During his recent interview with Tobias, Connor Haley, Founder of Alta Fox Capital Management, discusses how investors can find great opportunities in stocks that have a masking effect. Here’s an excerpt from the interview:
Tobias Carlisle: And one of the things in your presentation you say you’re looking for that masking effect. Is that the high fixed costs relative to the small set up or what is that?
Connor Haley: Yeah, that would be an example of one masking effect. Another could be … There are lots of different types, it couldn’t be maybe what they own are intangible assets, which are difficult to value which may not show up right now on the income statement or the cashflow statement, but have a lot of strategic value. There’s a lot of different types of masking effects, but I think that’s important. And with small and micros the fact that something’s a micro-cap, I think in and out of itself is a masking effect. Now, if you can pile on multiple masking effects with a really excited fundamental story, that’s when you can sometimes find some really outstanding stories and setups on for equities. But it can take a variety of different forms.
Tobias Carlisle: And what about on the short side, what are you looking for there?
Connor Haley: Yeah, on the short side, I’m really looking for competitively disadvantaged businesses where I feel they’re just secular pressures that can’t be escaped. I’m not sure it can currently, but a name I’ve been short in the past, for example, has been Harley Davidson. It’s just a situation where they’ve got a great legacy historical brand, but the demographics are so damaging for them going forward and there’s really nothing they can do. And they’re trying, they’re coming out with an electric bike, they’re doing all these other things. But at the end of the day, millennials are less interested in buying motorcycles and even when they are, they opt for cheater motorcycles. And so, that’s a very difficult, multi-year headwind along with all these other capital intensive issues and trade and whatever that, that’s the type of business.
Tobias Carlisle: Why are millennials less interested in motorcycles?
Connor Haley: Look, for one, they’re really expensive. For two, I think it’s just a generational thing where millennials seem to be more interested in experiences than material things. I don’t know if I have the perfect answer, but the data’s very clear. You look at the demographics, and it’s not positive for capital-intensive motorcycle manufacturers.
Tobias Carlisle: It’s not an age thing, you don’t just get to 55 and decide you got to buy a hog or something like that.
Connor Haley: Yeah, I guess we’ll see. But if you compare the current millennial base versus historical buyers at the same age and upon a cohort analysis, it’s not an encouraging trend, we’ll see. And I don’t have a position today, but it’s not something I would want to bet on the long side.
Tobias Carlisle: It’s funny, it’s an interesting position because I’ve seen guys, often been on Twitter say that they have this … The mode is the fact that they don’t sell motorcycles. They sell Harley Davidsons, they sell Hogs. But I have no view one way or the other, but it’s interesting to hear a different view on it.
Connor Haley: Yeah. They definitely have a strong brand. I guess I would just question like, “Who is that brand strong with?” And is that an increasing or decreasing population and more important the population purchasing power. And I don’t have a position today and I’m sure potentially at the right price, everything can be interesting. But those are the types of businesses which are capital intensive, have strong headwinds that cannot be escaped by even the strongest management teams and innovation. I’m just tough to see how the next five years are a lot better than the last.
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