(Ep.97) The Acquirers Podcast: Andrew Walker – Special Ops: SPACS, Dropbox, Transitioning From Small And Micro Deep Value To Compounders

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In this episode of The Acquirers Podcast Tobias chats with Andrew Walker, Portfolio Manager at Rangeley Capital. During the interview Andrew provided some great insights into:

  • Great Opportunities In SPACs
  • Why #neversell Is Cyclical
  • $DBX And That #2 Idea
  • History Rhymes: $FB attacks $MTCH / $ANGI
  • $IAC & $MTCH
  • Special Ops Investing
  • Option Arbitrage
  • Can’t Quite Get There On $DISCA
  • Three To Five Large Positions
  • Managing Redemptions When You’re Holding A 100x Idea
  • Being In The Right Company After A Spin-Off
  • Selling Small & Micro-Caps Too Early

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirer’s Podcast. My special guest today is Andrew Walker of Rangeley Capital. He runs the special ops fund there. We’re going to talk about SPACs. We’re going to talk about Dropbox. We’re going to talk about how he finds companies transitioning from small, micro, special situations into compounders, where he sees Match, where he sees IAC, where he sees Angie’s List, right after this.


Tobias: What’s your background, Andrew?

Andrew: My background, I graduated and went to work for a lot of the traditional finance and consulting firms. About five years ago, I was thinking about continuing on that ladder and moving up in the finance world with a bigger firm. I loved it there. I know a lot of people like to hate on private equity firms and all this, but I found the people there were fantastic, they were sharp, they were nice. I loved working there. I’ve got nothing but praise to say about them. I was thinking about staying there.

About five years ago, I was like, well, I was 27 and single at the time, I was like, “If I’m ever going to go do something a little more entrepreneurial, where I can call my own shots and go on a podcast when I want to,” and all this sort of stuff and hustle– “Hustle a little bit more,” not that I wasn’t working hard, “but just start something grow with my own hands. Now’s probably the time.”

About five years ago, I talked to Chris DeMuth and his partners at Rangeley Capital for a while. About five years ago, I made the switch and went over to Rangeley and launched my own fund. From that, I run my own fund, I work with Chris, and we’ve got a lot of– I don’t want to call them side hustles because they all work together. I’ve got all the public-facing stuff, Yet Another Value Blog, Yet Another Value Podcast, all this type of stuff that have come out of that as well.

Tobias: How did you meet Chris?

Andrew: When I was in college, I was writing a very small time website called Whopper Investments. It was mainly focused on real deep value stuff, stuff that I think you probably know pretty well. Micro-caps, net-nets, all that type of stuff. We actually overlapped on a couple of different investments. The coolest one was, there was this one investment, it was $100 million cable channel called, I think it was Outdoor Networks. They got a bid to get bought out for $8 per share. A month later, Stanley Kroenke, he’s married into the Walmart [unintelligible [00:02:50], and he owns the Colorado Avalanche, and I think he owns the Denver Broncos, I think he’s the owner the Denver Broncos. Anyway, he’s a multi-multi-billionaire. He came in and he said, “Hey, I will pay $8.80 per share for this cable channel,” and the stock trade’s at $8.60. If you read through the merger agreement, there were all these interesting things in the merger agreement. The most interesting one was, it was not only was there no financing condition, which a financing condition says, you and I want to go buy something, we say, “Hey, we’ve got a bank who’s going to back us.” There was no finance condition.

It said Stanley Kroenke, a man who is worth $10 billion personally guarantees that if you sign this deal with him, it will go through. This is a $150 million cable channel or something. The stock trading for $8.60 and the offer price was $8.70 or $8.80 or something. We said, “This is free money. We have a bidding war situation. The backstop right now is a man whose personal net worth covers this cable channel’s value 50 times over.” I think both of us, I was just out of college, so I was running a personal account, and Chris was running a little bit more money, but I think both of us really backed the truck up on this and it turned into a mini bidding war. The final price was like $10 per share or something. I’m probably getting some of the numbers wrong. The basics were there were these really quirky situations, and Chris and I worked on a couple of them. That was probably the highlight over the year.

When I was 27 and single and thinking, “Do I want to go do something on my own or move on?” I’d stayed in touch with Chris for a long time. He said, “Hey, I’d love to work with you. Come on over, you and I, the other people at Rangeley–” Rangeley is three or four people, so it’s not very big. “We’ll run this, we’ll hustle and we’ll do whatever we can do.” That’s how I came over to Rangeley and started everything.

Tobias: The fund is called Special Ops?

Special Ops Investing

Andrew: Yes. My fund is called a Rangeley Capital Special Opportunities, and we actually run three funds. We run a SPAC-focused Fund, which all of a sudden has become– We launched a SPAC-focused fund before it was hot. A year and a half ago we looked at SPACs and we saw like, “Hey, you can buy these for $10 per share and you get equity-like returns with treasury-like risk.”

All of the sudden, this year it’s become, you buying for $10 per share, and you get levered beta times 50 equity upside returns with treasury risk. I can’t talk returns or anything, but that’s been really interesting, really good. Anybody’s interested in SPACs, we can talk about that. I’m obsessed with SPACs actually. We can talk about that all day if you want. Then, we run an event fund, which is more traditional Merger Arb event.

And then Special Ops, which is the fund I run. It’s more concentrated investing. You and I were talking before we started taping. When I launched, I think I thought it was going to be much more the traditional deep value, net-nets, low price earning stuff. Overtime, probably more as my strategy’s evolved, it’s become a little bit more, hey, the value here is more in– it’s in different stuff.

Yes, it might look expensive on a trailing basis, but if you look four or three years, it’s really cheap, or, “Hey, there’s this really complicated merger that’s going on.” But if you strip out a lot of the merger noise, I think this is going to look good– or a great example, is a cable company. Three, four years ago, everyone was concerned about– everyone knew what cable cord cutting was, and everyone was concerned about these businesses with cable cord cutting.

Three or four years ago, I looked at it and said, hey, well the revenues go down, because video costs $100 per month and cable internet is $50 per month, but actually their profits go up, because video, you have to pay ESPN and Disney and all these things. Broadband, your profit, it’s basically 100% profit margin at that point.

I was looking at that and say, hey, the demand for cable’s growing, they’ve got great pricing power. So, you have this thing where the story is revenue is going down, cord cutting, all this competition, but the actual truth was revenue going down, profits going up, value going up, the business was getting more valuable. Those are the types of things I like to look at.

Tobias: That’s an interesting insight. Let’s talk a little bit about SPACs.

Andrew: Love to.

Great Opportunities In SPACs

Tobias: When I first encountered SPACs was probably a little bit more than a decade ago, when the way that you played SPACs was you found the ones that were getting close to the two-year period that they had to actually do a deal. They all traded at a big discount to basically the cash that they had to return, and so you played these busted SPACs, so that you basically got– they’re little special situations where you basically got the $10 back. What’s changed? What’s the focus now?

Andrew: Well, I think that’s the way most people played them until about a year ago, I’d say with– Chamath’s IPOA which turned into Virgin Galactic SPCE, which he bought it, it captured the retail mentality, and it went from 10 to 30 in a day. I think that’s the one that really changed the dynamics for these things. Now, what it’s become is a SPAC is, it’s $10 sitting in trust, that if you announce a merger with anything that’s connected to an electrical vehicle play, it’s worth $30 per share the next day. It’s almost a license to make money.

I’m obsessed with them because, A, like Pershing Square Holdings right now, that has $20 per share in trust value, and that’s a very unique structure we can talk about, but it trades at $25 per share right now. Investors are saying, Bill Ackman’s the one who runs Pershing Square, “We like you so much, that the $500 million you’re sitting on, we’re going to value that at a $700 million. Not only that but when you do this deal, we’re going to get diluted down because the founder shares are going to dilute us down. We actually think you’re going to be able to announce a deal that so good, that you’re basically going to create 40% of value out of thin air.”

You see a lot of these, the EV SPACs, they’re all agreeing to mergers that value them at a billion and the next day, the market’s saying, “No, you’re worth 4 or 5 billion.” And it’s just insane to me that two rational parties, if you and I announced a deal at $100 million, and the market came around and valued that deal at $300 million, it would just seem weird to me.

Tobias: Yeah. Is that something that is sustainable, do you think?

Andrew: I don’t think it’s sustainable. So, this year, I think– I don’t have the stats for it, but I think there’s going to be 300 SPAC IPOs. In a normal year, I think there’s something like 80 normal IPOs, 80 to 120. So, if you think about that, there’s going to be almost three times as many SPAC IPOs as normal IPOs this year. There’s not three times as many IPO-able companies.

At some point, there has to be a reckoning where there’s just not enough companies to go public through these SPACs. I’ve been thinking, do I want to do a 2021 piece? If I did, one of my predictions for 2021 is, a lot of these SPACs that haven’t announced deals are just going to– they’re going to go without deals and they’re going to have to liquidate and pay their $10 per share back, or they’re going to announce deals, and at some point investors are going to say, that company is not a public-ready company. You pay too much all this.

I think we’re going to see a lot of SPACs end up liquidating, would be one of my predictions for SPACs. That doesn’t mean there aren’t going to be great SPACs in there, but I do think we’re going to see a lot of SPACs liquidating on the back end of this.

Tobias: With a SPAC-focused fund, how do you parse the opportunities?

Andrew: I help a lot on the SPAC-focused fund, but Chris actually manages the SPAC-focused fund. I don’t want to put words in his mouth, per se. What it originally started as was, hey, we’re going to go by– again, this was before the SPC mania. It was, hey, we’re going to do a lot due diligence on the managers. We’re going to invest in managers we like at $10 per share.

We’re going to have this parked in trust, and if they announce a deal we like, great. But most likely, what we’re looking to do is fund the deal and not take a lot of upside risk. Again, I don’t want to speak particularly to the SPAC-focused fund. I’m happy to talk my views on SPAC, but I don’t want to speak to the SPAC-focused fund if that makes sense.

Tobias: All right. Well, let’s talk Special Ops. Let’s talk about the strategy in Special Ops, and where you’re finding opportunities.

Andrew: Yeah. Well, not to bring it back to SPACs, again, the strategy for Special Ops, it varies. I always want to pay– I want to buy something for less than it’s worth is the overall strategy, I’m a value investor. It varies over time. When I launched Special Ops, I thought the definition of that was, I buy things for four times price earnings when the market’s at 10 times price earnings, or I buy net-nets, and over time that’s evolved.

Option Arbitrage

One of the things I found really interesting being on the other side of the SPAC mania craze is what I like to call it. I published a piece on Pershing Square Holdings, the volatility on that thing is off the charts right now. I’ll put a disclaimer out there options are risky, everyone should consult a financial advisor.

Options are like big boy plays, you don’t want to do this naked, but Pershing Square Holdings right now trades for $25 per share. They do not have a deal announced. They have $20 per share in cash. You can go write a put option for $20 per share for March. Right now, I think you get paid– it was more when we were doing this, but you’d get paid about 30 cents. You get 1.5% of your money back for three months for writing $20 per share put. But if you think about what needs to happen for Pershing Square to go below $20 per share, which is their trust value, the only way that could really happen is if they announced the deal and the market hated the deal so much that right now– the market is saying, “Bill, $20 per share in your hands worth $25.” They say, “Oh, actually your deal was worth less than $20.” Not only that, but you’d have the option to redeem your shares for $20 per share.

The only way that it could go below that is if they could close a deal before that option expired. If you look at the history of SPACs, takes about 90 days from deal announced to deal close. Again, options are risky. I don’t ever want to say free money, but it looks like free money, because there’s no way that they could announce a deal and close it before these options expire. You write the put, if it goes below $20, you’ll have the shares put to you, but then you’ll just redeem them into any Bill Ackman deal. There’s a lot of different ways to play the SPAC mania. I think it’s because SPACs have done so well, the implied volatility on the SPACs, it’s higher than Tesla. It’s higher than Moderna, which just had a COVID vaccine approved and nobody knows what the financials of rolling out a COVID vaccine is, or how many doses they’re going to be, or how many vaccine manufacturers they’re going to be. But the volatility on the SPACs is higher than that. This is for cash shells. That’s just something that fascinates me to no end.

Tobias: I think the Moderna insiders have an idea. I see them doing a lot of selling.

Andrew: Well, that’s interesting. I’m not a Moderna expert, but they’ve been selling really heavily since $60, $70. Now Moderna is at $150, $160, and I do think there’s a lot of these places– Tesla’s a longtime favorite of every value investor to dunk on. Tesla for a long time, we had a short position in it to our huge detriment, but I remember when it was $200 per share before the split, and insiders were selling– they would have options that didn’t expire till 2027. They would sell the day those options vested. So, they’d give up six years of option premium for one of the highest volatility stocks on the market just to get their cash. I think value investors looked at this and said, “Oh, my God, that’s one of the biggest red flags I’ve ever seen.” So much for Moderna, “Hey, they’re selling everything they can at $60 or $70. They probably think the Pfizer vaccine’s better.” Well, it’s short term because they were doing that over the summer, and now we’re in the winter, and the stock’s at $150. But Tesla’s a 12X since the CFO was selling every share he could get his hand on.

Tobias: [laughs] Tesla defies all gravity, logic as far as I can see.

Andrew: I listened to– not to pitch someone else’s podcast, but Bill Brewster had The Acquirer’s Podcast which I’ve really been enjoying. Oh, you just went on it. I haven’t got on to listen to your episode.

Tobias: Yeah. [laughs]

Andrew: You tape a two and a half hour episode, it’s tough to find time for, but I will, because I’ve really enjoyed it. He had SuperMugatu on there and he said, “Look, when you and I are talking in the room, it’s an electric car company, they’re never going to make money, and then the bulls are talking the same, they’re going to put something on the moon.” [crosstalk]

Tobias: They’re going to put something on Mars.

Andrew: Yeah.


Tobias: One of the strategies that you were talking about earlier, was looking at something that can grow significantly over the next three years, you buy it cheap now relative to where it can grow to. What sort of companies fit that profile? How are you thinking about those?

Andrew: A good classic example would be Match.com, which one of my favorite companies, one of my favorite investors follows, IAC, which is Barry Diller’s holding company, and I just love how, A, they look at the world, and, B, how they’ve evolved over the years. About three years ago, I got really into Match.com, and this is one of the ones that really opened my eyes as an investor, I would say.

Match.com shares were at about $18 per share at the time. I had just met my soon-to-be wife online. We met on a Tinder competitor, but all of my friends were on Tinder, and everyone’s on Tinder. There was this big debate, people would say, “Oh, Match treats at 30 times EBITDA. How are they ever going to justify this valuation?” I said, “30 times EBITDA? Are you guys crazy?” Tinder hasn’t even started monetizing yet.

People would say, “How is Tinder ever going to monetize?” I’d say, “Well, they’ve got every 20 or 30 year old in the country is on Tinder, looking for their life partner, or looking for one-night stand,” but they’re looking for something. At some point, if everyone’s on the product doing that, they’re going to be able to monetize this and it’s going to be absolutely enormous when they figure out the right way to monetize this.

Match was at $18 then three and a half years later from when I put out my piece on them. Match today is around $150 per share. I think that’s looking and saying, hey, the financials, they have zero value from Tinder in them at that time basically and Tinder is the biggest product of all time, for sex it is.

History Rhymes: $FB attacks $MTCH / $ANGI

A similar one right now, I just published a piece. History rhymes. Angie’s List, which Home Advisor’s Angie, which is Angie’s List, Home Advisor, and if you’ve ever used them, they’re trying to build out the local marketplace for home services. This morning, Facebook announced that, or the Information had an article that said Facebook is looking into moving into this product category, and Angie’s stock opened down 10%. I said history rhymes because two and a half years ago, Facebook announced they were moving into online dating, and Match’s stock fell 20%. Here we are, three years later, nobody uses Facebook dating, and Match’s stock is 5X since then.

With Angie’s List, I think history rhymes because Facebook wants to move in there. I think they’ve got a lot of local market network effects similar, but it rhymes. It’s not the same, but it’s similar to what Match had in local dating. I think Angie is too far ahead for Facebook to really make the moves that they would need to make to beat them. Match was a 5X over two and a half years. That’s a really good outcome but I think Angie could be a 5X over the next three to five years because of that.

Tobias: Yeah, that’s interesting. I saw Rishi Gosalia had a comment either under your tweet or under another one where he said that, “If it’s not been the top five priorities for a trillion-dollar company, it’s a poorly funded startup.” He didn’t think it was going to be much of a competitor.

Andrew: No, I think that’s great. For years, everyone’s been saying Netflix is dead, dead in the water, Apple is going to roll out Apple TV, and it’s going to be free, and everybody’s going to cancel their Netflix subscription. Amazon’s going to put Amazon Prime TV in there, and everybody’s going to cancel the Netflix subscription because they already have Prime, why would they pay for Netflix?

The answer is Netflix is fanatical about one thing, that’s video. I actually like some shows on other services better but they’ve got the best service, like little things. If you watch Disney+, if you watch an episode, at the end, the credits pop up, and you have to watch all the way through to the end of the credits for it to go to the next show if you’re on Disney+. If you’re on Netflix, you don’t have that issue. You watch to the end of the show. You see two seconds of credits, and then boom, next episode. That seems like a small thing, but that just shows there’s a maniacal focus on delivering the best consumer experience at Netflix, which Disney+– is Disney’s priority right now. They don’t have that yet. Amazon TV, they never had that.

For something like Angie’s List, Home Avisor their one focus is on figuring out the consumer marketplace for local services. Facebook, that’s priority eight. They’ve got to stop from being broken up. They’ve got to steal all Snapchat stuff. Mark Zuckerberg has to go, kill his own meat and eat his own dinner tonight. That’s not a high up on the priorities for them. So, it’s probably not going to work.

Tobias: How do you find your ideas and then how do you filter and validate what you’re looking for?

Andrew: Ideas all over the place. I think it’s tough for anyone to say they have proprietary idea sourcing at this point because we all look in the same wells. I’d say valueinvestorsclub.com. SumZero, Seeking Alpha, all these places, varying qualities, but I think everybody’s looking at the same place, we all follow the same 13Fs and everything. I see all of those, I think the best place actually has been one of the great things about having an online presence, has been people will shoot you, will ping you, and say, “Hey, this seems like it’s up your alley.” And a lot of times, they’ll come with a fully fleshed out thesis, and they’ll say, “What do you think?” And I’ll say, “Oh, oh, that looks really cool.”

The one I’m most jealous of, Mike over at NonGAAP, who I sing his praises all the time, he’s done incredible work with saying, “Oh, this company, they normally grant options in June. This year, they granted them in March.” They probably doing that because they think the stocks going to go up a lot before June.

Now, I’m really jealous, because I think a lot of people do ping him and say, “Hey, my company normally grants options in June and they just ran a bunch of options in January, what do you think?” He’s got this great incoming thing of, “Hey, these people are repricing their options at the interesting times.” I think that’s actually been the best place for looking at them for getting interesting ideas recently.

Tobias: You’re getting a source of ideas externally being brought to you, that’s ideal.

Andrew: I think everybody gets their ideas their own place. I do think that’s one proprietary place where I have it. Then at this point, I followed so many companies for so long that a lot of them will– they’re kind of recycling waves, like Discovery Communications. I followed that for years. At the end of November leaving their Investor Day, I thought it got interesting. I had five years worth of notes built up over that, and a long history with it. You follow companies for a long time, they recycle. But the external ideas, I do think there is something to that.

Can’t Get There On $DISCA

Tobias: Let’s talk about Discovery, because that’s been cheap for a little while. The bear case on it is that it’s the programming that people don’t necessarily seek out. It’s sort of programming that you put on in the background while you’re doing something else and you might not necessarily go and pay for it if it’s unbundled. What’s your take on it?

Andrew: Look, I think they laid out the bear case well. I think the bull case would be, hey, if you subscribe to the cable bundle right now, the cable bundle is effectively sports, news, and discovery. The cable bundle does want to offer something for the viewer who doesn’t want sports or news and increasingly, that is Discovery.

Discovery’s argument is, “Hey, half of women who watch TV in America, watch us. If you look at our pricing per hour versus ESPN or any of these sports things, we are massively undervalued. By the way, right now in the cable bundle, you pay $2 per month for us versus $10 for just ESPN, and that’s $2 per month for HGTV, Food, Discovery, all these shows. We’re going to switch it over at some point to Discovery Plus, and people will pay $6 per month for Discovery Plus.” That means, as we go from the bundled world to the unbundle world, maybe we lose half of our subs, but we get 3X the pricing. I think that’s the bull case.

I’ve never quite gotten there on the bull case because I do think the bear case has a lot to it where, yes, I do think they’ve got great personalities, people seek out like Guy Fieri, all these things, Chip and Jo, 90 Day Fiancé, all this type of stuff. You do run into, “Hey, for $15 per month, I can get Netflix,” and Netflix has Planet Earth, and all that type of stuff. For 80% of households, is that enough natural programming versus actually going out and paying $6 for Discovery?

I don’t know. It is very cheap, and I think there’s a lot of interesting optionality there. The bull case would be, “Hey, Discovery is launching Discovery Plus as we speak, and go look at what Disney stock did from Disney+ launch today. If Discovery does that, and by the way, they’ve got tons of cash flow and all this sort of stuff.” I mean, it’s a ginormous homerun.

Three To Five Large Positions

Tobias: When you’re managing the portfolio, how do you size positions when they come in? Do you trim? Do you rebalance? How do you think about diversification?

Andrew: It’s always evolving. The way I’ve run Special Ops is generally about 20 positions, 3 to 5 core positions that are going to be very large. Three to five positions are going to make up 60 to 75% of the portfolio, so quite concentrated. Then, the other 15% of the positions which make up, let’s say, 25%, that’s pretty small. So, those are more event-y type stuff, interesting names, like the SPAC-type ideas like the Pershing Square we talked about would fit in there. It varies.

With the cable companies, a couple years ago, Charter was at $300, and I thought it was enormously undervalued. Today, Charter’s at $650. I think it’s undervalued, I don’t think it’s as undervalued, but if you’re selling, there’s tax consequence and all that. It’s very difficult, and selling a cable company where I’ve got such clear line of sight to their future versus a Discovery, where you might think there’s a lot of upside, but there are a lot of more questions on that, it’s really tough to give a firm answer.

Tobias: What about diversification? Does it play into or you just take the opportunities where you find them?

Andrew: Diversification, it’s tough. Again, it evolves over the years, because I do think there were times where my three best ideas were three cable companies. If I’d just gone with those and hashtag #neversold, I think I would have outperformed a lot versus what I actually did, which was had one cable company be a ginormous position, ignore the other two, and diversify into things that I didn’t like as much, but that didn’t have the same cable company risk.

But you can say that now with the benefit of hindsight versus– I know a lot of people who two years ago, oil was their best idea, and three oil companies were their three largest positions, and no benefit of hindsight, that was a mistake. It’s tough. It’s always evolving. I wish I had a real, straight, firm answer for you that you and I could write a book about, put it down, and our listeners would walk away. I really don’t. Especially when you run a more concentrated portfolio, I think there’s a lot of art versus science to it. I’m always trying to improve that art side of it.

Tobias: How’s your funds structured?

Andrew: What do you mean?

Tobias: Is it a limited partnership or are you managed accounts, how do you do it?

Andrew: It’s a hedge fund. Yeah.

Tobias: That creates its own problems when you’re reasonably concentrated, and you’ve got money flowing in and out. How do you handle the flows? How do you think about that?

Andrew: Well, we’re still in startup mode. Most of the– I say most, but I think all the investors, I know when we talk to, and it’s been a debate. I think we structured it so there are benefits to investing for– you get lower fee classes– you get better fee classes and better terms for having a longer-term time horizon and committing to a little bit more of a lock-up and stuff. We’ve talked to them. I do think it’s cliché. People say shareholder base is a company’s edge, which I don’t believe that at all. I think companies are going to get valued like they get valued at some point. I think people who say that are only saying that for really high multiple companies, but I do you think for a hedge fund, like a shareholder, your hedge fund base can be a little bit of an edge, like you need to talk to them make sure that there’s a similarity and vision.

Managing Redemptions When You’re Holding A 100x Idea

The one nightmare I think most hedge fund managers have is the Michael Burry situation where in 2006-2007, everyone’s redeeming and pulling money from you because you underperformed a little bit short term when you actually had that killer 100X idea and it just needed a little bit more time to play out but you had probably some more institutional investors who didn’t really know you, who measured you on short-term performance and marks and all of that.

Tobias: Yeah, that makes it tough. When you think about the level of the market, does that play any role in whether you carrying some cash or whether you have sort of sizing-up positions?

Andrew: Again, more art than science, but I will say that’s really evolved for me, particularly over this year with– I came into this year, I thought market’s fairly valued, but I thought there were some really interesting opportunities out there and then you have COVID and things pull back really quickly and not having cash to play there is just– If you and I had just gone to the beach and slept, and then we woke up in March with the past 10 years, we’d had 100% of our portfolio in cash, and then we woke up in March to play it all from March 15 to March 31, and that’s all we did, we probably outperform 99% of funds.

Tobias: Your 10-year track record still looked pretty good.

Andrew: It would. A little bit for me has been, even when you’ve got a lot of interesting great ideas, really interesting good ideas, there is something to, hold a little bit back for things just get absolutely more crazy, or, you have the Facebook announces Match dating and Match’s stock is down 30% because everyone’s losing their minds and nobody’s thinking, Facebook has a problem here and it’s going to take them years to roll out, and is this really going to be top priority? It’s evolved a little bit too. It’s not that I’m paying attention to the market, but I want to make sure I’ve got a little bit something held back for when everything goes from good to, “Oh my God, screamingly amazing, awesome.”

Being In The Right Company After A Spin-Off

Tobias: One of the interesting things that you’ve raised before Mike, NonGAAP. He just tweeted this, but it’s something that I saw Dan Loeb made the comment a little earlier that he looks for these– I think that Match and Angie’s List probably meet this definition where– maybe it’s not necessarily activism, but where there’s some activist event, and then a better company gets spun out. If you just hold those– I mean, this is almost like the reverse Greenblatt, where Greenblatt used to say, “Buy the company that got in the spin, buy whatever’s got sold the most heavily.” And everybody did that for a long time. All those returns went away.

I think it’s slowly drifted to the other side of the boat now where you buy the better company in a spin. I think that’s what Dan Loeb is saying. When they do their activism and they sort of cause a company to be spun out, and they found that that’s the event that leads to a compounder type, more focused management team in a slightly better business, and given enough time, that can work. He was floating an idea where you just buy these things, just put them away in a never-sell portfolio, and let them go, like coffee-can these ideas because you’re getting a much better business. Do you see that anyway?

Andrew: It’s an interesting thought because I agree with a lot– I do think 20 years ago, spin-offs were all the rage, and I still look at pretty much every spin. Companies also got wise that were, “Hey, if we spin shitty assets, a bunch of event investors are just going to come by these assets. We can offload our assets, have a inflated price for a second. We’ll restrike our stock options. The crappy company can go raise a bunch of equity if they need to.” I think they got wise to that. I do think there is something to, “Hey, you spin off the bad business and we’re living in a world with– we’ve never seen returns to scale like the internet world allow. So, if you spin a bad company off from a good company, and that good company can focus and go from good to great, like the returns to that are astronomical. There’s certainly something to that.

Tobias: What are you hunting for at the moment? How’s your strategy evolved? Is there anything particularly interesting right now?

Andrew: We mentioned SPACs. I don’t want to go long every EV company at all, but I do think there’s a lot of interesting dynamics around SPACs. Again, options are risky. Everyone knows about the SPAC warrant things where their warrants will trade for a 40% discount to the stock. I actually think there’s reasons for that, and a lot of reasons have to do with– the warrants aren’t fully exercisable yet, the stock’s not borrowable, so shorts can’t ARB that. I’m not sure if there’s opportunity there, or if it’s actually a function of like no borrow availability, but there’s definitely interesting opportunities with SPAC, that’s obviously far, far, far more on the event-y side.

But then, on the more value side, Angie’s List is something I’m looking at. I think a lot of these companies that aren’t growing 30% per year, maybe they’re growing 5%, 10%, 15%, but they lead their categories, and there’s the possibility for them to– I like to call it leveling up into tangential services and stuff. I think a lot of those companies sell at really interesting multiples and have a lot of interesting optionality in a bunch of different ways. A lot of like FinTwit’s favorites, Dropbox right now. I think that’s super interesting. That’s one of FinTwit’s favorite. Again, Angie’s List is one that I really like. There’s a couple more I’m working on that I think are pretty interesting.

$DBX And That #2 Idea

Tobias: How well do you know Dropbox?

Andrew: Very well.

Tobias: Do you want to give us the Dropbox thesis because it looks it’s transitioned from being a more FinTech science experiment to that– now, it’s starting to look like a real business?

Andrew: Dropbox thesis, I think, I’m trying to pull up all my notes here, so I can give you precise numbers. I don’t know if that’s going to work with the podcast. The thesis is really simple. A 100 million plus people use Dropbox, I think they have about 15 million active paying users. When you look at that, this is a product that people are using. I use Dropbox to save all my files, that should be a very sticky business. It trades very cheaply. It’s run by– everybody loves the founder, CEO. It’s run by Drew, the founder. He still runs it. He’s got a very option stock price heavy incentive system. He owns a lot of stock, but you can see this in the [unintelligible [00:34:41] I think it’s called the Founders Grant, where if the stock gets 30, he gets one payout, 32, 35, all the sorts of stuff. They layout all their targets. They say, “Hey, we’re going to do a billion of cash flow by 2023.” If you look at their history of meeting the numbers, they put out, this is a company that does not miss when they give guidance. They consistently beat their guidance.

I think you add it all up and you say, hey, cheap company run by founder who– by the way, I think nobody gives him credit, but he’s a founder of Dropbox, and he tried to buy Slack for, I think it was a billion dollars. I believe the story is his board turned him down. Slack just got bought for $35 billion by Salesforce. A lot of people like to say, “Oh, Blockbuster could have bought Netflix for a million dollars,” or something. Well, it’s probably a different company and a different product in someone else’s hands. But I do think there is something to– here’s this heavily incentivized founder who built Dropbox, who saw the future clearly enough to want to buy Slack for a billion dollars, I think there would have been huge synergies there.

Most of these guys have product number two or insight number two when they do this. Jeff Bezos had, not just Amazon, he had Amazon Web Services and a bunch of other ones. I think that this guy, he’s going to have a product number two. Even if he doesn’t, if you just look at the core business you’re paying for, you’re paying a very cheap multiple, and if they hit their long-term numbers, you’re paying a super cheap multiple. Again, this is a company that doesn’t miss number. I think it’s cheap, I think it’s got optionality, I think it’s got a great founder, I think that’s the overall financial pitch for it.

Tobias: He sits on the Facebook board too. So, there’s always a potential for something there.

Andrew: I think you’re right. What would the Facebook-Dropbox synergies be? Does Facebook really want to get into another acquisition when they’ve got the FTC breathing down their back saying, [crosstalk] “Hey, your past acquisitions have done too well, we have to take them back for you?”

Tobias: [laughs] Instagram acquisition, it was like two guys in Bloomberg, it was like 15 guys with a money losing product.

Andrew: I talked earlier about how Match opened my eyes. Instagram, I remember, people hated on them. The numbers were 39 employees for a billion dollars. Facebook paid all stock, and people said, “Are you insane?”

Tobias: It’s too much, it’s crazy.

Andrew: “39 employees [crosstalk] billion dollars?” That was one of the ones where I looked at and I said, “Are you guys crazy? This is 30 million active users, and they just bought this and the synergies between they’re going to be huge. This seems like a pretty darn good deal if you look at the optionality.” That’s a different story. For Dropbox, I do think there are companies that could acquire it. Who thought Salesforce was going to buy Slack? I don’t think a lot of people thought that was going to happen, and they paid a very nice premium for that business. I don’t think Dropbox fits quite as neatly into any company’s portfolio, but there’s a lot of people who have Dropbox downloaded, they’ve got a lot of credit cards on file. I think there’s a lot of different things that Dropbox could do, either as someone else’s acquisition target, or for Dropbox going and growing the business.

Tobias: Yeah, I like Dropbox as an opportunity too. I also like the idea of finding these guys who’ve got product number two. I think that’s a good approach.

Andrew: Yeah. You look at the history of guys who build multibillion-dollar businesses, I mean, it’s not guaranteed because there’s a lot of luck to building a multibillion-dollar business. But, everybody wants to back these founder-led huge growth stories. There’s Dropbox sitting right there, multibillion-dollar company, led by its founder/CEO. He owns a lot of equity, he’s got a lot of optionality to grow the company, and he’s proven that he can see the ball really clearly going forward. I think it’s crazy that you can get the optionality of him doing something for more than free.

Tobias: It meets that rule of 40. It’s not so much on the growth side, I think, is the problem.

Andrew: Yeah. Dropbox, if their profits were a little lower, but their growth was a little higher, I think people will be going crazy.

Tobias: That’s it.

Andrew: The big question with them is there are terminal value questions, because a lot of what they do, you can get for free on Google Drives, you can get for free from a bunch of other places. So, I hear that, but it comes back to what we said with Angie’s List versus Facebook. Dropbox, one thing is storage and making your life easier with storage, that’s probably 15th down the line for Google and for Microsoft. A lot of people are putting their money where their mouth is and paying for this product, I think they’re focused, I think they can do a lot with it.

Tobias: There’s also reasonable argument for an independent, if you don’t want to be associated with Google or with Apple, or with whoever else. You can go and work with Dropbox and it’s a totally independent company.

Andrew: They’ve made this argument before and they’ve even said like, they were doing a lot of integrations with Slack. I thought the Slack still might get together. The coalition of the independent stuff. Something simple, if you use Google Sheets for your business, and I use Microsoft Excel, and we’re going back and forth, that can make it really difficult. It probably doesn’t matter for us, but if you’re a lawyer and all your clients are on different products and stuff, having an independent thing that integrates with all them actually has a lot of value for for them. So, yeah.

Tobias: I like the product number two idea a lot. Another good example of that is Jack at Twitter with his secondary Square and now Cash App. It seems to be a pretty good example of that product number two doing quite well. I just wish he could do a little bit more with product number one.

Andrew: Yeah, I was about to say, some people might argue that Square was product number one and Twitter’s like accidental mess-up product number zero, or something but yeah. Jack and Twitter, Elon with what, 17 different businesses now? There are a lot of examples of these. It’s tough, but I love getting that optionality for free.

Tobias: Do you have any other good examples? You have any other interesting opportunities?

Andrew: Let’s see. [laughs] I’m just pitching the whole book here. What else I’ve been researching a lot recently? I put a lot on the blog. I’m just trying to think of ones that I’ve been into recently, not necessarily recommendations or anything.

Selling Small & Micro-Caps Too Early

Tobias: We were on a small and micro-cap panel recently. How do you come to be on the small and micro-cap panel, from a background and small and micro-cap rather than like a current focus?

Andrew: Again, when I launched Special Ops, I thought how I was going to build it and structured and how I thought about the world was going to be very different. I’ve got a lot of background. I still spend a lot of time looking at small and micro-cap companies. Actually, one of the things I kick myself in regret is, there were two or three real winners on the small and micro-cap side that I think I did the classic value investor thing and I sold out way, way too early.

Tobias: [crosstalk] Xpel or something like that?

Andrew: Xpel, have an article on Seeking Alpha the day 3M filed a lawsuit against them saying that I think they’re going to win that. I think my cost basis was $1.50 and I sold for $2. InfuSystem was one where I had a huge position in it. I think that trades for $15. Again, it’s one of those things I’m trying to evolve and learn from, but a lot of these times when you find a good company, and if you’re a value investor, and they trade from 8 times earnings to 12 times earnings, a lot of times you say that’s enough, but if it’s a good company, and you’ve really built conviction, and you understand it, you can say, “Oh, it’s 12 times trailing earnings, but it’s two times what I think they’re two years ahead of earnings are,” or, “it’s half times what I think like the strategic optionality to an acquirer is five years out.” [crosstalk] a lot of time looking [unintelligible [00:42:20].

Tobias: InfuSystem was a net-net, wasn’t it?

Andrew: Oh, InfuSystem was a net-net, they had accounting issues, they had all these issues for years. I talked to their board, I was helpful. And they had an activist who reconstituted the board, I was helpful to him. Eventually, I had held it for three years and the IRR was middling, and I just got sick of– they are always promising and they never delivered and the market just didn’t seem to care. And I think the day I sold was two days before the stock has gone on a five times run, but that was one where I actually I think I saw the value very clearly. Again, I don’t know if I’m making myself look like a loser or trying to pay myself as a profit. It’s neither, I’m just saying like– I think I saw the value clearly, I got a little sick of it and it got like– it was married to I want to buy this for less than 10 earnings, the day it went over 10 earnings, I sold it and that was a mistake.

Why #neversell Is Cyclical

Tobias: Where do you fall on never sell or selling as a value guy? What’s the process?

Andrew: I think you sell, but you sell– I’m not a never sell guy. And I do think a lot of never sell is the current environment where we’re looking at companies that have scaled that we’ve never seen before. If you’re in the 1920s and you practice never sell, any decade but this decade, never sell would have been an awful decade to practice. I think some of never sell is 0% interest rates, lets you pull a lot of the future value forward. I think some of never sell is a correct identification that, in today’s environment– Walmart 50 years ago, they were going to take a lot of value, but they couldn’t take all the value. Whereas today, if you’re the winner in a market, you take all the value in that market, and you might take all the value and every tangential market to you. I think a lot of never sell is identifying, hey, you don’t sell a business when it’s priced at 50 times earnings because if it goes and takes five tangential markets, it’s two times earnings. I disagree with– I think they’ve identified something, hold really good companies until they take everything they can take. I think never sell will reach its limits at some point as well.

Tobias: Yeah, I think it’s cyclical too, we saw it in the 70s with the NIFTY 50. I think we saw it also in the late 1990s, not with the dotcom stocks but just there were lot of really good stocks. Walmart was one. Microsoft was one.

Andrew: Great point.

Tobias: GE. GE, not such a great business now. Neutron Jack was the CEO of probably the preceding decade at the time. All of those companies just bumped sideways for 10 or 15 years after that point. Even though there were great businesses underneath and still compounding at higher rate, they were just too expensive and it took a while for the underlying business to catch up with the stock price.

Andrew: Microsoft is an interesting one because Bill Gates retires– GE would be different because I think people look back on Jack Welch a lot differently with the benefit of hindsight. Microsoft is really interesting because Bill Gates retires, and he hands the greatest portfolio of tech assets in history to–

Tobias: Balmer?

Andrew: Steve Balmer. He hands him the greatest, and the guy bungles it for 15 years, and if he hadn’t been nicely forced out, I mean, what does Microsoft do? They missed a ton of boats, but their assets were so good that they could survive 15 years of mismanagement. You look at a lot of these companies today, Facebook, Amazon, their founders still have a very long runway ahead of them.

So, I don’t think it’s a super near-term problem. But at some point, someone else is going to be running those assets– Apple, Tim Cook has been great, but you do sometimes look at Apple and say, “Hey, what is Apple done under him aside from continue the Apple iPhone, Apple Watch?” Everything under Steve Jobs, they’ve just continued in those assets were so great. But they haven’t really introduced anything new, I would say. Facebook, Amazon, all these guys, at some point, someone else is going to run them, and how does that look after five years of someone who isn’t the founder running them?

Tobias: I think AirPods have been pretty successful. That might be one product people like.

Andrew: You’re probably right, but they’re successful, but they’re built on the iOS ecosystem. Any other company would love to have an AirPod success, but does that really budge the needle for Apple?

Tobias: Yeah, that’s fair. We’re coming up on time, Andrew. If folks want to follow along with what you’re doing or get in contact with you, what’s the best way to do that?

Andrew: I think the best way, Twitter. It’s so cliche at this point, but I post a lot on Twitter. If you slide into my DMs on Twitter, I feel like I’m pretty responsive. @AndrewRangeley on Twitter’s a great way. I run Yet Another Value Blog, which you can follow me. I write semi-frequently on there. Yet Another Value Podcast, which you’ll have to come on at some point, where I try to talk to guests, really dive deeply into one stock idea is how I’ve done it. I’ve tried other formats, but that’s really where I’m most passionate, I think the best conversations are. Yeah, I think those are the best ways.

Tobias: That’s great. Andrew Walker, Rangeley, thank you very much.

Andrew: Hey, thanks for having me on, man.

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