger the market cap gets.
And so sometimes you do just see like this should this is only a
micro account because it's fallen from being a larger
company and we can get back there.
And therefore you're willing to kind of just not, it's not a
deal breaker that they're burning some cash on on
corporate costs, right? Another situation makes
absolutely no sense, but you can get sometimes the economics like
the unit economics are just good enough to justify those
expenses, right? Like that happens to you
sometimes. But you how do you find cipher?
How did I find it? I actually found it.
There was a. There was an right up on the
Valley Investors Club on it. I think it was pitched in like
the $2.00 range, right? And but what happened there was
the stories it, it's been a really, I mean, it's a
worthwhile kind of case study because the setup has continued
to kind of morph into something new.
And each step along the way has offered like basically say at
$16.00 today, I don't think it's that much more expensive than it
was at three like things that just keep captain proving right.
And so when it was initially pitched on Victoria, it was sort
of this really little multiple asset light, like kind of like a
coupon, like a bond coupon yielder, which is sold like a
legacy pharma product. And it had a ton of cash on the
balance sheet. And it was like, hey, you can
get like a pretty nice free cash flow yield on this and you get a
free call option on this drug that they have in the pipeline.
So then that's kind of when I started looking at it.
And then the stock goes from like 2:00 to 5:00.
And then they filed a prospectus for a substantial issue or bid,
which is basically a tender in Canada, like a large buyback.
And you have to file accompanying that is like
attached to the valuation report.
And so I'm looking through this prospectus on the buyback, which
in and of itself is pretty interesting because they have
too much cash and they're cheap. But you go into the valuation
reports and there are these projections for the company's
operating income based on the pipeline assets getting
approved. And you can see it goes from
like, I want to say, 10 billion of operating income to like 35
in the course of a few years. And so you're looking at this
and saying, well, the stock 5 bucks is at like 2 times
operating profit in a few years if they're right about this.
Now in the micro cap space, how many people rent that
prospectus? Like very few, surely.
Like I'd be shocked if more than a couple 100 people read that.
That's probably even too high, like at the time, right?
Yeah. And so then it kind of leads to,
well, what is this pipeline product and is it going to get
approved? And I'm certainly not a biotech
expert, but in this case, it turns out that this product is
already approved in 13 European countries, right?
And so that lends a ton of credibility.
And one thing leads to the other.
And I mean, it still doesn't have any other American
approval. But it turns out that doesn't
really even matter, probably because of all the groundwork
that's been laid in Europe. And so that kind of starts
picking and starting to become more popular online.
That starts getting traction. Stock goes from like 5 to, you
know, 8. And then last month they took
that massive pile of cash that they've been building up on the
balance sheet and they bought asset which double S their
operating profits and really transforms the business
strategically in many ways. But kind of the most predominant
way is it turns it into a growth stock because this asset that
bought has a ton of upside growth potential.
And so we've gone from this like basically no growth cash shell
with one product that just kind of spits out a nice coupon to
gross the asset. I think that's probably going to
grow at like 35% a year for the next several years.
And so it deserves that higher multiple it has now, but it's
also like not only have you had very big multiple expansion that
you've had the earnings number grow a ton, right?
Like it's I, I think conservatively even now we're
looking at like 5 times growth and operating income by 2027.
And so it's a worthwhile story to I think review because kind
of shows you what can happen when, well, a, you have a really
good manager at the helmet of micro cap, right?
Like ACEO owns 40% of the company came back incentivized
to turn this thing around. So it's a really good capital
allocation like very timely buybacks.
So we're getting kind of see the importance of that.
You can see the importance of an asset light company that doesn't
need capital to run its current business, right, because what
you've had here is so much cash flow generation.
Cash with this. Enabled this transition, right,
like they're this is this company is so asset light that
there is no cash flow from investing section on the
cashless statement, right? Like there's zero cap and very
little working capital requirements.
And so basically you have this cash generative legacy product
and then what are you going to do with that cash?
If you buy that at a low multiple and you get good
capital allocation, you might get a situation like this,
right? Like obviously it's not going to
happen that option or something goes paramolic like that.
But if you spend enough time looking at micro caps, you will
find that that's not an outlier. Like there are examples of that
happening with pretty decent regularity.
So I think if you develop some good pattern recognition there
and I think really importantly have the discipline to say no to
honest everything, there's definitely opportunities like
that for real outsized returns, right.
And you're not, it's not something that's on, off or as
much as you move out them market caps, obviously.
Yeah, I don't know. When I was on value after Hours,
but I said something like small and expensive might work well.
And I was thinking about some of these Med tech companies that
have gotten like that whole sector and not just Med tech.
I mean, I realize Cypher is pharmaceuticals, but yeah, I do
I kind of understand why small caps are naturally a place where
that type of business would go, especially if they have R&D
components, right? Because they do kind of need
access to capital markets to continue to spend.
And I can totally see why going back to our conversation about
investors get really tired. I wouldn't follow on offering
after follow on offering like can get really tedious.
And then sometimes something can hit or the OR the time they put
in since 1998 finally has the technology of today, right?
It's actually becoming the vision that is the reason the
company went public, right? And like I do, you got to sift
through a lot of trash to find some gold, but I don't know any
situation. In life where that's not true,
that's exactly right. And, and I think actually that
that point about sometimes the technology takes a long time is
super applicable. And even more so just like the
function that this business is attempting to fulfill might just
be really delayed, right. And there's another one which is
back earlier than, well, it's actually, I mean, if you look at
it's, I think it's a 10X in the last five years.
But I just got involved kind of recently.
And I think there's a lot of upside in it has some
similarities to Cipher, which is a company called BTE Water.
And what they do is water treatment from mines.
So basically you have a regulatory landscape that is
becoming increasingly stringent. Yeah, I would think mining water
and mining runoff, I would think would be highly, highly
regulated. Much every mine you're going to
come across has some kind of water runoff concern, right.
And huge amount of regulation. So this is one of these
companies where the service is mandated by regulation.
There's nothing you can do about it.
Historically not a bad place to play.
Yeah, and the miners are not cost sensitive because they have
to do a small fraction of what they're paying for at the mine,
right? Like they just they just want it
in their regular on in their filings with the regulators,
right, So they can get the mine approved.
But. Is this one of these scenarios
where BQE has demonstrated that there is sufficient a good?
Like a good enough? What's this?
What's the word? I'm trying to think of Steward
of the Water that like once they're proven that they can do
it at this mine, all of a sudden the next mine just says, well,
we're just gonna use BQE cause like why mess around?
With anybody. Else.
You know, I think we're getting there, right?
Like it's still early, but for example, they've worked with
Glencore for 20 years. That's not a small firm.
No. And what's interesting about
this business is that every mine is unique.
I like you're kind of building an ad hoc solution for water
treatment at every mine that exists because the kind of
contamination could be selenium, it could be something else will
require its own method of treatment.
And So what what they've done and what has then this is kind
of getting back to what started to be honest, which is the
transformation of the company, right.
So you've had on one part of that is just these guys have
existed for a long time, but it's only now that these
regulations have become so extreme that like they're,
they're, they've become more integral in the mining process.
Two, you have kind of the cyclicality of mining back on
the upswing. But three, what makes it super
attractive is that they have changed the operating model in a
way that makes it far more attractive.
And So what they do now is they come in and they provide what is
essentially consulting services to the minors during like the
permitting and development stage of the mine, which they just
charge a consulting fee for. And then once the mine is ready
to go, the miner actually pays the CapEx to build out the water
treatment facility and BQE charges was essentially a toll
on the volume of water treated. And that could be for 20 years
because it generally by regulation is just going to have
to run for the life of the mine and in some circumstances, even
after the mine shuts because there's continued runoff.
And So what you actually have is an asset light kind of full
booth and a lot of white space because obviously there's a lot
of mining development and this is the tiny company like they
don't need to, they don't need to penetrate more than 1% of
this market to be a multi beggar.
But they are kind of at the leading edge of certain
technological aspects of this, particularly selenium treatment,
which has become a particularly pressing concern due to some
environmental disasters in the last 20 years.
And so you basically have these guys coming in, investing
nothing in the project and then just clipping recurring revenue
potentially for years, right. So you kind of.
Again, you get that like quasi bond coupon structure, super
asset light, very high margin, which then frees up all the
capital for a shareholder returns in one day, right?
Like that's kind of the that's the hope it's.
Wild. The gross, gross profit in this
thing went nowhere forever and then started to go somewhere.
What they were doing before this is actually.
First of all, this is. Tiny for anyone listening, this
is very tiny. Really do your own work.
This is This is high octane stuff.
Yeah. It's 7 million in gross profit,
Yeah, but it was, it was, it was like 1.5 million for, I don't
know from 2013 or I don't know, maybe even 2008.
When they have a project that I believe is going to become an
online stream, which could just double their recurring revenue.
Like what's what's happened is the way that they've charged for
the services is that their largest project a few years back
before this transition was a joint venture in China where
they did water treatment. But how they got paid for that,
and this is still on the books and it's still a small part of
the business, but they'd actually get paid because when
you treat the water, you extract the minerals that have been
caught in it, right? And so you would.
Get tell me they sold the minerals.
They sold the copper that. That's a bad business.
Terrible business. It was in very bad business.
They're actually carrying the facilities on their balance
sheet, paying the cost to build them out and then getting paid
with commodity pricing, right? So it led to a complete
disaster. They brought in you CEO and
about 10 years ago, Glue, I think is sort of the one who
came up with this model for the industry.
And it seems to benefit both the miners and the service
providers. What if you think of this more
as a service provider now than like well before was a provider
of inventory, right? Like that kind of like they
built these plants for the mines.
And so it's been a radical transformation.
And it's one of these things where, yeah, you're right, it's
tiny. It's a liquid, but the runway is
very big and given the nature of the model that growth can be
captured without really any capital reinvestment.
And so you're not kind of you're not relying on your balance
sheet to capture the market. And so this is a kind of setup
where I think you could see if something really turned into a
larger company if they execute well.
Interesting. It's funny, it's not everyday
that I see a a shareholder list that is looks like it's all
people. Yeah, yeah.
The three largest shareholders are all individual people.
Yeah, yeah. And all of that 240,000 shares
is at 65 bucks a share Canadian and it's not nothing.
Well, yeah, I mean, and this is again what make it almost, it's
like a quasi private investment, right?
Because there are 1.3 million shares outstanding and more than
half of those are controlled by those 3 shareholders and then
the CEO and a couple board members.
So really you've got to float somewhere in the neighborhood of
600,000 shares at 6 plus Canadian.
That's not a lot of stock ain't like no so, but you know is
that. Part of why it's tripled, you
think? Well, I think it's tripled
because their earnings power is kind of starting to manifest
itself here, right? Like you have finally you've had
that inflection, which is not unique to micro caps, but where
you do have the recurring revenue part of the business now
take over from what was previously that joint venture
copper part of the business. And so you're you're starting to
get higher quality earnings. You've had you've had the kind
of legacy code declining and the and the new model increasing.
And so people are trying to put a higher multiple on it because
the way that they have laid out their projections, which I think
is definitely feasible, you can sort of see like they did four
and a half million of EBITDA last year.
They might be tacking on a million or two every year just
based on getting one or two new projects, which is not a
Herculean feed by any means. So you have a really easy way to
50 to 100% growth in recurring revenue for several more years
here. So I mean, if you look at the
multiple, it doesn't seem cheap for a small business like this.
Yeah, no. But if you look ahead 20 times
EBITDA or so, yeah, but it's growing at 100% a year, right,
so. That old EBITDA to growth.
Right, Yeah, yeah, yeah. And at least the, the Azona,
what they call company maker projects, which they haven't
really disclosed much of the details on, but if you're
willing to do scuttlebutt, you can kind of figure it out.
And so I've written about one of them on my blog, but it's, it's
obvious that this is their project.
Cause the mining company has to file a document and it's a
Canadian mine have to file a document with regulators
explaining how they're going to treat the water.
And you can see these name all over it.
And but what you can also see is what the miner expects to pay
for the water treatment services.
So you can sort of like backdoor that into what they're going to
generate from this project which is clearly going online.
It appears to me that I think they're doing $8 million of
recurring revenue today company wide.
I think this project will contribute a further 8 million
of recurring revenue. And so that double s the
recurring revenue and it's 50 plus percent margins with some
operating laboratory because you've got fixed cost GNA, it's
really yeah, Icarus margin, Yeah, interesting.
How the hell do you come across this thing?
Honestly, this one somebody dropped into my DMS on Twitter
and said you might want to take a look at this.
It's better than some X-rated thing I'd rather have people
drop good good ideas in. Yeah.
Well, I think I might have. I think I tweeted something.
To the to the effect of. Like what's a Canadian micro cap
that could become the next Cipher Pharmaceuticals or
something? And somebody messaged me and I
looked at it and it didn't hit at all.
At first I was like, I don't, I don't understand this.
Like 3 segments like this copper business looks terrible.
It just didn't click for whatever reason.
Then I got asked to pitch a stock on like a Twitter Spaces
forum. Oh, and you were on that.
Yeah, and it. Was like the micro cap forum
right? Yeah, yeah.
Well, I think there's been a few of them, but I was on one and
it's very, very micro cap focused.
And it was like, OK, well, no, the audience like some of the
things that I don't aren't going to work here.
So I kind of started like thinking about it and then that
got me looking at this. And upon closer exam, like the
stock was at 40 at the time and upon closer examination, I was
like this actually super interesting.
So I did a write up and I pitched it on the spaces.
But before that, I mean, there was very, very little attention
on that. There still is.
And like it remains to be seen if this one's going to work out
as well. But I mean, it's worked out very
well for the guys who bought it five years ago.
You don't know how you would have discovered it at that point
or even gone liquidity. Like I think that was it.
I think that was a private placement raise, like if you
wanted to buy stock back then. Yeah.
Yeah, it's up what I'm looking at the chart here, five years,
it's up to 800%. So those legacies shareholders
you're seeing in there, I think have done super well.
But yeah, I mean, it's a big position for me.
And it was kind of probably the idea that I've been most
associated with like since I, like launched the public
persona. Oh, interesting.
Yeah. I think of you for Howard
Hughes. Well, it's one of my favourites.
Because I was like, I don't know, you're just hammering it.
And I was like, this dude makes a lot of sense.
And then I got a buddy that owns it that I've known for a while.
He bought it. I think he bought it from the
General Growth. So it was like.
Wow. And so, yeah.
Yeah, he's owned it for a long time.
And looks like Ackman might try to take it away from us here,
but. Yeah, Yeah.
Well, you know, we'll see. Yeah.
That was kind of always the risk, it seemed.
Well, I mean, yeah, if you it's hard to complain if you got a
big enough premium, but I'm skeptical.
Yeah. I don't think that people that
are going to be selling are going to be totally thrilled.
It's not a. Counterparty that I think people
get like screaming deals from I I'm not even saying anything
like negative about the guy. He he owes his clients a
fiduciary news. He's assured guy.
I mean, I don't blame him, but it's it's unfortunate timing
because it looks like the business is about to really in
fact, of course, right. The part of the Seaport spin and
Bill Chen may have put this in my head, but that I didn't
understand is I understand wanting to separate the
entertainment assets and like sort of the housing and the
office assets. That minority, the minor league
team, I think should have stayed with Howard Hughes because I
think it's like part of the community.
Yeah, right. I don't know that you want a
separate public entity trying to raise ticket prices on minor
league games. For your community, Yeah, it's
interesting. I kind of my view of the like I,
I own a good amount of Seaport as well.
I think it's actually, I think it's pretty interesting.
And I have sort of thought that the baseball assets went with
Seaport for two reasons. 1 is that it just, it's not really,
it's not an MPC and I think they're really trying to just be
like we are clean real estate development kind of NPC company.
But I also think it doesn't fit with Seaport either.
And it's possible that that might be an asset that they try
to shop pretty quickly because you have a lot of funding needs
for some of the Seaport assets, like the actual New York Seaport
assets and they're burning a ton of cash.
But the break up value, like, I don't know, hopefully see what
did Seaport spin. But like, I think the breakup
value is like pretty clearly like 100 bucks a share versus
25. But nobody believes in the
story, right? And you have you've got Ackman
with the potential to take like up to 70% of the company on the
rights off, right, If no one subscribes and it's cash
burning. But and kind of going full
circle to how we started this, like my bad, is a hated
collection of assets, right? Like if you want to, if you want
to look somewhere where people have kind of lost the ability to
think straight, I think that's a pretty good place to look.
Not saying that. Why do you think they've lost
the the ability to think straight?
It's it's always been on the comma, hasn't it?
It's just been like problem after problem.
Such a disaster for Howard Hughes, right?
Like I think they sunk a billion into it and but they took a $700
million impairment last year and it was like advertised as being
their crown jewel. And I think a lot of like vanity
went into it, right. You had kind of just like, let's
buy the slug of Manhattan and put some luxury restaurants in
there. And it just it, I clearly spent
way too much money on it. It never worked.
And Howard Hughes itself as a result of this and due to some
other issues, is also really hated.
So interesting to get a dynamic where the parent company of the
spin is already something that people probably don't like
thinking about very much. It's not a particularly popular
stock. And then you have just spinning
out like the piece of that that's hated even more.
But the way I kind of look at it is it's like it's a piece of
Manhattan. Like it must be worth something,
you know? Unless, unless it's completely
misused and you got to tear it down and rebuild it.
But I I mean. Yeah, I just and then there's
everyone has their theories and and playing the game.
The game theory with Bill Ackman is always doesn't really get you
anywhere, but I do kind of first of all, why is he willing to
spend 175,000,000 to backstop this thing and have his LP's?
Presumably it's it's within the Pershing structure.
So you're going to own this like micro cap in a much larger fund
doesn't fit the mandate at all. But then the thing that makes it
even stranger from an incentives perspective is to flush Seaport
out, put yourself in a situation where you might have to end up
owning most of it anyways through a backstop and then
putting a bid in on Howard Hughes, right?
Like you might just end up in a situation where Ackman owns both
these assets again, separated. So I've spent a lot of time
trying to figure out what his incentives are here.
I'm not sure if there's I've heard so many different ideas.
It's possible he just got frustrated with the Persian US
debacle and then has just pivoted back to wanting to buy
our cues. There's a ton of interesting
theories out there. I don't think anyone knows but
it is kind of odd to spin it to spend all this money on the spin
off right? Like a power to use I think
spent like 30 mil. Kind of like getting the whole
thing spun out to then have Ackman buy both the companies
separately. Yeah, that would be a little
odd. It's a little odd, right?
But I don't think anyone knows what he's thinking.
I like both the assets and like. My guess is he's thinking he's
going to make money. That's my guess.
After that is true. And but when you see that like
the break up value of the Seaporn assets is probably a
billion and you can buy it for like, like it's, it's, it's
incredibly cheap here because pro forma this rights offering
they're doing the enterprise values like 230 million at 25
bucks. And then there's a bunch of data
on that which is not a recourse and you could probably exclude
for your calculus and at which point you have like a enterprise
value that's like in the 100,000,000 and the baseball
assets like the baseball stadium itself cost 130 million to build
five years. Ago.
I'd assume you want to replace it.
Sure. Yeah, I mean like.
It could just be a complete misallocation of capital haircut
that in half. Right.
Like call it sound, that's still a good chunk of the enterprise
value. And like non core asset, you get
all these buildings in Manhattan, I know that they're
cash burning like there's there's a lot of hair on it.
But my kind of Occam's razor for Ackman's incentives here is that
he thinks that it's worth a lot more.
Yeah, I mean, look, I, I think, I think people can have opinions
of Ackman. A lot of them can be driven by
how he uses Twitter or whatever. But I, I don't think that
anything that I don't think it's valid to think he's not in it to
make money. His, I mean his track record
would suggest he is I. Agree, but people and like I
don't necessarily subscribe to this view.
Whether or not you get taken under is sort of a different
issue. That's the.
You're not on the same side of the table necessarily.
But she has to buy per the rights offering backstop, what
could be a majority of the company at $25 a share, right?
And it's basically at 25 right now.
I think it's gone surging today, but it's in and around that
range. And so it's not like like the
take under thing. Maybe he can maybe he can grab
an extra 30% of this for a really low ball price.
But he's already having to pay what we're paying at 25, right?
So I just, I feel like he just thinks this is really cheap and
something that could happen here.
And as it goes up 4X, he's got a billion dollar market cap in
Pershing, which makes a lot more sense.
But I don't know, it's hard, I think.
I think because of the distrust that a lot of investors have for
him, they're distorting movie incentives.
But I could be wrong too. Maybe he is up to something.
But I just think he probably thinks it's cheap, right?
I don't know. I don't know.
He's been doing a lot of things, whether or not it's the spark in
PSTH. Yeah.
Whatever you think about him, I think he, I think you can't not
give him credit for always trying.
You think, right, like he is. He's a very resilient guy,
seemingly, yeah. And he seems quite talented at
real estate. So yeah, absolutely.
I mean, yeah, he's got his big failures, but he never keep,
never stops trying. So I don't know what he's going
to do with these two companies, but I do think it's about Howard
Hughes and Seaport are really interesting entities to look at
whether from an investment perspective or just like trying
to curiosity. Yeah, very it's a very curious
case of of very kind of end of one situation and see where
those go, I have no idea. But I do think that what kind of
prices are pretty interesting. The thing that still confuses me
about like the REIT series, I mean it doesn't confuse me.
But I guess the question I cannot answer is it would have
been nice to see if rates had continued to go up with the
stocks have worked. Because you know, the question
that I said to Bill the last time he was on, is it, is it
really just a rates trade? And I think these sort of fall
into that same question, right? Is it, is it rates or is it
really cheap and. Yeah.
Maybe the answer doesn't have to be 1 or the other.
Maybe they can occur at the same time.
Think. That it's both and what I mean
by that is I don't know if the stock works if rates were to go.
Up but like. Does the business work and will
them market eventually just like give it its worth, I think are
different questions, right? Like I always found the Howard
Hughes in the last couple of years, like trading on rates to
be a little bit ridiculous. Like obviously that's impacting
the cap rates, but like you have like what is a pretty like
decent capital stack and so and a company that's just like, but
yeah, rates are higher, it's puts pressure on cap rates, but
also NOI is growing a lot, right.
And so those two things are are fighting against each other.
But I do think that like there is just this general flow of
funds going in and out of these names based on the anticipation
of war rates head, which I can kind of like the cannabis thing,
I think sort of makes people pass, right.
Like if you have a quarterly mandate, well, it's like,
there's nothing I can do about these.
Like flow of funds based on like some of your rate expectation is
nothing to do with the company really.
But maybe it's better just to avoid this because it could get
money. And that's what happened.
I mean, it was when I first started tweeting about Howard
Hughes, it was in April and I think it had dropped that had
dropped below 60. And I was a company that I'd
watched for a long time. And I just kind of thought like,
this doesn't make a ton of sense, but it was at a point
where people were pretty preoccupied about the direction
of interest rates, right? And so it created an
opportunity. But I think I think you're right
to say that like if rates just kept going up, this probably
wouldn't work. Yeah.
And look, I mean, I what 6 months is not working or or not
working and that that's only been four months.
So that's like short term stuff. But I I agree with you.
The private marker, from a private market owners
perspective, I don't think the rates really matter that much.
But from public ownership perspective, yeah, it is kind of
the thesis, which is a frustrating thing sometimes
about public equities, right, is they may just not trade on
fundamentals. Well, you know, Ed Castle said
something about smaller names that I thought was pretty sharp,
he said. A lot of people don't like to to
own them because if you go into like let's say it's the 30th of
of some quarter end and somebody just decides to puke it like
your mark, you're kind of screwed.
Yeah, for the quarter. Yeah, right.
Or I mean, if you have monthly marks or whatever.
So you really need, you really need to have like that
intestinal fortitude to just. Not.
You often have some kind of alignment with your LP's, right
where and perhaps some kind of compensation structure that's
not based on that because it does make it difficult, right?
Like if you have someone just decide they need out of the
stock drops 20%. Yeah.
That can ruin your compensation for the year, right, depending
on on how your fund is structured.
So yeah, I I get that. But at the same time that
volatility can hugely be your friend.
And I think if you keep at it and stay disciplined, then
perhaps over a longer periods of time it can actually help your
returns. Yeah, like few following a stock
flows here and said, oh, this is actually BQE though when I was
talking about it just it, it dumped a couple months ago.
There was a director who had been, it's not really like a
core person in the business, but was starting to exit and it put
a lot of pressure on the stuff it's out.
Yeah, who the hell are they selling to?
Like no one, right? No one right, So I was buying
them, but like you did have and then they they released
earnings, Q1 earnings, which were like fine.
But then this is something you also get with these micro caps
is sometimes the investor base might be a lot of retail people
who saw me tweet about it or something and don't fully grasp
the idea maybe. You.
See Q1 results and they see revenue down and they start
dumping without realizing that Q1 is a seasonally weak quarter.
And therefore like it, it's not surprising that it's down,
right? Or that there are just kind of
like there are maybe the cadence of revenue is just a little bit
different than a quarterly thing, which I think is what's
going on. But it was the stock went from
like 67 to 53 and then back up to like 62 within the day,
right? And so you could have been a
buyer at 53, you know, been up double digit percent on the
basis of nothing out there though.
Although as I'm saying this, I'm thinking about what happens to
mega cap tax during earnings. And it's yeah, you need
different, right? Like sometimes you'll just see
like Amazon's down 7% and then. After the call, it's up 5%.
Yeah, I'm not really sure that's much different there to be
honest. Like, well the micro cap stuff
is a little different. I mean, I'm watching one right
now and it just won't go down. And it's like the the
probability that the incremental money, I mean, I don't know.
I may know most of the people that are buying it, but it seems
like it's probably new people. And the idea that they're going
to be there for the long term, I think is we'll see, right?
It's up to them to do their own work.
You know what they own. Yeah.
If you're, I mean it is, I think if you think about these things
as quasi private investments and maybe you have them in APA, look
at it that often and you like kind of get to know the
operators and believe in the business, you can, you can sort
of mitigate the psychological costs of yeah, some of that.
I said that just Sweeney. I was like, it's almost as if
you're paid not to look at these things.
Yeah. Yeah, exactly.
And you obviously it magnifies the importance of doing work,
right? Like you really need to, you
need to understand this business and what you're doing here
because you're paying a premium, like an illiquidity premium on
the way in and then a discount on the way out.
And it's just like an like a high implied cost of equity,
right? Like you're just kind of, and,
and I mean that also psychologically.
So it's not the kind of thing that you should.
I mean, you really can't do it, but it's not meant for trading.
Yeah, that's right. I like that.
I don't do that anyways, so it's fine with me, but it really
does. Like I can't stress it enough
when I talk to people about it. Like you really need to like be
comfortable with what this business is doing because if
they have a bad quarter or something, you're getting out
for really low, right? Yeah, you're everybody else is
getting out and then if you want to get out, you're probably
moving it lower as you get out. So have fun with.
That exactly like you almost just, you know, just kind of
think about it like once I put this money and I'm not getting
it out, I'm in this business, it's like investing in a in a
private vehicle, like we have a five year exit strategy or
something and like who knows what the mark is, yeah.
Right. Yeah.
I think that's. I think that's.
The right way to go about it, yeah.
And if nothing else, it puts you in the right frame of mind.
For sure, which and I think it's advantageous frame of mind for
public market investing broadly. Yeah.
We just kind of thinking about things like you're an owner in a
private business and not getting too bogged down in the minutiae
of like daily and quarterly movements and focusing more on
what the business is doing. Now the of course, the issue
with that is that if no one else is thinking about markets that
way, you might not get the value you think you're going to get
right, which is. Yes, but if you trust management
and you believe that it's going to.
Be cash generative. You haven't heard?
The episode yet because it drops tomorrow.
But one of the things that Richard Cook was saying is like
he's invested with people that understand buybacks on average
and like, eventually we'll get that money out.
That can be a real bag holder thing to say.
And I understand why, like short term people would laugh at it.
But I do. I think it's closer to reality.
Yeah. What I don't know that I believe
anymore is that I have the ability and or willingness to
take like these concentrated bets for a number of reasons,
which is not to say that people should or should not everybody
has their own goals. But for me, I've kind of been
like, all right, I could be wrong on the people.
I could be a little bit more wrong on the business than I
thought. Like my risk tolerance has gone
down. When you say concentrated, what
do you mean by that like 5% positions 10% or?
Oh, yeah, I, yeah, I mean, I would say, look, I'm not going
to ever run like A6 stock portfolio.
That's just a function of what I'm trying to accomplish and
where I'm at I don't think many people can can handle.
That yeah, yeah. So, you know, I don't know, like
I I'd, I'd like to hover around 15 to 20.
And I think for some people that's concentrated like I think
some people, right. I mean, particularly if you, if
you allow, which is kind of the way that I approach it.
I, I think I own a little bit more companies than I would like
to actually I know that I do. But the problem is Betty just
having a really interesting opportunity set recently.
But if you have 15 stocks, right, and then you kind of
allow for them to run, you kind of end up getting some kind of
organic concentration. Yeah, right.
Where it's like from me now, Cypher Pharmaceuticals is almost
a 20% position. Oh my.
But certainly to start there, right, It's just I didn't sell
any of it. But now it's like I feel
concentrated. But I do own like 15 socks.
Yeah, we. But because one of them is just,
it's just gone so bloated. I mean, maybe that's one way of
approaching it, but then you just now have the same problem
or it's like a lot of money in one company even though, but the
other one's just becoming significant.
Honest. Yeah.
Which sort of like reminds me of that sad thing about that hat in
his letter a couple years ago about whatever the 10 or 12
decisions that Berkshires may have like made all the
difference, Right? Where And that you can kind of
see that in portfolios if you're not, if you don't have too much
turnover. What you kind of, I think pretty
quickly realize is you can actually afford to make quite a
few mistakes if you have a decent slugging percentage on a
couple of the ideas because the stinkers will just like fade
into nothing and winners will come to dominate your portfolio,
right? Yeah, you just can't swing like
super hard and strike out. No, I agree, But I tend to kind
of, I size them not, you know, I don't think I've ever taken more
than a 10% position on sizing. Yeah, Well, then that stock
double S and you still like it Maybe.
I don't know. I think it's slightly, I don't
not even sure that makes sense rationally speaking.
But psychologically it feels different, right?
It feels like a different kind of concentration.
Yes, it's funny because some of the things that I say, like I
wonder how it sounds or I think like, Oh well, somebody that's a
pro at like .72 would clearly think this is stupid or
whatever. But there's just a lot of value.
Like when when Berkowitz said financial, that cash is
financial value. I mean, I would argue there's a
level of diversification that's financial value and too and the
ability to just be like, this isn't going to kill me and then
take my time to figure out what I actually think and do not have
like the monkey brain of or lizard brain or whatever of like
I'm being attacked. I need to figure out something
right now goes a long way. And and you know, hopefully on
the concentrated stuff, you have a sense of what you're looking
for before it. So it went when it happens.
You can be done quick, right? Yeah.
I think that's why I say psychologically it's different.
I think if you had and this, this could actually be a totally
foolish thing, obviously, and it could be a sense of like
survivorship bias. But I, I, I think when
something's worked for you and you, you've had time to really
start to understand the business and trust the people running it,
perhaps there's a sense of comfort in that, even though
it's become large. And of course I can be a trap,
right? Because you might just, you
might just be early and, and end up being raw later on.
But I just, for whatever reason, feel the longer I own stock, the
more I'm kind of involved with the company, the more I feel
comfortable holding it in larger size.
When I initiate a position, I'm generally like, I don't know.
I'm more skeptical about the work I've put in.
Yeah, as you probably should be, right?
You don't. You don't know what you don't
know. I mean, I said it the other day,
like, I I wish, I wish I could learn from other people's
mistakes. I wish I could learn as well as
I otherwise would learn without money on the line.
Like I just don't. Yeah.
So the dumbest possible thing is to be like, it doesn't matter.
I can still go big in the beginning, but, you know, it's,
I don't know. Yeah.
The more the more I do it, the more I realize it's there's a
lot of art to this. It's it is such a craft, right?
Like it's there's a lot of ways of doing it.
But the contradiction I was talking about the headset of
this kind of also applies to, so the idea of concentration versus
diversification, right? Like as you and you imagine you,
you find something like I did with Cyber Pharmaceuticals when
it's 3 bucks and you just go all the way, right?
The fin you're done for your career, right?
Yeah. Yeah, yeah, it's just like you
spin a zero yourself if you're wrong, right?
But yeah, you could, you could long run save yourself so much
brain damage and psychological torment by just finding a big
winner early on in life that you concentrated on and letting that
ride, right. And then, and then there's the
calculus of like, well, do you have dependents?
Are you really gone? How much money is really at
stake? I do think these variables are
always changing through a time, right?
But there's something to be sad about taking those slings early
on in life, I think, or at least when you can afford to lose that
capital. It's so for sure.
It's like the poker analogies, right?
Like you've never wanna, you never want to go all in and you
always want chips on the table. But when the odds are stacked in
your favor, I think makes a ton of sense to swing.
But you know that calculus is impacted so much by your
circumstances in life, right? Like I don't I don't have
dependents of in my early 30s. So I have, I think, more of a
stomach for this kind of stuff, right, than one who has five
kids and, you know, has worked their whole life to build the
savings. Yeah, that's right.
That's right. Just make sure your LP's
understand that and and don't over allocate.
I got myself in a problem once where I over allocated to
somebody. Yeah, I still am mad about how
it all went down, but I do. I blame myself more now right
than I used to. I still think it's like 7030 on
them, but the 30 was on me. Yeah.
I think, I mean, it's, it's part of what I said, I think before
we start recording, which is just the portfolio management
aspect of it just has to change regardless.
It doesn't matter like how big the fund is or the instructions
you get the LP's or like what the purported understanding is
like. I just think like there's a,
there's a kind of required respect for this kind of thing
where it just like even if you tell them like this can be
really concentrating the volatility is going to be pretty
wild. I just, I think a lot of people
can sign off on that in the apps, but then when it happens,
they can't, right? And that's you just, you know,
you just have to be cognizant of that.
Like, yeah, it's fine. Like I don't mind being down 20%
of the day. It's like, I can guarantee you,
you will really mind. I'll tell you when you mind is
if the market's only down 10, yeah.
Or if, like if there's a prolonged period where the
market's up. Because a lot of these stocks,
at least from people that I'm learning from there, there's one
that, you know, I'm involved in. And it's kind of in the Lassonda
Curve part, right? And people are really getting
frustrated. And a number of people have been
like, look, some of my biggest winners went nowhere for three
years and then they popped, right?
And it's like, OK, well, if you have a big position that goes
nowhere for three years and the market's going up in a straight
right line, it's just hard to tell people you're
underperforming, even if even if the business is getting better.
And it's like, no, it's gotta work out.
It's like. It, it is the really difficult
thing about value investing within a fund structure, right?
And I think it's, it is where this this lost foreclosed
capital comes from, you know, just like permit capital
structures really lend itself to the ability to be like, hey,
this is we're looking three years out and like there's some
time arbitrage here. I'm like, I'm pretty confident
that this will work. But like if you have the risk of
redemptions, like you said, it gets really hard to do that.
But I think this from my experience, like my big winners
have almost all taken time to play out, right?
Like. As it should.
Like Cypher Pharmaceuticals when I was buying a three, I think
sat there for a year and a half. Right.
Oh, really? Yeah.
I think it was just like it was like like not much happening,
but it was like that's kind of looking at it and being like,
what am I missing here? Yeah.
And then it does often take a catalyst and and this goes back
to the buyback thing, right, which you know Einhorn was
talking about in his letter I think a couple quarters ago
where you might not get the incremental buyer.
And so like having that return of capital is increasingly
important. And I think what happened there
was they announced a buyback and that started getting people
involved, right? And it's, it's something that
capital return variable is something I've been prioritizing
a lot more recently. Yeah, there would be dividends
or buybacks. I just think it helps you deal
with the kind of like the schizophrenia of the market in
the short term sometimes, right? Like just if no one cares, like
it can be very frustrating to just sit on that money and be
like, this is a really good idea, but it's not going
anywhere. At least if you know you're
getting some yield out of it, it helps, right?
Even if it's a lock back and you don't see that today, it just it
quells your anxiety that like one day this will work, right?
Like if you buy some three times free cash flow and they're
buying back stock, it's very hard for that to not work if
that cash was sustainable, right?
Like, yeah, there's just going to be enough shares to buy at
some point. And so.
Yeah, that's right. Yeah, I've been.
And if there aren't, you do a big special and then everybody
parties. Maybe like management tools,
maybe I might be, maybe it's just the sectors that I, I'm
spending time and I feel like they're becoming more sensitive
to this need as well. Maybe that's pressure from
shareholders, right? Or, or just certain capital
cycle dynamics, like if you're investing in commodities and
stuff and you've watched governments kind of shut your
business down and what on you're like, right, I own a lot of pool
companies and like that's one sector where it's like, hey, we
have low multiples. The the future of the industry
is really in jeopardy. Probably never going to like
we're going to, we're going to be shuttered pretty soon.
So let's just start buying back the stock.
And in a large respects, they have it free rated like Peabody
Energy trades at some ridiculously low free cash flow
multiple. And they just had an activist
actually file A13D today with some proposals, right.
But and almost all of those are like, let's get the buyback
going really hard here because, you know, if you're at four
times free cash flow and you start like just hammering the
bid on your own stock. And anyone who isn't, I think
flagged by sort of environmentalist ideology can
understand that coal isn't just going to disappear in five
years, right? Like, sure, it's declining, but
so is the supply. And, you know, if you just can
somewhat sustain this cash flow and buy back your stock, like
it's going to go out. Yeah.
But the question becomes how I did to wait.
But I don't know. I think I think time arbitrage
and stuff like that is a really nice place to be looking.
I quite agree. You always have the risk in like
coal in theory, the terminal value 0, but I would argue that
terminal when that zero may come as a very it's it's much longer
than probably most people might think, right?
I mean, all you have to do is look at any forecast.
Certainly further out than it's being priced in, right, Like,
yeah, so. You don't want to.
You don't want to buy in to when that terminal value occurs.
But if you can do it when the market implies a shorter
duration than is reality, you can get some really nice
returns. Right.
Yeah. We'll see.
Dude, I've enjoyed this. I, you know, I, I'm going to get
you out of here on time. And also the editing does goes
by the minute. So I like to keep them under 2
hours, but I appreciate you stopping by then.
It's been a fun conversation. One of the things that I really
liked about this podcast when it was small and I didn't think
anybody listened because I got to feature a lot of guys like
yourself and have conversations that I was not like as, as
concerned about, I guess like people listening.
And I, I'm glad that you went where you went with it.
I hope anyone that heard any micro Cab names understands the
risk and, you know, should they buy and sell and liquidate,
they're probably liquidating to you.
So beware of the beware of the risks.
But it's been nice to have one of these kinds of conversations
again, and I'm glad that I did it with you.
Thank you for what you contributed.
Well, thank you for having you, Bill.
This is yeah, man, Great time, great conversation.
Maybe we'll do a space sometime. Yeah, that'd be awesome.
Cool. Thanks again and have a good
day. Cheers.
Thank you.