(Ep.82) The Acquirers Podcast: Scott Jackson – FOIA Warrior: Freedom Of Information Act Requests, And Small And Micro Stocks

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In this episode of The Acquirers Podcast Tobias chats with Scott Jackson. He’s the Chief Investment Officer of Ravenwood Capital Management. During the interview Scott provided some great insights into:

  • Using Mauboussin’s BAIT Strategy To Land Winners
  • How Investors Can Use Freedom of Information Requests To Find Red Flags
  • Combine Insider Trades With A Catalyst To Find Great Opportunities
  • FOIA Warriors
  • Gamestop Has Serious Upside In The Short To Intermediate Term
  • The Bull Case For Fossil Group $FOSL
  • The Long Thesis For Del Taco Restaurants $TACO
  • Gold Play Iamgold Corp $IAG

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Scott Jackson. He’s the Chief Investment Officer of Ravenwood Capital Management. He’s got a micro-cap value strategy that’s very interesting. We’re going to talk about a specialty of his, which is Freedom of Information Act requests and what he’s found when he’s run those. We’ll be talking to him right after this.


Tobias: So, you’re a 12-year veteran, US Army, what were you doing there?

Scott: Yes, I was in the Army National Guard for 12 years, went in in 2001. Well, signed up before September 11, and then went in October to basic training. And man, it was just like flooded with people. And then did a tour, left in 2003 to go train and then went Iraq from March 2004 to March 2005, got back. And then, just started going to school and that’s where I started digging into stocks and markets and stuff like that and started really reading. And then, got into Gonzaga, I went back to Iraq for another year. And then, jumped on– this guy was starting a small micro-cap value shop, and so then that was kind of where– he’d been doing it for 10, 15 years or something like that. That’s where I figured out that you could make 30%, 100%, 200% on stocks. Before that, everybody told you that you could expect an 8% return. [crosstalk]

Tobias: Yeah, the micro-caps rip around.

Scott: Oh, man, they’re so volatile. The way I describe it, it’s like being in a different solar system with a different gravity system, and it can change at any time. When I was in Iraq, I was infantry. We were running the first tour. We were running full-spectrum operations where we would go from, one week, we were kicking in doors at 3:00 in the morning and looking for weapons and bad guys and stuff. And then, we would switch to patrols where we would be out in the neighborhoods doing like presence patrols. And then, we do MEDCAP security, so for our medics and stuff, we go set up and help the local communities and we would pull security for that kind of stuff and hand out water. And then, the fourth week was typically fixed site security. We would just be sitting on the towers, watching cars go by and stuff.

Tobias: And when did you get back?

Scott: The first tour, left March 2004 and then got back March 2005. That tour was amazing, man, because it’s like Alibaba and the 40 Thieves, palaces everywhere. What Saddam wasn’t spending on weapons and guns, he was spending on palaces. The infrastructure was just nuts, and everybody else was dirt poor, but there’s amazing architecture over there for sure.

Tobias: Did you see that stuff?

Scott: Oh, yeah. We were running around all these bombed-out palaces and there’s secret tunnels underneath and dungeons. It’s nuts, man. It was surreal. It was a cool experience for– I think I was 21 when I got over there. And then, I think it’s almost like March– My birthday is March 5. So, I got back just like shortly after my– I left– I got over there when I was 22, but we were in Kuwait and I was still 21, and then when I got back, I was 23. So, for a 22-year-old, running around, kicking in doors, just in super good shape and working out every day. And seeing all that kind of stuff was just on a different level. And then, the combat aspect of it. I figured out that I just stayed stay calmer than a lot of other people when bullets start flying and stuff. But definitely, you get to see a different side of yourself and get tested in a different way and then you get to see a different side of other people that you’re with too.

Tobias: When did you start your MBA?

Scott: I started up this company called Downriver Capital Management in 2010. That was probably about more like April-May 2010. And then, I left there in 2015 to go back to school, and just wanting to start up my own shop and create my own culture and stuff like that. And then, I finished the MBA in, I think it was December 2016. So, started the MBA in May 2015 and then finished it in December 2016. I tried to do it in a year, but then I ended up having to take one class in the semester.

Tobias: When you were learning the micro-cap stuff, what was the style of that firm?

Scott: It was deep value. If you pull up the Russell data– we had access to some of the Russell data. And where we landed and used, I think we used the investment alliance to map all the institutional managers, like Donald Smith and some of the other ones. We were the lowest price to book, debt to cap managers. If you pull out that on an axis, on a scatterplot-type thing, we were lowest in the country. You’re still coming out of the bottom after all that stuff had gotten killed, and there’s a lot of low price to book stuff that still had upside. And things would still get washed out into that area. But, man, after 2000– like we had crushed it for probably, I don’t know, two or three years. And my portion of the portfolio, we’re banging down like 45% returns, and I was managing 20– I think it was like 20% of the portfolio or something like that.

When I joined this firm back in 2010, I didn’t understand the space at all, and my business partner, I was like, “Hey, where do we get the money from?” Our AUM was basically zero. It’s like high net worth, family office or institutional, and then walk through all of those. It was like, “How do we get the institutional money?” So, started looking for RFPs and then just cold calling the institutions, looking for direct mandates, and then started talking to some of the funds to funds as well. And then, we landed a direct mandate from MERS of Michigan in the amount of $25 million, which was pretty cool. And that two years in. It usually takes– like you need typically a three to five-year track record. And then, some of the institutions I talked to can only be 20%, 25% of your total AUM.

We had landed that and then it was off to the races. But yeah, the price to book space, that slowed down, when the economy started slowing down, to like 14, and then everything stagnated

Tobias: Yeah, it’s been a rough run for the deep value guys since about 2015. I see you launched in about 2015, that’s a tough time to get going. Ravenwood is the name of your firm. What’s the focus of Ravenwood? What are you trying to find?

Combine Insider Trades With A Catalyst To Find Great Opportunities

Scott: Yeah, we’ve evolved over time from philosophy, being the lowest price to book, debt to cap manager. I’ve always had a huge focus on insider transactions in the open market and insider ownership. And that’s been driven by– there’s a professor at the University of Michigan. I don’t want to butcher his name, but I think it’s Nejat Seyhun. He wrote a book called– it’s like, Intelligence from Insider Trading, or something like that. Basically, I had gone through– it’s the same type of format as Jim O’Shaughnessy’s What Works on Wall Street with the core focus on inside transactions in the open market. The conclusion from that book was that, they tested P/E and then price to sales, and they focused on– they said if you combine price to book with the– insider buys over 10,000 shares, which is arbitrary because you have different dollar amounts. And then, you go down the cap spectrum, into the micro-cap spectrum, you end up with 40% annual returns. That’s kind of been the cornerstone.

I think I sent you a copy of the portfolio. If you look at the portfolio, all of our names, we’ve got just a ton of insider buying, no selling and our stuff’s pretty cheap. We’ve evolved away from the price to book side and it’s more your love for enterprise value to EBITDA.

Tobias: Yeah, I recognized a lot of the names as I was going through. They’re old friends of mine, a lot of them.

Scott: Yeah. So, we do that, but then we also combine it with– we really try to drill down on the catalysts. And so, we look at a lot of like alt data.

Tobias: What’s alt data?

Scott: Well, alternative data, like Google Trends data, website traffic data. So, we’ll look at what’s going on at the top level. We’ll look at overall web traffic, where the hotspots are. For example, the way things have evolved in the pandemic, we didn’t scrap the portfolio, but we sort of made small adjustments. And then, came to the conclusion that there were so many landmines out there, so much risk out there that we think that we couldn’t see, so we didn’t touch anything that didn’t have insider buying after 3/15, when we were in a full-blown pandemic. And then, that led us to– typically we use screens for idea generation, but we backed into it and just used insider buys, and then looked at valuation and then if valuation was good, then we moved on to the catalyst. And typically, you compare the catalyst stuff, you could figure out why the insiders were buying. So, a lot of it was e-commerce driven, esports video game type stuff, that was cheap. And we did really well.


Using Mauboussin’s BAIT Strategy To Land Winners

Tobias: So, I see, you’ve got this BAIT framework, do you want to walk us through the BAIT framework?

Scott: Yeah. BAIT, Michael Mauboussin gone over this in a bunch of different podcasts. I think he wrote a paper on it called Who is on the Other Side? But essentially, the sources of alpha come from inefficiencies in the market and they’ve been narrowed down to the BAIT framework, behavioral, informational, analytical, and technical. The behavioral aspect, we watch behavior from corporate insiders, that’s how we utilize the framework. And then, you have the behaviors from market participants, and typically we see it all the time where they over-extrapolate, pile in, and things go up, they think things are good, and they treat it like trees are going to grow to the moon, and they don’t. So, we exploit those inefficiencies.

And then, informational. If you look at like the micro-cap space, it’s pretty symmetrical. If you look at the number of analysts per company, on companies greater than $12 billion, you end up with like 18.54 analysts per company. This is just from a screen on 12/31/2019 for analyst coverage. And then, you get all the way down to and it steps down and symmetrically moves down for you get to the less than $300 million range and you end up with like 2.5 analysts per company. And then, if you look at companies with no analyst coverage– there’s 1.2% of the companies with greater than $12 billion market cap have got 1.2% analyst coverage. With no analyst coverage is 1.2%. And then, less than $300 million, 71% of the companies have no analysts covered.

So, it’s an informational inefficiency. Less people digging for the sell-side banks. A lot of the market caps are too small, where they get that three cents to trade or one cent to trade or whatever it is. Now, half the cent to trade. It doesn’t make economical sense for them to initiate coverage on a lot of these micro-cap names.

So, there’s just a lot less information floating around out there in the world, which you get divergence and value from price because people just can’t assign a value to it. They don’t because they just don’t have the information.

Tobias: The technical front, what are you looking for technically?

Scott: Yeah, technically, we’ve been watching ETF passive flow. So, I think everybody seen it, there’s a chart floating around out there where passive is supposed to outtake active here, I think, in 2021 or something like that. One of the things that we did, coming out of the bottom, we looked at ETF ownership and it sells off, they get pushed down pretty hard, and then money comes back into them. So, that wasn’t like a cornerstone to it, but it’s just a technical factor and then you have other opportunities arise caused by forced liquidations and delistings and things of that nature.

Tobias: Yeah, so that’s what creates the opportunity and then you buy into it in the hope that they get caught back into those indexes maybe?

Scott: Yeah, exactly. And they just come skyrocketing back. The analyticals, you take information and what do you do with it? How you analyze information differently? What’s your edge on that front? Like I was saying, we look at alt data, we pair that. It’s like a cross-sectional framework where we compare all these things and they confirm each other. Is there a catalyst? Like the insider buying says there’s a catalyst. One of the things that we really focus on is to identify red flags, whether it’s fraud, weakness in internal controls, changes in auditor statements. Just general language changes. We do a lot of the black line reports where it highlights changes in language throughout the Ks and Qs. 10-K, 10-Q.


Investors Can Use Freedom of Information Requests To Find Red Flags

Tobias: How are you identifying the weakness in the internal controls? You looking for that particularly in the auditor’s report?

Scott: Yeah. Well, we’re looking for the language, but then we also look for red flags, like net income higher than operating cash flow. And then, stuff with high cash flow, but doesn’t really– things that have high earnings and low cash flow, stuff like Wirecard that was just one that just went down. Then, on the other side, we have some primary information to too. We do reduce risk. We think it reduces risk because micro caps, I think one of your biggest risks is fraud and just getting blindsided. We do FOIA requests with various government agencies, but mostly we do it with the SEC. And the way it’s set up, the SEC will tell you if there’s an active investigation going on– they can’t tell you that there’s an active investigation going on. But they have to tell you whether documents are being withheld. And so, that’s a B7A Exemption is what it’s called.

And so, quarterly, we do requests on all the companies on the portfolio just to make sure. And we’ve gotten ahead of a few of them, and their routine– I think like every three years companies get reviewed by the Department of Corporate Finance for the SEC. But the investigations are different because they’re done by the enforcement division. When you get basically records being withheld, it says for investigative purposes and law enforcement purposes, that doesn’t have anything to do with the division of corporate finance. That’s all the enforcement division. So, we look for stuff like that and we just don’t take any risk on that. Typically, where there’s smoke, there’s fire. If something’s cheap, it might be because somebody’s figured out something like that and they short it.

There’s a company right now that we did four requests on the short side. There was another FOIA request for this company called Tactile Medical Systems. And there’s been a couple short reports on it, and they basically came to the conclusion that their revenues are being overstated. So then, I see that– and I do one with the VA. It’s just for one year. We have ones out for more years to increase the sample size of it, but I think that the revenues based on what the VA are telling me– they’re overstated by about, I think about $6 million for, I think, it was 2018-19.

Tobias: How material is that to what they’re earning?

Scott: I don’t remember the split between. They sell basically one product, so it’s super easy to track. And then, most of the revenues are from CMS, for Center for Medicaid, and I forget exactly what it stands for. That one’s like very overstated. And then, the one from the VA, I think they told me that there are– they had $25 million in product sales and the company reported 30, 31 or something like that. So, it’s quite a bit. But then, there’s also short reports on kickbacks for the company and all kinds of stuff. I don’t know what’s going on there, but we find stuff like that. And then, we’ve got a couple more FOIA requests to the SEC. I follow a lot of the short sellers on Twitter and when they start talking about names and fighting over with the longs and stuff, like I’ll just go run FOIA requests on stuff and then send it to some of the people that are talking on Twitter. And just be like, “Hey, you guys got an active investigation on this thing.”

Tobias: I think it’s super interesting. I think it’s one of the main reasons that I wanted to talk to you because part of your strategy, you find these companies– and I didn’t actually appreciate that you’re doing this for your whole portfolio, but you submit Freedom of Information Act requests to see what’s happening. And so, you submit them to the SEC, and they’re prevented from– they can’t release the documents, but they can tell you if there’s an active investigation going on. But you’ve been doing this for long enough that you know that every three years or so, these companies get ordered by– or they get approached by the SEC. So, that’s not unusual. You’re looking for something that’s been handed across to enforcement. Is that what I’m understanding?

Scott: Right. So, it’s basically the government’s giving you somewhat nonpublic information. The power that information is determines whether an investigation is disclosed or undisclosed. A lot of the times, the investigations are undisclosed. And for the record, I don’t have a long or short position in Tactile. It’s just something that I’ve been digging into.

Tobias: Just walk us through the process. How do you submit a Freedom of Information Act request?

Scott: Yeah. So, if you go to foia.gov in the US here, you can basically– it pops up with a box for the agency you want to submit a FOIA request to. A lot of them are on there. Some of them, you have to go to the website for Department of Homeland Security, I think. And then, I believe– I’m not sure there are a couple others that you have to submit, just straight through email because they don’t have electronic systems developed. But let’s say you want to do it– I think the SEC, it funnels it through the SEC website. And then, you input your information and then the company and then you have a list of like what information you want. You can pull complaints to the SEC. That one’s always fun, reading some of the complaints. A lot of the times when you pull up the complaints to whether it’s the SEC or the FTC, it’s the longs complaining about short attack sellers.


Scott: It’s pretty entertaining sometimes.

Tobias: Have you ever found anything in there that’s helped you make a decision one way or the other?

Scott: Oh, yeah. For sure. Yeah, definitely. We found a couple of active investigations on stuff that we own that weren’t disclosed. One of them was GAIN Capital. I think we got one through the SEC, but then we also got one through the CFTC, which was the main governing body from an [unintelligible [00:25:12] standpoint. And then you go back, and you search through the legal documents and there’s just a ton of complaints on stuff. It seems like that they’re not good for the stock price. There’s no way to tell if other people are really figuring out. You can see through the FOIA logs what other people are requesting. So, when I look for on the short side, I just download all of the SEC’s FOIA logs, and then I’ll just search the name of the company and see who all has done requests on that specific company.

And then I’ll go, and sometimes I’ll request the requests that have been done on that company to see what some of these hedge funds and some of these firms that are contracted by hedge funds are looking for.

Tobias: The companies don’t have to disclose that to the market?

Scott: I think it’s subjective. Sometimes, I think they can make the case that it’s not a material event or– obviously if there’s some big huge fraud, they’re going to try not to disclose it. Yeah, a lot of the times, they don’t. One of the first things I do after I submit the FOIA request and ask for– and I have a specific language that I use to ask for, and I think it’s like six types of records, like subpoenas, Wells notices, anything that speaks to the conduct of officers and directors involved with that company and its subsidiaries. And then, I’ll also search– I’ll go on EDGAR and I’ll pull up all the correspondence. So, if you type on EDGAR or Bloomberg, CORRESP is the code for 10-K you’d punch into EDGAR. And then, you can start reading. If there’s any letters, you can see when the last communication was. You can see what the division of corporate finance was interested in if they had any back-and-forth dialogue that they have to publish. I think they do have to publish any communications with the company, like any increase in responses and stuff like that.


FOIA Warriors

Tobias: Let’s just talk a little bit about your strategy and how that creates a portfolio. So, how do you think about position sizing? Do you let your winners run? Do you trim? What’s the thought process around the portfolio?

Scott: Real quick, go back. We started an LLC called FOIA Warriors LLC. We just started that a few months ago because this stuff is gaining traction. But back to–

Tobias: Just tell us about the FOIA Warriors.

Scott: We’ve been doing this since I think it was early 2018. And then, we do some outside business, like consulting-type work as well. We do on the local level with records. We do request with the city. And then, we do requests with the state, and then on the federal level as well. So, it works great for searching 911 calls and stuff like that. I’ve actually done that, like digging super deep on some of the shorts, like pulled up 911 calls and–

Tobias: There are 911 calls on the shorts?

Scott: On management teams, yeah. Well, not on the shorts, but some of the short candidates. Yeah. So, on the managements. [laughs]

Tobias: What kind of stuff? What are you finding?

Scott: Oh, just neighbors calling because the dogs are barking and then DV-type stuff, and then each request back you get from a record, you get breadcrumbs. You’ll get traffic tickets, and then you’ll know the car type and then the VIN number. So, then you run the VIN number and then it pops up at someone’s house at 1:00 in the morning that’s not their house. Just stuff like that, and you just track it down. There’s no limit to how deep you can go with that stuff. It gets crazy, man.

Tobias: [laughs] These guys are managers of public companies?

Scott: Yeah. And then, if you’re long something, you want to know– if you see any red flags or hear any weird stuff, you would probably want to start digging into it. And it doesn’t take long, it only takes– I can put together like FOIA request with the SEC probably in 60 seconds. You can fire off a lot, and then it’s just managing the information.

Oh, and then the back to the FOIA side. You typically will get a response and then you have to appeal everything because sometimes they’re wrong, sometimes, they don’t find everything, and that forces– General Counsel, I think, is typically the ones that check the FOIA officers work, basically. And so, they’ll go back through and they’ll check all the databases. And then they’ll, “Hey, we missed something.” It was weird, I found one on GameStop that was from the end of last year and it’s like, “Oh, we’re withholding records.” And then, I had to submit an appeal and then it comes back. Then, they give me the records, but it takes time to redact them and stuff like that. I think I got a case closing report from that one. And then, they recommend no action, stuff like that.

A lot of them will recommend no action. SEC is not in the business of putting companies out of business and disrupting the financial market. So, I think that they’re pretty lenient for first-time offenders. But I’m sure if you get multiple offenses, then they’ll come through or if it’s a straight blatant fraud on a huge level, they’ll come through and they’ll do their thing.


Tobias: Let’s talk about the portfolio a little. How do you think about sizing? How do you think about managing the portfolio?

Scott: Yeah. It’s almost like a ranking function. You look at the valuation, I think there’s a lot of white papers, number one contributor returns is low valuation. So, the lower the valuation, the higher that gets ranked at the higher position size. And then, we look at insider buying, and then pair that with the catalyst. If the catalyst appears very large and insider purchases are very large, those are typically the ones that end up the largest in the portfolio. The cheaper they are, typically they get overweighted. As valuation closes that gap between where it’s at and what it’s worth, you [unintelligible [00:32:59] up position as your upside decreases. So, that’s how we think about.

Tobias: How many positions in the portfolio and how big is the biggest position?

Scott: The biggest position right now, I think, is around 10%, 11%. We have about, I think 20, 23 names or something like that in the portfolio right now. It’s probably more concentrated, but if you look at modern portfolio theory stuff, like the benefits of diversification, you don’t get much more diversification from 20 names than you do from 200. If you had 8 names, there’s not much difference between 8 and 20. We don’t have enough bandwidth to have 200 names in the portfolio and don’t think that really will create alpha. I think you create alpha by finding the right stuff and overweighting the stuff that’s the cheapest with the highest catalyst, and then you collect your money and then move on to the next thing.

We have a lot of stuff that ebbs and flows. As that gap between what something’s trading at and what it’s worth closes, it will reduce the position and then it’ll go back down. I think Greenblatt said, “Most stocks are up 25% a year, down 25% in a year, but it’s the intrinsic value of the business that didn’t fluctuate by 50%.” So, you get these moves, whether they’re technical in nature or for whatever reason, and you just get price moves. But we always try to buy stuff that’s cheap.

Tobias: Do you want to talk about the portfolio? What’s your favorite position in the portfolio right now?

Scott: I don’t know if I should talk about the portfolio for regulatory reasons. I just don’t, man. I don’t want to be seen as pumping something that we own.

Tobias: Well, let’s talk about stuff that you’ve held in the past. What about Xplore? Do you continue to hold that?

Scott: No, that got acquired, so that was Xplore Technology, a ruggedized tablet and handheld device manufacturer. They went through a turnaround in 2017 and then started executing, and there was a ton of insider buying on that one. And then, going into July 2018, they were launching the handheld business. The company got bought out by Zebra Technologies but probably a month before I spent about two hours on a call with IR. The company was already throwing off cash flow and then they were just launching into the handheld business. The economics were pretty amazing and there was a lot of operating leverage in there, and it was just right on the cusp of an inflection point to the upside. I felt like I was right, make it or buy it thing. Zebra just came through and acquired them at 6 bucks a share. I think our cost basis was, what was that? 315 or something like that, or 350– yeah, 318 was our average price on that one. And that was probably the quickest buyout that we’ve ever had.

We get a lot of M&A in the portfolio in the micro-cap space. All the other larger companies tend to swallow up the smaller ones. So, that’s a slide on that one in there for M&A on micro-cap. If you look at like all the public M&A deals by market cap, 55% of them is happening below the $300 million market cap level. And then, if you look at the M&A deal premium, like the one-day move in a stock when it got acquired, it’s on average 46%. And then, just looking at that Xplore Technologies, that one got taken out a 47% premium. So, right in line with the average.


Gamestop Has Serious Upside In The Short To Intermediate Term

Tobias: Yeah, that’s a nice bump. Not to force you to talk about companies in the portfolio, but there’s a few old friends of mine that I have to talk about with you in there. So, let’s talk about GameStop. Everybody knows about GameStop. What’s the thesis there?

Scott: Yeah, I’ve got to read the disclosures real quick then.


Scott: Got to do it right, man. All right. Nothing I say today should be considered an investment advice. Past performance does not guarantee future returns. Before making investment decisions, investors should consult a licensed professional and consider fees and expenses, their investment objectives, and risk involved before they make any investment decisions.

Tobias: I have been so advised.

Scott: [laughs] GameStop, that’s a really interesting one and it seems pretty controversial. It kind of appears to be a melting ice cube. And then, we talked about a little bit on Twitter. But, man, Q1 and Q4 were just brutal going into the end of the console cycle. But I think that Michael Burry’s right. If you look back at cash flows and stuff, you can see that the console cycle does bring a lot of new revenues and then the consoles come with pretty high margin on the hardware sales. Man, COVID has saved GameStop pretty well. You can’t find a Nintendo Switch. Every time they get one, they’re gone. COVID has just accelerated the move to esports and gaming in general. And then, if you just think about it from a market share standpoint for entertainment in general, you can’t go to the movies anymore. The bars have been basically closed for the most part. No one wants to go out. So, you got all those hobbies and things that used to eat up your time and money shifting to gaming and things of that nature.

We’re going into the holiday season where they’re going to release the next console for the Xbox and the PlayStation. At the same time, the probability is pretty high that we’re going to get another round of stimulus for unemployment and it’s probably going to continue to pay people more than what they were getting before. If you look at disposable income, it’s just skyrocketed with the checks and the unemployment. So, I think that that’s going to really drive those consoles sales cycle. So, I think that people could be really surprised.

Tobias: Yeah, so for folks who don’t know, I’m sure that this is everybody, but Michael Burry, who’s The Big Short guy played by Christian Bale in the movie. He’s a phenomenal investor. Everybody knows this, I know. But just for the two people out there who’ve never heard of him. He’s on Twitter now talking a little bit and you can see his holdings publicly. And one of his biggest holdings is GameStop, which has been pretty controversial because it’s very, very cheap. There’s no question about that. But the issue is, as all of the sales of computer games go online, why would you need to shop through GameStop? What keeps GameStop going if everything– you buy a console online and you just download the games?

Scott: You can buy extra space for right now. I think the drives are only one or two terabytes or something like that. If you look at the new Call of Duty game that was released, just the download– the core game for that one, is like 500 gigabytes. So, it eats up a ton of the space on there. So, why you can add an external hard drive, the stock consoles, they don’t have enough storage to put unlimited amounts of games on there. You have to clear out some and delete them and then reinstall them. Being a military dude, when we were in Iraq, we played a lot of games. And just having the discs to be able to give to someone else to play is pretty huge. It just removes that optionality when you just buy DLC games. And then also, from the technical side, the float is 100% short right now.

Tobias: [laughs]

Scott: There’s a nuclear weapon buried in there somewhere.

Tobias: [laughs] Yeah, so you think if they get some unexpectedly good results, that nuclear weapon detonates, and it goes up a lot?

Scott: Yeah, man. Wall Street Bets, Robinhood, El Presidente, Dave Portnoy, man, one of these days could figure it out. It wouldn’t take much to pile in there and set that thing off. While it may be a melting ice cube over a five-year period, I think the chances are that it’s got some serious upside like in the short to intermediate term. I think you get paid by holding that thing.


The Bull Case For Fossil Group $FOSL

Tobias: Let’s talk about another old favorite of mine, Fossil. What do they do?

Scott: Yeah. They make watches, handbags things of those nature. And then, they do [unintelligible [00:44:07] brands as well. The stocks pretty cheap right now. It’s got just a ton of buying, which is why we own it. When you see the buying, you’re like, “Okay, what’s the catalyst?” So, you start digging through and they have a plan for like New World Fossil, they call it New World Fossil and that’s just cutting expenses. I think a lot of these companies in COVID, they’ve cut a lot of expenses that they didn’t think were discretionary, and they’re fine in how far they can push the envelope to cutting expenses. I think they’re going to come out on the other side all right.

Then Fossil, they’re in the smartwatch market. They use the Android operating system for all their smartwatches. They’re getting ready to roll out the 5G stuff, like LTE 5G stuff for all their smartwatches. We’ve done well in the name since we’ve owned it. But probably price still got a ways to go. And then, you go back, there’s a lot of leverage in the model. I mean, it’s just 150 bucks, what’s it at, like $560 right now or something like that?

Tobias: I don’t know. It used to be net cash. I haven’t looked at it for a little while. But when I was looking at it, it was more cash on the balance sheet than– it’s a pretty healthy balance sheet.

Scott: Yeah, they got a great balance sheet. And that’s one of the things we look at. We don’t typically like to– we don’t mess around with debt too much. We like large cash positions.

Tobias: That’s one of the nice things about micro-cap. For whatever reason– Well, maybe this is the ones that I like to look at, but you can find them with still being run by the guy who started it, which I think Fossil was. They’re still involved, there’s two brothers I think who started it. And then net cash, still earning money, still doing pretty well. Just not sexy in a world where there’s Apple Watches and other things like that.

Scott: Yeah. I think Apple’s just eating the market. Their stuff is just so far advanced to everybody else’s. It’s not even comparable really. Just the way the ecosystem works.


The Long Thesis For Del Taco Restaurants $TACO

Tobias: There’s a couple more I want to talk to you about, but let’s talk about Potbelly first. What’s Potbelly do?

Scott: Potbelly, they’re just a sandwich shop. I can’t remember the mix between company owned and franchise stores, but it’s a sandwich shop, they make sandwiches. It’s not a great, sexy business, but the story there is that they’re going to move more towards a franchise model and then becomes more– you cut up and it accidentally becomes more capital-light and more of a compound thing. So, you get multiple expansion with it basically as the franchise owners pick up more stores.

Tobias: An old favorite of my wife’s, they pretty popular around here, the Del Tacos.

Scott: Yeah, that’s a great one, man and a good example of insider transactions. That thing was just getting slaughtered. I picked up the phone and called IR when everything started just getting whacked from February to March just trying to figure out how much discretionary spending that they could cut and it was fine. Just trying to figure out how much total liquidity that they had and how much they could cut. But it’s got a cult following, man. Down there where you are, man, it’s huge.

Tobias: My wife’s in the cult.

Scott: Yeah, man. It’s a great little company. We have one up here. It’s in another town called Post Falls, it’s 30 minutes away or something like that. But it’s between where I live and the lake. I’ll always take my daughter when we’re going off the lake and just check it out, check out the menu and prices and stuff like that. Just talk to the people who working there to see what’s going on. But that got a huge runway for growth. If you look at the store count, it’s all pretty much on the West Coast in California. Most of the locations are in California. It’s the same thing as Potbelly. I think it’s a better store than Potbelly. But there’s a lot of company-owned stores that they’re handed over to different franchisees and then, there’s no penetration for half the United States. I like it, you like it. I think they would probably pick up some traction across the rest of the states as well. It’s like a combination between Chipotle and Taco Bell.

Tobias: Yeah, maybe slightly healthier. That’s right. Bit healthier version than–

Scott: Higher quality food. Yeah.


Gold Play Iamgold Corp $IAG

Tobias: So-Cal Tacos. Last one, man. Just because I’ve been in and out of this stock for a long time. Don’t own it now, but IAG Iamgold.

Scott: Yeah, Iamgold. We’ve been just cutting that company. That’s a larger market cap. Sometimes, when you own stuff like miners and get exposure to gold– it’s still the same story. We pair insider buying with catalysts and stuff. And that’s more of a– we’re typically bottom-up fundamental investors but that’s more of a top-down thing with all the printing, money supply expanding. It’s coming down a little bit, but I think what are we up 18% year over year? And then, we got a second round come in, another 1 to 1.5, 2 trillion, probably you have to do more the longer it goes on and the longer we don’t get stimulus. I don’t think that– the economy’s not strong enough to hold itself up right now, I don’t think so right now.

Tobias: Just to play on gold, just to leave at play on gold.

Scott: Yeah, exactly. In negative rates. There’s just so much debt in the system. And then, there’s even more debt in the system now that everybody’s gone on the revolvers and response to COVID. So, I don’t know how rates are going to rise without really, really messing things up. So, I think that the ceiling, what was it? Last time rates are rising was like, what was the 10 year? Was it 3.2?

Tobias: Something like that.

Scott: And then, it’s not 3.2 anymore, it’s lower because there’s so much more debt in the system. So, I just don’t think the rates are going to go very high. And then, you get cost increases and I think we have some– with the 10 years, like negative 1% on a real basis right now. So, gold, we’ve got a basket of miners, junior miners that have served us well. And then, on the market cap issue, it’s hard to find a mining company, that’s a micro-cap. In my opinion, it costs like a billion dollars to create a mine, so it’s hard to find something that’s somewhat stable in less than $300 million range.

Tobias: You can find ones that have spent a billion dollars on their mine and they’re currently micro-caps. I think I saw Intrepid Potash in your portfolio there.

Scott: Yeah. We owned that one back at my last firm. We own that at about like 18 bucks and then same thing, like an OPEC type of thing that’s– the Potash supply is mostly controlled by a cartel, the Belarusan cartel. Then, they came out and they said that they’re going to let the market dictate prices. And then, it plummeted and just destroyed Intrepid Potash, and it went down. If you look at– the CEO has just been backing up the truck on those shares for years, man.

It doesn’t mean that it’s going to turn out just because he’s been buying a lot of stuff, but there’s a ton of assets there. They just recently, the last couple years, branched out into oilfield services, providing water. They’re like smack dab right down there. I don’t know if it’s the Permian or what, but they got a really good location to transport water to a lot of the drillers down there. And then, they do the potash thing. Then they’re also, I think they’re the only domestic producer of potash in the United States. If things heat up and things get more protectionist, you have that sort of thing built in. And then, if we get into an inflationary environment, you got that working out as well. But it’s not a huge weight by any means.

Tobias: Yeah, that’s great. Well, thanks so much for your time, Scott. If folks want to follow along with what you’re doing, how did they do that?

Scott: Yeah, you can follow me on Twitter. I’m @price_to_value. And then, email is scott@ravenwood.capital. And then, website is just ravenwood.capital, a little different top-level domain. It’s not a dotcom, but yeah.

Tobias: Scott Jackson, Ravenwood Capital Management. Thank you very much.

Scott: Yeah. Thank you so much, Toby. Great talking to you.

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