Summary
In this episode of The Acquirer’s Podcast Tobias chats with Sahm Adrangi of Kerrisdale Capital. Kerrisdale are well known for their activist shorts, short-selling, and event-driven special situation investing, characterized by deep research, and some great research reports which they very generously share with the market. Sahm provided some great insights into:
- How Were Significant Profits Generated From Chinese Reverse Merger Frauds? – China Marine
- Activist Shorts Can Be Very Exciting And Lucrative – Global Star
- No Short Activist Has Ever Been More Wrong On A Name Than We’ve Been Wrong – Straight Path
- How To Find Multi-Baggers In The Telecommunications Space – Intelsat
- Successfully Short Selling In The Biotech Space – Prothena
- Finding Short Opportunities In The Mining Sector – First Majestic
- Successfully Investing Across Multiple Industries Is All About Due Diligence
- If You Take A Big Position In A Stock Make Sure You Let Everyone Know – Here’s Why
- Valuation Shorts Aren’t Good Shorts
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Full Transcript
Tobias Carlisle: When you’re ready.
Sahm Adrangi: Sure.
Tobias Carlisle: Hi, I’m Tobias Carlisle. This is the Acquirers podcast. I’m joined today by Sahm Adrangi of Kerrisdale Capital. Kerrisdale are well known for their short-selling, their special situation, event-driven special situation characterized by deep research, and some great research reports which they very generously share with the ma…
Speaker 3: Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own, and do not reflect the opinions of Acquires Funds or affiliates. For more information, visit acquirersfunds.com.
Tobias Carlisle: Sahm, thanks for joining me today.
Sahm Adrangi: Thank you. It’s good to be here.
Tobias Carlisle: My absolute pleasure. So I think that the way that most folks probably will… You came to prominence with the Chinese Reverse Mergers, that was in, what year was that?
Sahm Adrangi: That was 2010. It all began.
Tobias Carlisle: We had been emailing back and forth in about 2009, about some knits that I used to run on the oldbloggreenback.com. So how did you find the Chinese reverse merger frauds? What was the catalyst there?
Sahm Adrangi: Sure. So I launched my fund with $300,000 middle of July, 2009. And, I’d never been a portfolio manager before, I was 28, and started really, the idea was to start putting together a portfolio. And so, back then, like a lot of people, I was just getting ideas from the Internet. And so that’s how I came across, I think it was Coventry that you’d written about on your blog, and I took a closer look at, and I think that’s when I reached out, and it was one of the first longs I wrote about in 2009, 2010, and it was this net. I can’t even remember exactly how it turned out. [crosstalk 00:02:15].
Sahm Adrangi: I think we made money off of it. I remember like the CEO got sued, and like you didn’t know whether proceeds were going to come from that or whatever, but yeah, I was getting a lot of my ideas off the Internet. And around then, SumZero had launched, and many of your followers maybe familiar with SumZero. For those who aren’t SumZero is a platform where mostly professional analysts trade ideas with one another. And I would just sort of scour SumZero looking for ideas. I was member number a 100. I knew Divya and Aalap personally at the time when they launched it. And, I would just sort of make connections with other folks, sharing ideas on there.
Sahm Adrangi: And I remember at one point, one of the guys I was speaking with said, “Hey, you should take a look at this idea.” It was a SPAC buying a Chinese company. And as I looked deeper into it, it seemed like a great financial engineering opportunity on the alongside. So I made sort of a big investment five months into my fund. It was sort of a binary trade up a 10% of my capital into this binary trade where it was either going to go to zero, it was going to at least double.
Sahm Adrangi: And I sort of like took the rest of the month off. I’m like, you know what, either my hedge funds over after five months, or I’m up like 20 or 30%, I started working on my website. I hadn’t built a website then. It’s probably good working on the website since it’s become such a big part of our business at this point. The trade worked out. We had a good November in 2009, and I had my first six months on my belt, and I had a finished website. But after that, after the SPAC acquired this Chinese company, I looked more deeply into whether, what was going on with these businesses. And after six months of analysis, I realized they were committing fraud, and then it was off to the races.
Tobias Carlisle: So the first one that you’ve wrote about was China Marine. Do you remember China Marine?
Sahm Adrangi: Yeah. China Marine food was the first one. And the reason that was the first one, I mean, there were a lot of these companies, right? And, one of the sort of my bigger breakthroughs and sort of discovering that they were committing fraud was, back then there wasn’t SignalFx for real. I mean SignalFx existed, but nobody really wrote anything substantial on there. What was actually a great area to just sort of talk about stocks was Yahoo Finance. And so I was sort of just always reading the Yahoo Finance. I was just doing my diligence on these Chinese reverse mergers. But you’re getting the Yahoo Finance message boards, and there was this one guy who was writing under a screen name turned out to be a 70 year old businessman in Austin, Texas that just liked to trade stocks on his own.
Sahm Adrangi: And he started doing this work where he was pulling these Chinese filings from China, and the filings from China were showing like $1 million of revenue, whereas the US filing was showing a 100 million dollars of revenue. And I started doing the same thing for a bunch of companies for like 10, 20 companies that I’d been looking at. And China Marine was one of them where it was reporting a couple million dollars versus the 100, $200 million, that it was reporting it in the US. The reason I did China Marine first was because as part of my diligence, I wasn’t simply just weeding docs. I was going to the conferences and I was just trying to talk to people. I was trying to talk to the bankers that did these deals. I was trying to talk to the sell side analysts, and one of the folks, one of the groups of Industry folks that I was trying to speak with was the pipe funds that seem to be the original seed investors in a lot of them.
Sahm Adrangi: And I was sort of like looking for these guys. It was a very small handful of pipe funds. Most people wouldn’t recognize them. But I ended up getting a lunch with one of them, and I was 28, 29 at the time. I managed 300,000, $400,000 now, maybe $360,000 at this part, after my returns until I was nine. And I had lunch, and I just started talking to him. I talked to him about these filings I was pulling, he was curious about them and he was behind… He’d seated a bunch of these companies, and I think as sort of the lunch continued, and he got more comfortable, and we started in the raw third, fourth glass of wine. He started like telling me some of the stories that he’d seen in China.
Sahm Adrangi: And, he had a team in China. Sort of, probably was invested in 20 or 30 of these businesses, but he’d seen hundreds of them, right? His team had seen hundreds of them. So he started telling me stories about the fraud. He’d be like, “Yeah, we’d visit this one company, and it was an entire board in a building with like padlocked doors. We visited this other company, and there’d be like nothing in the factory.” And always, the companies where there were blatant fraud were the ones he wasn’t invested in. It was all the other ones that were coming, that were like there [crosstalk 00:07:10].
Tobias Carlisle: The ones that went blatant frauds.
Sahm Adrangi: Yeah. But like-
Tobias Carlisle: And the frauds just not blatant ones.
Sahm Adrangi: But anyway, so he started talking about China Marine Food, and he’d started telling me a few stories about China Marine Food, and I remember their Chinese filings hadn’t matched their US filings. And I had this sort of like pipe investor that was investing in a lot of these, saying, “Hey, this one’s not real.” And so, that ended up being the first one I decided to go forward with. And as I did my diligence, a bunch of pretty funny stuff came up, I remember. Originally I wrote an article that said, “Hey, the US filings in Chinese filings don’t match.” And a whole bunch of things about their margins and their working capital didn’t make any sense. But then as I continued to do research, I realized that their accounting firm was this Hong Kong accounting firm. They only had two partners, right?
Sahm Adrangi: They’re generating 50, $100 million of revenue each year and it’s a two partner firm. And then I started doing more work, and I realized that one of them was in the midst of a lawsuit getting sued by a Danish Investor for defrauding that Danish Investor, by putting that Danish investor into one fraudulent like Chinese private entity.
Sahm Adrangi: Then when that guy lost money on that entity, he’s like, “All right, well, sorry that one didn’t work out, but why don’t we take the money that you had, put some more money in into this second thing and then do a third thing.” By the time the guy had gotten duped four times, he filed a lawsuit against the accountant, and this was the accountant of China Marine Food. And so I’m, I decided to move forward with that one. And, I ended up being a successful trade and that stock declined dramatically, and it was part of an SDC enforcement action. I think a couple of years later, Wheelie brought by the ACC against that company’s US accountant. I think it may have switched from the Hong Kong auditor to the US account, but I think it was subject to an ACC enforcement action to some point a couple years ago.
Tobias Carlisle: And so the next high profile Chinese reverse merger was, China education. Do you want to tell a story there?
Sahm Adrangi: Yeah, China Educational Lines is sort of one of the sillier frauds that we’ve exposed. And it was early on, it was November, 2010. It was just when the whole fraud exposing thing was gaining steam. And in China Education Lines, half of its business was in an online education website, where high school students would go and get test prep in order for their end of year exams. And I had someone who speaks Chinese, visit the website, and just look through it, and he came back and said, “Like, everything’s broken on this website, and none of the links work.” You can’t even pay for anything on the site because there’s companies reporting 50% growth each year.
Sahm Adrangi: You can’t actually purchase anything on their website because they haven’t bothered to like update the website over the past year. And so we created a video where this person just simply started clicking on links and showed all the dead links, like American investors couldn’t necessarily see that, but, any, but this person spoke Chinese and English.
Sahm Adrangi: And so he was able to demonstrate, how these as the site was broken. And so that was half the business. And then the other half the business was a training center. Think of like Princeton review with it’s a classroom centers. And, we had someone go visit the building, and completely vacant building. We had the right address, right everything. But, the actual educator that was occupying the building, and it wasn’t China Educational Lines, had vacated the building six months before. And so there was just no chairs, no desks. So we’d be in particular a video of that. I think both of those are on the Internet somewhere, and expose the company, and it was a very profitable trade for us. And…
Tobias Carlisle: Yeah, that’s funny. I knew of a local firm in Los Angeles that invested in Sino-Forest. I don’t know if you remember that one, but that was-
Sahm Adrangi: My Dad was invested in Sino-Forest, and I knew Carson at the time, and after we exposed them, I’m like, dude, you just like lost my dad 50k, not cool.
Tobias Carlisle: Well, this firm is a pretty big firm. They put a 100 billion dollars into this. So they did extensive due diligence, including sending an analyst to China who took them to a forest and showed them the forest. But they didn’t own it. So that’s a trap that you have to be careful of. So, more recently, possibly the thing that you have been best known for is the telecommunications was global star. Do you want to tell the global star story?
Sahm Adrangi: Sure. Yeah. Global Star has probably been my favorite campaign outside of the Chinese frauds. In this business, sometimes you find shorts that you’re very excited about, and you feel like you’ve definitively proven that it’s towards zero. And then other situations, like much of investing, you based on your diligence, you think that you’re probably right. And if you’ve done your work, you usually are, but you don’t have that same level of conviction as other situations. Global Star was an exciting one for us because the company was trading at $5 billion, enterprise value, four and half billion dollars market cap.
Sahm Adrangi: And we felt that we proven definitively that the stock was worthless. Which was just very exciting, and our thesis really was not there in any way, shape or form. It wasn’t on any websites. Because nobody had really done the level of work that we’d done and come to our conclusions. So we got so excited by it. We made it a large position. And, this was a year and a half after Bill Ackman’s Herbalife campaign, and I sort of watched that just as part of studying what other short activists were doing. And so we decided to rent the same auditorium, the same live streaming firm, and we even created the same website, his website was talked about Herbalife. We created a website called Facts About Global Star, which is still alive.
Sahm Adrangi: And, I gave a three or four hour presentation on why this company spectrum was worthless. And that’s really what the company’s four and a half billion dollar valuation is based on sort of the spectrum value. And, it was a really exciting one for us as sort of to this day, the only other life, the only life presentation we’ve given, I think us and Ackman are really the only two firms that have rented out our own auditoriums for our own presentations. I mean there’s folks that go onto these conferences, Robin hood, Aranson, and present amongst many other speakers, but it certainly takes… There’s another level to just rent your own auditorium, create your own event, and it was an exciting one. And-
Tobias Carlisle: Well it worked. But do you remember the thesis?
Sahm Adrangi: Yeah, so in the case of Global Star, it basically had spectrum. So it’s a satellite company, and many of these satellite businesses oftentimes end up being worth more for the spectrum than the actual satellite business. Satellite connectivity continues to lose ground to terrestrial competition, and Global Star made phones that could be used in places where you can get cell phone connectivity. But nowadays, outside of… If you’re hiking in really remote areas, you’re going to get Verizon AT & T, or T-mobile signals, just about everywhere. You don’t need a special phone.
Sahm Adrangi: And so, whereas these satellite companies have to spend billions of dollars to launch these satellites into space to serve ever shrinking markets. And on top of that Global Star was sort of the worst provider relative to its peers. And so the satellite business was just not worth very much, certainly not worth four or five billion dollars, but the spectrum that it was using for part of it’s wireless operations, is in the sort of the 2.4 starting to get 2.495 gigahertz band I think. And that’s sort of roughly around where springs 2.5 gigahertz spectrum is. And in some of the other LTE bands, the other bands that do those pairs you use for LTE.
Sahm Adrangi: And so there was just sort of very basic thinking out there that the spectrum was potentially very valuable, worth billions of dollars. But, it wasn’t, because it’s not simply about the location of your frequencies. It depends on who your neighbors are, who you’re sharing the spectrum with, the width of it, how it sort of plays into current wire, the current wireless generation, upcoming wireless generations.
Sahm Adrangi: And for a variety of reasons, Global Star spectrum, which was getting $4 billion was actually worth nothing. Then the main reason is the same reason that Light Squared has gone bankrupt multiple times. At the end of the day, it has the wrong neighbors, Light Squared Spectrum had GPS as its immediate neighbor. And so there was interference between its bands. Had it been enabled for a cellular communication and the GPS frequency is immediately adjacent to it. In the case of Global Star it was immediately adjacent to Wifi. And so if it was ever converted to high power cellular usage, it would cause an offense with the immediately neighboring Wifi. And so this spectrum was just never going to get out to anything, because you have the wrong neighbors.
Tobias Carlisle: And so, can you contrast that with your experience with Straight Path?
Sahm Adrangi: Sure. So Global Star is a Spectrum story. We got dead right Straight Path into the spectrum story, we’ve got dead wrong. In the case of Straight Path, Straight Path has very high frequency spectrum. And so, certainly I mean, if you went back five, 10 years ago, the idea that these frequencies would ever become valuable, I think, a lot of experts in the field, which sort of cast that on that because as you go higher up in frequency, the signal strength gets exponentially weaker. And most of the frequencies that are used for LTE or sort of current wireless communications are at 2.5 gigahertz or lower, right? As you start getting to three gigahertz, four gigahertz five gigahertz, this thing has become exponentially weaker, and Straights Path Spectrum was in 29 gigahertz band, the 36 gigahertz band, right?
Sahm Adrangi: So dramatically higher than what’s currently being used. And then the other issue with frequencies in that high of spectrum range, nobody else is using them. So there’s hundreds of megahertz, there’s gigahertz totally available. It’s not like spectrums, oh sorry Straight Paths bands are the only frequencies available. And so we just felt it wasn’t worth more than a couple of hundred million dollars. The issue is that wireless technology has been advancing pretty dramatically over the past five years, given just the exploding usage of cell phones. And there’s just been a lot of funding that’s gone into that line of work.
Sahm Adrangi: And so, engineers have been able to find ways to make use of these very high frequency bands. And although there’s a lot out there, Verizon AT & T and Sprint were willing to spend a couple billion dollars to get their hands of on something that they could start deploying 5G on. And so 5G technology will be using these very high frequencies, and Straight Path ended up becoming an asset that folks wanted. And so we thought that the frequencies are worth a couple hundred million dollars. In the end, I think it was about $3 billion of rise and ultimately paid for it. And I think, on sort of one account, no short activists has ever been more wrong on a name than we’ve been wrong on Straight Path, we said, and the stock was trading I think around 40, we said in January, 2017 that it was worth like 20 bucks, and then within three months later it was bought at 180 bucks. So-
Tobias Carlisle: Ouch! You’ve clearly got some expertise in telecommunications, and that’s reflected. You’ve also got a long, or you had an activist long in Intel Side. Do you want to talk about Intel Side?
Sahm Adrangi: Yeah. So then in the case of Intel Side, it’s another satellite company where the satellite business is under pressure, not worth a whole lot in terms of as a revenue, has a multiple of revenue or EBITDA. But they’ve ended up sitting on an extremely valuable swath of spectrum. They use frequencies between 3.7 and 4.2 gigahertz for linear TV broadcast distribution. So, if you’ve got Disney studio in Los Angeles, that sort of making a sort of broadcasting and certain shows et cetera, those signals in order to get to maybe the other side of the country will go up to satellites and then go back down to cable head ends in Washington DC.
Sahm Adrangi: And those free, the frequencies used for those TV broadcast signals are between 3.7 and 4.2 gigahertz. The mid three gigahertz band has become a prime area of unused spectrum that 5G technology can take advantage of. And so, Intel Side and SCS, the other main user of this sort of 3.7 to 4.2 gigahertz band. And this is a small part of both businesses. They approached the FCC in 2018, and or 2017. Late 2017 and pitch the idea of sort of we configuring their usage within 3.7 to 4.2 to be able to take some of that spectrum and sell it to Verizon AT $ T or Sprint or T-mobile. And I think the ultimate proceeds that they could get from that are going to be in the tens of billions of dollars. And in those proceeds sort of dwarf the market gap and enterprise values of these companies. And so, it makes the stocks multi baggers, and when we published on it last year, the story really wasn’t out there.
Sahm Adrangi: There was just a few glimmers that the spectrum might be valuable, and the FCC proceeding might play out to their favor, but there’s been so much disappointment in the history of satellite companies trying to make money off of their spectrum, holdings, that I think there was a lot of skepticism, but in this is a situation where the stars. Did align and we believe have continued to align and much of what we predicted in the middle of last year about how the FCC process was going to proceed, and the potential value of the spectrum, as his played out. And, it’s still one of our largest investments. So we’re particularly excited about Intelsat, and its ability to sell this 3.7 and 4.2 gigahertz spectrum to the wireless carriers.
Tobias Carlisle: So you guys also have a focus in biotech and mining. Do you want to talk a little bit about Prothena?
Sahm Adrangi: Sure. So Prothena’s this situation, we end up publishing on bot attacks a couple times a year typically. And a lot of the names that we published on are companies that are getting value to a billion, 2 billion, $3 billion, because of our single drug that’s undergoing phase three trials. And given that biotech’s been a hot space over the past five to 10 years, you have situations where investor expectation around phase three trial is sort of resulting in, or success in phase two is resulting in multibillion dollar evaluations. But if you actually sort of dig into the mechanisms of action, and you look at the phase two data, you come to the conclusion that it’s very unlikely to, to succeed in that phase three. And to the extent they fail phase three, these stocks are down 70 or 80%.
Sahm Adrangi: And we get excited about that on the short side because in terms of short actives and we can go out and we can say a stock as worth dramatically less than where it’s currently trading at versus worth 20, 30% lasts. And so, we’ve always poked around in the biotech space. We’ve built out some expertise there. And Prothena was a situation where, the company was getting valued at $2 billion, two and a half billion dollars, because of one drug. And, we felt within six to 12 months the trials were going to read out for that drug. They weren’t going to be successful in terms of allowing the trials to meet their end points. And I think when that phase three failed, stock got a lot of downside, and turned out to be the case, I think they ended up failing that trial, in sort of seven or eight months later, and the stocks, 70 80%.
Tobias Carlisle: And on the mining front, how about First Majestic?
Sahm Adrangi: Sure. First Majestic was a situation where silver prices had gone up a lot. But the stock price of First Majestic, one of the larger silver mining companies, have gone up a lot more. And the best way to just sort of assess that is to see, this company’s valuation based on it’s sort of stock price relative to its NAV and how much of a premium, I’d started to get built in there. So a lot of times these silver miners were sort of trading, in a lot of the comps are trading maybe one to two times NAV. First majestic had gone up to four to five times. And so, unless there was something special about their silver relative to the other silver miners, this valuation premium wasn’t justified or for something, special about management or potentially future acquisitions, et cetera. But, to a large part, it was sort of business as usual for first majestic, the company.
Sahm Adrangi: The market had just gotten carried away because several prices had increased significantly over the prior six months. And so what we did there is we went short first majestic, we went long a basket of other silver miners. We were to report the saying that this sort of NAV premium just makes no sense. And, so that’s the first majestic.
Tobias Carlisle: You’ve got a very broad range of industries that you look at from telecommunications mining by a tech started with the Chinese reverse mergers and the long and short, what’s your process for finding positions, and when you’re looking at them, are you thinking long or short or are you, how do you handle that?
Sahm Adrangi: Yeah, so I mean, we’ve got a team. And I think one thing that I’ve just noticed about investment professionals is that, there are differences among different folks. Some people look at a ton of ideas, and went down to a much smaller number of names. Some analysts like to build expertise in certain sectors, and mostly focus on those sectors and leverage what they’ve learned over many years. And different members of our team sort of do things differently. Just in terms of myself. I like to jump around, sort of like the ADD in me. Sometimes I’m sourcing ideas from the idea sharing websites, sometimes I’m using screens, sometimes we visit a company that I looked at five years ago. But over time as you look in more and more investments, it’s not about how you source ideas, but understanding what you need to, what diligence you need to have done to get enough conviction to build a position.
Sahm Adrangi: And then especially, when to move from making something a one or 2% position, to a potentially 10, 15, 20% position. Those are the situations where you can make real money. And I think the skill and investing in the public markets has a lot more to do with, not where you source your ideas or how you source your ideas, but how you navigate that sort of continua of, when you’ve done enough research to make something a position, and when you’ve done enough research to take a small position and make it a large position. But what I found is where we actually get the idea, it can really vary.
Tobias Carlisle: Yeah. So in terms of managing the portfolio, that moving from a smaller position, start a position in the 1 to 2% range to conviction, is that what you regard as sort of 10 or 15%? Is as concentrated as you go from the outset?
Sahm Adrangi: Now we’ll get more concentrated.
Tobias Carlisle: How big are you at inception?
Sahm Adrangi: Well, I’ll make something 50% if I have the conviction on it. One of the things that we do is we don’t just sort of make an investment and sit on our hands. I think if you’ve developed enough conviction to make something that large, then it shouldn’t take that long for all our market participants to see what you’re seeing. Some of these very attractive investment opportunities can be fleeting. There’s multiple times and sort of, over the past 10 years running the financial, I’ve sort of seen opportunities that seem just really exciting. The stars have aligned with respect to, that stock and why its valuation should be higher, and you just like really can’t come up with an argument against it relative to the market is, or how his peers are trading, et cetera. And they don’t, oftentimes they don’t stay at that depressed valuation for too long.
Sahm Adrangi: Um, and so in those situations, you know, where we’ve made something, a big position, we go out there and we try to sort of tell everyone about what we know, right? And we’ll call the south side, we’ll call it the holder’s will. Unfortunately with us, we’ve built a brand, we’ve got 31,000 followers on Twitter. Thousands of followers on our email lists. We write up the idea and we’ll use those platforms as a way to sort of get the thesis out there. So, we can start hearing what other people have to say about it. We can get sort of get our views out there. Sometimes we’ll get feedback that comes back and points holes in our original thesis, and we were like, oops, shouldn’t have been a 50% position or not that we’re building 50% positions left right.
Sahm Adrangi: This shouldn’t be a 10% position, 15% position. Even if you make something at 12% position, if you get it wrong, most funds can’t withstand 600 basis points losses on a given name. But we look forward to opportunities where, internally within the firm both the investment team and myself are really excited about an investment. So we can make it large, write it up and share ideas out there and go and try to get others to view the stock the same way we do, and potentially generates an outsize peanut for our investors. Or, if we find out that we’re wrong, we’ll sort of exit the position, reduce the position. But I like searching for those opportunities and investing that way rather than building a diversified portfolio of a bunch of two or 3% positions. Cause the reality is it’s sort of a worst way of doing right by your investors or generated terms for your fun. Like it’s just, it’s worth investing when you build, when you get too diversified by opinions.
Tobias Carlisle: And how does your exposure run? Do you aim for any level of exposure long as short a net gross?
Sahm Adrangi: Well, historically, the fund was really designed just to generate returns. As a lot of my personal capital, I didn’t know as much about, so the hedge fund, alligator community, it would some investors we’re looking for. I never really had been in the seat of some family office that maybe has $500 million because of a founder that sold his business for a billion. And when they sort of took that capital, they sort of put monitory 50 million and 200 million into equities, and 70% of that would go into various ETFs, low cost, just Beta exposure. And then when they look to their hedge funds, they really wanted just something as an alternative to that.
Sahm Adrangi: And so oftentimes when those investors look at funds, they’re looking just for a product that can generate returns for them, but withstand volatility during market draw downs, mostly because of what they have in the rest of our portfolio. Right? But I first started and I’m just like, “I’m just gonna create a vehicle that’s going to make as much money as possible in the public markets.” Right? So we used to run a higher net back then and, but over the past couple years we’ve changed that dramatically, for a variety of reasons. So today I run a much lower that, 20 to 30%, 20 to 40%, whereas in the old days you used to be 70 to 90%, and that was fun. But I think today and going forward, what we try to do is we run, we run 20 to 40% net.
Sahm Adrangi: And we try to generate meaningful returns for our investors, double digit returns for our investors year in, year out. But without suffering significant fun draw downs when you get an overall choppy market, that’s what we try to achieve.
Tobias Carlisle: The 50% positions, that’s on the long side, you’re not putting a short on at 50% or are you putting a short on at 50%?
Sahm Adrangi: Yeah, it’s much more on the long side. On the short side, you tail risk, stock often go up, an infinite amount and so certainly have to be more careful about.
Tobias Carlisle: How large do you get on the short side?
Sahm Adrangi: It varies, depends on the ideas. I mean we have built 20, 30% positions. But sometimes those stocks are very big. So, you’re not necessarily, if a stock trades $500 million a day, building a $50 million position isn’t quite as risky as if it trades $10 million a day. So it varies, it’s case dependent. I think that this whole logic about concentration makes a lot more sense on the long side. And on the short side, we’re short activists. And so we’ve got a following of folks that will pay attention to our ideas when we publish on the short side, And that can be powerful. Whereas on the long, and that can help us justify building larger short positions, but-
Tobias Carlisle: Because you act as your own catalyst?
Sahm Adrangi: I wouldn’t necessarily put it that way, but I think your average investor, when they share their research, their followers, they haven’t built as much credibility over many years. And so, Morgan Stanley sale side analyst is less likely to pay attention to their research, whereas for us, we’ve just build credibility. We’ve built a following, built a reputation for doing very high quality research. So certainly in certain sectors when we publish on them, the sale side pays attention and that can be powerful. I think the spectrum space is a good example of that. Right? Some of the analysts that cover satellite players and spectrum stories, they remember when we published on Global Star, they remember when we published on DISH, right? DISH was a very large company and we had a very contrarian view at the time that Spectrum was being valued much too highly.
Sahm Adrangi: Folks, most analysts covering DISH, were either bullish on DISH, or they felt there was a lot of potential upside as such that they would never really have sort of a negative view on DISH given, how much horizon you’re coming in and potentially buy them out for. But, when we studied the situation we felt that the vast majority of paths or nearly all paths lead to a lower stock price for a reason specific to DISH. And so, we published that report, and I went on CNBC, and I highlighted our thesis on the short side, and there was a lot of volume in the stock, and a lot of the holders reached out to the south side and talk to him about our thesis. And a lot of what we’d predicted turned out to be right.
Sahm Adrangi: And I think that stock is down materially from when we originally published on them. It sort of retrace it this year. And I have no idea why. I have no idea why districts were trades. I think it makes no sense whatsoever. Totally nutty. But a lot of what we sort of predicted in terms of how that situation would play at, as turned out to be true so that now when we publish on the Spectrum story, sell side pays attention. The longs that sort of traffic in this very niche space will pay attention. And I think it can be powerful. It’s something that we continue to try to cultivate. We try to cultivate a brand, because it can be helpful in the hedge fund arena.
Tobias Carlisle: So as we’re coming to the end, when you’re thinking perspectively about fertile areas for continued research, now do you look at something like software as a service? Is that a good sector to be digging into?
Sahm Adrangi: On the short side?
Tobias Carlisle: On the short side.
Sahm Adrangi: I think valuations are stretched in the SAS space. It’s just we don’t strive to publish on names where the companies are going to become a much larger five, 10 15, 20 years from now. And the reason is because it ends up being a bit of a call on the market’s view on valuation, right? I mean, we live in a zero or 1% interest rate environment, right? And every company is worth the present value of his future discounted cash flows. If you plug a 1% interest rate into DCF, it applies an S & P multiple of like a hundred times per year, north of 50 times a year, well north of wherever it’s trading where this S & P is trading right now.
Sahm Adrangi: And so if a company is going to become much larger 10 years or 20 years from now, maybe we’re just sort of in this world where if 1%, 2% interest rates persist, that you’re not really right mathematically on new short thesis, versus biotech where it’s going to fail, it’s phase three, and they’re all in a potential revenues, or in a situation like Global Star with a Spectrum just has no value, under circumstances. So companies where, that aren’t going to be larger or 10 or 20 years from now. We’re fundamentally very right about our short thesis. Whereas, a SAS business that is trading at 25 to at times revenue that we should think should be trading at 15 or 10 times revenue could just be a tougher call.
Sahm Adrangi: I think people… Evaluation shorts get a bad rep, and a lot of shorts as they say, they try not to do valuation shorts. I think the one thing people don’t talk about is that there’s a real mathematical argument for why valuation shorts aren’t good shorts. And the math behind it is that, the DCF fast growing companies will spit out very high values if interest rates are low, and interest rates have been low for a long time, they are low. I think they might continue to be low for a very long period of time.
Tobias Carlisle: Well, thank you very much for talking to us. If folks want to follow along with what you’re doing, what’s your Twitter handle?
Sahm Adrangi: Yes, our Twitter handle is KerrisdaleCap, K-E-R-R-I-S-D-A-L-E-C- A-P. Our website is www.kerrisdalecap.com, and there’s a submit button at the top of the website, and visitors can sign up for research from that site. And Yeah, we love for some of your followers if they’re interested by this podcast, and want to learn more about our research, to follow us on Twitter and sign up for our email list.
Tobias Carlisle: Well, thanks very much, Sahm Adrangi of Kerrisdale capital.
Sahm Adrangi: Thanks Tobi.
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