In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, Vinny Daniels, and Porter Collins discuss:
- Wile E. Coyote vs. The Road Runner: Can Anyone Catch Elon Musk’s FSD Hype?
- Cannabis Producer Moats: How Glass House Wins on Cost of Production
- EVs and Catalytic Converters: Rethinking the Demand for Platinum
- Small-Cap Financials: An Overlooked Niche for Value Investors
- Inflation Busters: Companies with Built-In Price Increases
- The Durbin Act and Small-Cap Banks: Why Walmart Chose CCB
- Stocks Up, Fed Tightening: What’s Really Happening?
- Hidden Champions: How AerCap Wins in a “Crappy” Industry
- Emerging Market Gems: Finding Value Beyond the U.S
- Can Chinese Tech Thrive Despite Manufacturing Headwinds?
- Undervalued Oil Plays: Occidental, Petrobras, and Ecopetrol Lead the Way
- Market Outlook: Good Year, But Not Euphoria
- Geo Group, Sable Offshore, and Insider Buying
- Market Manipulations and Misinformation
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Transcript
Tobias: This meeting is being livestreamed. Hi, everyone, I’m Tobias Carlisle. This is Value: After Hours. I’m joined, as always, by my cohost, Jake Taylor. Very special guests today, Vinny Daniel and Porter Collins. The Seawolf boys are back. How are you, gents?
Vincent: How you doing, guys? Doing well.
Porter: We’re great. Passionate as ever, angry as ever. So, [Jake laughs] we’re ready to go.
Tobias: That’s what I want to hear.
Jake: Let’s just wind them up and get out of the way.
Vincent: Yeah.
Jake: [laughs]
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Stocks Up, Fed Tightening: What’s Really Happening?
Tobias: How do you reconcile the Fed balance sheet shrinking, monetary base expanding stocks up. What’s going on? Way too confusing.
Vincent: So, over the past few years– And first off, thanks for having us on. We love doing this and look forward to it. Anytime we could talk value names and spice in a little bit macro, we’re always happy to do so.
Tobias: Perfect.
Vincent: And anyone will listen to us, we– [crosstalk]
Jake: Yeah. [laughs]
Vincent: It’s not many these days. But anyway, over the past few years, I began to subscribe to the views of Mike Howell from CrossBorder Capital. I’m giving him a free promotion on this one. And he does an incredible job of measuring liquidity, right?
Tobias: Yeah.
Vincent: Most of the historic economist strategists look at liquidity and just look at bank balance sheets, like you said, reserves, [unintelligible [00:01:25]. He goes one step further, and he essentially includes into his equation, the shadow capital markets liquidity, which is all the non-bank capital that’s at risk at work. And that measurement, which he does, I think he does a really good job. I never looked at the exact inputs.
Volatility or the level of volatility is so important to the overall measurement of liquidity. I’m going to try to keep this non-wonky. But if you’re in a collateral based system, which we are, highly levered, where you’re financing yourself based upon collateral, the volatility of that collateral matters a lot. The lower the volatility, the higher the amount that you can lever. So, let’s look at the MOVE index and VIX index over the past, say, year. They’ve been extremely low. So, I believe the capital market system is so levered right now, abundant with liquidity, making bets upon bets on both sides of the equations, long and short. So, when you look at liquidity that way, we’re not tightening. We’re actually expanding.
Jake: What goes into that private or into that kind of shadow banking system? Is that private credit, margin for hedge funds, what else goes in there?
Vincent: It’s private credit margin for hedge funds. It also includes the financing of Treasury securities and all things derivatives associated with it, such as the basis strait. When you think about the way some of these guys make money, which is on a spread basis, the degree of leverage that they could have is a measurement of historic volatility with probably a one-to-five year look back. So, as a result, I don’t know if it’s by design, but a bunch of cynics believe that the Fed has caught onto this to the fact that volatility can’t go higher in order for this crazy system that they’re running to work. And so far, they’ve been able to get away with it, because volatility has been so low. So, that’s my long-winded answer. I apologize to you, Tobias, on why I think markets have gone up.
Porter: And Vinny’s using all these fancy words now, but we were both luddites. We used to take field trips for a lunch trip to the debt clock on 4th Street there [Tobias laughs] in Times Square. And now they have it online, and you can see that the spending is outpacing the Federal tax revenue by about $2 trillion. [crosstalk]
Tobias: Is that a lot?
Jake: Yeah. [laughs]
Porter: Every time I click on there, it’s just mind numbing to me. And so, we’re running a 7% budget deficit. And it’s debt monetization. That’s what’s going on. That’s one of the reasons– It scares me at the same time. I don’t know how to put my bear/bull hat on that and think about it. But we’ve expressed that in a bullish theme for quite some time now, sometimes better, some more right than others. But A, there’s going to be more inflation for longer than you think there is. B, you’re just debasing assets against the dollar. And FX to FX, it’s all trading fiat. But you can see this gold move explodes from 1,960 bucks to basically 2,400 bucks here. And in six weeks, it explodes. Bitcoin’s gone crazy. A lot of this stuff is happening. I think it’s waking people up again to the fact, “Oh, we do have a problem.”
I love Steve, our former boss, but he’s now a long only guy and he’s like, “Ah, I don’t worry about it.” And listen, he’ll worry about it when it’s a problem. He’s in stocks, and stocks are going up right now. I think stocks are inflating against the dollar too. You can see that. For whatever reason, the PE multipliers have exploded over the past 15 years. And so, I try to take the super bear hat on and find other ways to play it. We do have shorts on, but we’re predominantly net long, and that’s been the place to be. And of course, when that view changes, I’m going to change too. But for now, both interest rates are pretty well contained, even though they’ve been moving higher. And so, I see the debasement and I choose not to short it. I choose to find other ways to play it.
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Inflation Busters: Companies with Built-In Price Increases
Tobias: If inflation is here to stay– I think that that’s the case. How do you play that from the long side?
Porter: If you’ve covered retail ever and you look at stocks– Take comps, for example, same store comps. And a lot of it’s just cycling the calendar. It was up 12% last year. Well, next year, it’s probably going to have a down comp, because it’s hard to comp that 12% comp. That’s what happened with inflation. We ran so hot. Of course, once you started to cycle the hard comps, things changed, or the easy comps. And now it’s just coming back again and it’s just basically the turning of the calendar. And nothing’s really changed, from a debt modernization perspective, and the velocity money is picking up again. And so, the way we’ve played it– Yes, we own value. We have some growth names too, but we own everything in the periodic tables, right?
Jake: [laughs]
Porter: We own coal stocks. We own oil stocks. We own metals. We own uranium. We own financials. We own shipping names.
Jake: But which element is that?
Porter: What’s that?
Jake: Which element is the financials?
Tobias: [laughs] Old school.
Vincent: Do you know? This one, it’s called, F-U-G, Fugazi.
Jake: Yeah. [laughs]
Tobias: Fugazi. [laughs]
Porter: Yeah. Exactly. But we own a lot of this stuff. We’ll start with the gold miners. The gold miners have been horrible stocks for a long time. It’s a really hard business. Getting gold and silver out of the ground is very, very difficult. It’s much harder than coal, and oil and all this sort of stuff. It’s just hard to find. There’s a lot of inflationary costs and a lot of bad jurisdictions. In Panama this year, they took over the silver mine. And all of a sudden, your biggest assets are out of commission. And so, we’ve chose to stuck with Agnico mines, and that’s the Cadillac of the group. It’s never been cheap. Just again, three weeks ago were at $1,900 gold. You start plugging in $2,400 gold, where we are now, stock’s not as expensive anymore.
There’s a lot of operating levers that obviously that comes through when you plug in $500 higher gold prices. Thats what we’ve been waiting for. It’s been a horrible value trap for the past two or three years. But again, it hadn’t really gone down all that much on us. And so, yes, it was painful to wait around. Some like a good value investor– We too deal with value traps. And the question is, how do you deal with them? Do you chuck them overboard or do you wait for things to improve? If you believe in the management team, if you believe in what’s going on, it gives you a little bit more conviction to hang with them. And so, that was one we hung with better. And it’s obviously done well for us.
Vincent: The other thing we try and look for which is a little bit difficult, when you have that sad thing called valuation as part of your process, is anything that has pricing power, and is a function and has a motor around it. So, to me, the crown jewel names that I know or four names that I know that have this Visa Mastercard, Moody’s and S&P. They’re always listed as the names that people love and they like. But of course, when you go and look at the valuation, it was like, “Okay, it’s in there. So, I get it, and they can continue to grind higher, but they’re a little bit too rich for my blood.” However, you could start going down deeper names and just trying to find names that actually do have modes that are not readily foreseen.
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Hidden Champions: How AerCap Wins in a “Crappy” Industry
Vincent: One of the names that we’ve owned, still own is the name AerCap, which happens to be the largest aircraft leaser in the business. I wouldn’t say they have tremendous pricing power, but they have enough of a control of what’s going on in the business where they’re always at play, and so they will get premium economics. That is rarely ever reflected in the valuation of the name. So, that’s where we try to look forward to say, “Okay, where are the moats? But, and they’re not as great as everyone, as the ones we all know and love, but do have some pricing power.”
Jake: Those hidden moats, do they tend to be more like the best business in a otherwise perceived to be crappy industry? Because-
Vincent: Yes.
Jake: -air leasing, everyone’s always like, “Oh, don’t go there.” [laughs]
Vincent: I wouldn’t say it’s called a moat. But yes, the answer is absolutely. And so, as a result, you fight– We talk about this all the time, all of us, that our biggest risk is a value trap that we’re sitting on something for three years and it does nothing.
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Cannabis Producer Moats: How Glass House Wins on Cost of Production
One of the names that we started looking at– We started looking at the cannabis industry. I love when you start naming a name, and you take your 100% investor TAM. And the minute you say a word, you’re down to 20%. And then you say, in other words, you’re down to 15%. [Jake laughs] Then to 5$, then to 2$, and there’s your addressable investors that can invest in the names. So, of the work that we started doing, the name that we realized was the low-cost producer. And not that I think you would laugh that– [crosstalk]
Porter: I’m going to throw out another screen on this one. It was also a SPAC.
Vincent: Correct. It was also a SPAC. I would also say that sadly or maybe greatly, Porter and I are not weed smokers, so this is coming from a completely ignorant lens, is Glass House, which is located in California. They have some of the best agriculture. Their lands are right near where we get strawberries and blueberries and the like. So, they are the low-cost provider in California. If you guys are smoking dope in California, chances are you probably might have smoked some Glass House weed.
Porter: I think there’s a lot of that going on in California.
Vincent: Yes. [Jake laughs] And with the upcoming potential catalyst of federal legislation, the de-scheduling of the drug, and have God willing, some form of either federal or state by state interstate commerce, this stock can really take off. And the reason where the moat lies is their moat lies in the cost of producing this stuff, whereas a lot of others can’t get that low.
Porter: And it hit a lot of different touch points for us. A, we were always looking for growth stocks and it’s a growth stock.
Jake: Literally.
Porter: They’re building out all these different greenhouses. And so, the low-cost producer can increase its supply by a lot. They’re only 20% utilized right now. So, a lot of growth run way ahead of them. It was a value stock, it was hated, it was contrarian and not many people can own it yet. And so, the question is, we thought we could win without federal legalization. It’s one of the few companies in the cannabis space that actually makes money. And so, we can withstand a bear market. Actually, from a fundamental perspective, it’s probably better in the near term if everyone else goes out of business, and they’re not going out of business at all. So, the capital structure is a little fugazi and it’s a SPAC and has a lot of crap attached to it. But we try to look for these off the beaten path value, weird contrarian names. And that was one of them we came across.
Jake: Imagine what the business could do if they could actually get a bank account.
Porter: Yeah.
Jake: [laughs]
Vincent: Or, get listed on the New York Exchange or issue securities. Yeah.
Porter: And the big upside is if they do interstate commerce, where you can sell weed not in California, but in New York or any of these northern states, where the cost of produce is just so much higher. And so, that’s a huge upside. So, again, stock that we thought when we underwrote it had 10 times upside and not a lot of downside. And so, we do have a bunch of those special situations in our portfolio. Some of them can be value traps for a little while and sometimes not. We were talking earlier about– Obviously, you guys do a lot of value screening.
The other screening we’ve been doing a lot more of is insider buys. It’s a really interesting thing, and it really makes you think when you go through some of these names.
One of the names we own in the portfolio, CEO, bought $115 million of stock personally. It wasn’t granted to be paid that in cash. So, you started thinking about like, “Wow, that’s a big number.” And we screened from anywhere from $500,000 and up. AON is a name that we don’t own. But CEO– 65-year-old chairman of the board, buys $16 million of stock, and you sit there going, “Hmm, what the hell’s going on here?”
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And so, another thing that makes you think and you put it through another screen again, is it cheap? What does it look like? We own three stocks in that screen. And then, you go do– do a shameless plug here. I learned some screens in this book.
[laughter]Tobias: What a great book. What a great cover.
Porter: The Acquirer’s Multiple book. [Tobias laughs]
Vincent: I also noticed to buy it. You were rocking a mug of The Acquirer’s Mul—that–
Tobias: Yeah. I have a mug. I do have a mug.
Vincent: I really do like that. Yeah.
Porter: [crosstalk] How the billionaire contrarians of deep value beat the market? Vin and I are not billionaires, but I can still use book.
Tobias: You can’t. Me either.
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Can Chinese Tech Thrive Despite Manufacturing Headwinds?
Porter: So, you go through that screen, and we own 10 of those names. That’s a lot. They’re all controversial. They’re there for a reason. The biggest market cap on there obviously is Baba. I think it’s over the last month and a half, the FXIs outperformed the S&P and NASDAQ. Kind of interesting. And so, as a true contrarian, you got to go through the thing, what can go right? Is there a manufacturing reacceleration in China and reacceleration in the US? I think the manufacturing PMIs in the US were below $50 for 18 months, Vinny, something like that? That’s a long time. And so, you’re finally starting to see for whatever reason, a reacceleration. So, maybe this is Chinese tech, but the Chinese market can do better under that scenario.
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Emerging Market Gems: Finding Value Beyond the US
We also did a screen prior to this podcast of looking for emerging markets stocks in that Acquirer’s Multiple. Obviously, the list is bigger than the US one, because there’s just a lot more value overseas. And obviously, emerging markets has much more risk. You buy oil companies in Brazil or Colombia or wherever, not much operational risk. Much more operational risks than there is ExxonMobil. And so, a big stock that we own still is Petrobras. It’s got some hair around it with Lula and the CEO, whether you’re going to really get the dividends. But the stock doubled last year. It went from, I think, 1.7 times EV/EBITDA to, I think now it’s two and a half, whereas ExxonMobil is, I think– I forget if I’m getting the numbers wrong, but they make as much as Chevron does. But the market cap’s like 25% of Chevron’s.
Tobias: I remember looking at it 18 months or so ago. I think it was 9 bucks. And then over the next 18 months, they were paying out $12 in dividends or something like that. Did that end up–?
Porter: Yeah.
Tobias: Did that happen? Did they make those payments?
Porter: We got a 25% dividend yield last year.
Vincent: Yeah.
Tobias: Wow.
Porter: Ecopetrol in Colombia, it’s a 20 something percent dividend yielder, because it’s in Colombia. If you look at the Colombian currency recently, it’s appreciated a lot. Colombian banks have done much better recently. And so, being a financials guy, you have to deal with every possible risk out there. We’ve done emerging markets before. So, you look at the currencies, you look at the banks, how are all this stuff doing, that’s another screen you do of like, “Hey, can I buy this if banks are imploding in Colombia?” The answer is no. And so, we go through all these things and just try to figure out– We try to look for the easy trades, not the hard trades.
Vincent: Within value.
Porter: Within value.
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Vincent: The easy trade would have been buy Nvidia and call it a day.
Porter: But that wasn’t our expertise. I don’t know shit about semiconductors. So, that’s a problem.
Vincent: Quite true.
Jake: But that didn’t stop a lot of other people– [crosstalk]
Tobias: Didn’t go up.
Vincent: I don’t think it stopped– It doesn’t stop any of my friends who call me up and say, “What should I do with it?” Of course, I got that call today, and he’s like, “What should I do with Nvidia?” And I told him, “Look, you should sell half,” right?
Tobias: Yeah.
Vincent: Sell half. Because let’s get into human emotion. If you don’t sell and the stock’s down 25%, the next thing you’re going to say is, “Well, I’ll sell when it gets back up to par,” or whatever the high note was. And then chances are for if, and I’m not saying we are, but if we were in a bear market or a deep bear market, there’s another 50% to go. And then you’re never going to sell. That’s how become a bag holder. So, selling those crazy names that go like that and selling half and half and half again gets you to keep your profits.
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Porter: Now, let’s discuss our own philosophy here on gold. [chuckles] I just talked about how gold went from $1,900 to $2,400 here or whatever it is. And everyone I talk to has sold, or trimmed or sold. I don’t think there’s a lot of people that I talk to that are actively buying right here, because the RSIs are high, the PTSD in gold has been horrendous. I don’t know. We trimmed some names, but it’s very small. I just think I’m going to sometimes just sitting on your hands waiting, seeing. We have no outside investors. We have no rush to hit the sell button. We try to sell everything for long-term cap gains. So, that’s an issue too. So, I’m sitting, waiting around– Again, you look at the debt problem, is it going to get better in your lifetime, Tobias?
Jake: [chuckles]
Tobias: Unlikely. I don’t see how. Why would it? There’s no reason to.
Porter: Jake, will the debt problem get better in your lifetime?
Jake: That’s a really good question, because you then think about a lot of other peer mutations like jubilees and–
Vincent: See, Jake, I’m in your camp that it will get better over my lifetime. It will not get better over the next three to five years. [crosstalk]
Tobias: How long are you guys planning to live?
Vincent: [Jake chuckles] It will get better when the bond market tells them it needs to get better. And so far– [crosstalk]
Porter: They got to wake up Nancy Pelosi, Joe Biden and every other politician that’s 80 years old that doesn’t really give a shit.
Vincent: Well, the running joke of the main today was when Janet Yellen was drinking the beer with– I forgot who else she was with. I think she was in China. I forgot who said, it was like, “By the time I’m done drinking this beer, I would have printed $4 million or I forgot it was a $40 million in paper.” And that’s the problem. They just can’t stop.
Porter: I think they print $5 billion or deficit grows by $5 billion a day.
Vincent: Yeah. It’s insanity.
Jake: Jeez.
Porter: It’s just a problem. And the problem, as it gets bigger, the interest payments accelerate.
Vincent: And for us, as Porter said, I don’t want all of us to slit our wrists in our throats, particularly as market participants– [crosstalk]
Porter: We try to do that all the time.
Vincent: No, but we’ve come to learn that the way to express yourself is not by being uber bearish in terms of capital markets because of the debasement effects. So, we try and go and find like you guys said, where do you look? If that’s your viewpoint, and it is, where do you look for opportunities? And we look for anything that really can’t be printed. If we have to keep a simple elevator pitch as we look for things that can’t be printed and where supply is deficient, and then from there, we start doing our work as what’s better than others.
Porter: We’re great cash flowing businesses, right?
Vincent: Yes.
Porter: We don’t own a lot of zero, non-revenue companies. We have a couple of moonshot, a medical device company that could possibly pass the FDA or something like that. Or, factory opens, things work. So, we have a couple of those. But the rest of our portfolio is cash flowing entities.
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EVs and Catalytic Converters: Rethinking the Demand for Platinum
Tobias: So, a basket of commodities is beating the S&P 500 this year. I saw that on Twitter.
Vincent: Yeah.
Porter: Go take a look at the platinum chart.
Vincent: I was funny. I was going to mention platinum, just so you go at it.
Porter: No. It’s like the contrarian’s dream. It’s gotten killed. And Vincent pointed out that the platinum card ranks higher in the Amex ecosystem than gold.
[laughter]Porter: And the two have crisscrossed in the night in terms of prices. And so, there’s a couple ways to play it. Anglo-American, a bunch of other, Sibanye-Stillwater. There’s degenerate ways to play it, and there’s cash flowing ways to play it, or you just play the commodity.
Vincent: The beauty of platinum– How long have we been doing this? 25 minutes? We haven’t spoken about Tesla yet, but here we go.
[laughter]Vincent: The beauty of platinum– It’s not really a Tesla thing. It’s actually not a Tesla thing. It’s an EV thing. When people dream of the TAM of EV by 2040 and the like, it might come to fruition. Who the hell knows? Their spreadsheet will do wonders, ours won’t. But at least in the near-term portion of that ramp from now to 2040, it’s not looking so good for EV. Yes, Tesla, their sales are down and their like– I’m talking– [crosstalk]
Porter: Robotaxis, Vinny.
Vincent: Stop. I’m talking about Mercedes. I’m talking about BMW. I’m talking about Ford, GM. All of them are doing a pivot. And Toyota seems like they had it right from the jump to say, “Not so fast. These hybrids are probably the better technology for now until we really figure this out.” And so, what that means, long winded way for platinum, is that if catalytic converters, which everyone thought they would make zero catalytic converters by 2030, all of a sudden, we were making more than zero, platinum is in demand. Then when you take that into account, that fundamental view, and marry it with the chart that you’re looking at with platinum, which is on its ass, there is an opportunity.
Porter: During the UConn basketball game last night, Ford had a commercial out. You think of the Super Bowl two years ago, it was all electric. Last night, the commercial was, “We have it all. We have gas, we have electric and we have hybrids.” So, it’s interesting.
Tobias: The weird thing about those hybrids is how hard they are to buy, because I’ve just bought a car. I just rolled one of my cars, and I wanted the hybrid for exactly that reason that you can get these like 30 miles EV that converts into an ICE, which is perfect, because I drive around a little area where I want to drive longer periods. They’re not available anyway. They don’t exist. They’re not real cars.
Vincent: The big myths of Seawolf about a year or two ago was truly not believing in what you believed in, which is that hybrids were going to be an answer. I wouldn’t say the answer, but an answer. I was going around, shopping around, looking for a hybrid and it’s like, “Why wouldn’t I buy this over an EV?” I think Toyota was trading– You want to talk about in Acquirer’s Multiple valuation, Toyota, which is once again turning out to be the best auto manufacturer in the world, I think was trading at sub five times. Some crazy number for such a quality franchise. It just sat there, because everyone thought they were dead. Thats not the case anymore.
So, yeah, I’m with you, Tobias. I actually think you have to be a complete contrarian and ignore everything you’ve heard from your friends to TV, social media, to everything else saying, “No, I don’t think this is going to work as well as you people think.”
Porter: You mean you had to think for yourself?
[chuckles]Vincent: Yes, something like that.
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Porter: I’m actually on the waitlist for the Toyota Land Cruiser hybrid. I’m pretty excited. I get it in 2035. But other than that, it’ll be great.
[laughter]Tobias: The other problem is that it’s as expensive as buying two cars. There’s such a huge premium on the hybrid.
Porter: They’re not expensive anymore though.
Tobias: Well, I was looking at the Lexus. They had a GX and a TX.
Vincent: Oh, yeah. The ditties are expensive, but you can get a cheaper hybrid. I was looking at the Lexus as well, which is a really nice car.
Tobias: Yeah.
Porter: I’m a true value guy. I’m too cheap. I’m usually a used car guy, but this might be my first new car in quite some time.
Tobias: Well, do you know what I did? Do you know how I solved the problem? There’s this little car company, you might not have heard of it, Tesla, they make these EVs, they had this deal on where you could get– It was two and a half down. It was like $250 a month or something. So, I was like, “All right, I’ll do it. Let’s do it.”
Vincent: Good job.
Tobias: I’m not driving a Tesla.
Vincent: At least you got him cheap, which is good. You hurt his margins.
Tobias: Well, it’s a nice car. This stock could do really well. Car’s really nice.
Porter: Go to– [crosstalk]
Tobias: [unintelligible 00:30:11] gone Musk.
Jake: Have you driven one, bro? Finally, the answer is yes.
Vincent: That’s the classic bowline. Have you driven one?
Tobias: It is a nice drive. When I got into it, it actually made me a little bit angry that the other car manufacturers like, there’s just stuff in there that just– It makes sense. I don’t know why the other guys don’t do it. So, I go from my Toyota to my Tesla, one’s like driving a boat.
Porter: You like driving cars without suspension. They’re great.
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Undervalued Oil Plays: Occidental, Petrobras, and Ecopetrol Lead the Way
Tobias: Yeah, I drive around my little area. It’s very smooth. It’s too easy. Yeah, I agree. That’s stiff. Energy, fellas. Segway into energy. What do you think? Where are we?
Porter: Well, we’ve never subscribed to the explosion in energy prices. When you buy these stocks, you have to underwrite these things to $60 to $80 West Texas Brent prices or whatever. We bought these things under those scenarios. And now, we’re looking at $85 West Texas and $90 Brent prices– We own a lot of emerging market oil companies, too many, between Petrobras, Ecopetrol, a couple other Columbian names. Occidental, we still own. These emerging market stocks are still under, call it, definitely under three times EV/EBITDA. And some of these Colombian stocks that we own are under two times. And pumping out huge dividends, buying back stock tenders, everything. And so, you just got to look a little harder. I mean, we can. So, that’s where we are.
Vincent: Just to add on to that, I think when looking at energy now, when we started investing in energy, say in 2022, it was like shooting fish in a barrel, because everything was grotesquely cheap out of favor, like, everything we all love. Now, that’s not the case anymore. So, it’s funny. I just rolled up a chart of ExxonMobil or Diamondback with FANG. I can’t go out and suggest to people, “You need to be owning this right now.” The next 5%, 10% in the name, or even 15%, is a 50% probability it’s up or down. [crosstalk]
Porter: We actually sold our Diamondback recently.
Vincent: We did. And so, on the other hand, as Porter saying, I think you need to look at different markets, different sectors within the energy space, define where there are pockets of opportunity. So, in the mega cap energy space, they see no opportunities there whatsoever. I have nothing bad against them. As Porter said, “The prices of energy justify where the stock prices are.” But on the other hand, we find names that have– because of PTSD of their own kind, they have zero debt on their balance sheet. Not net debt. Like, zero debt on their balance sheet, because they just don’t trust capital markets will give them the benefit of the doubt. And because they’re not part of an ETF and not joining in on the parade and the party, they trade at crazy low multiples. The most important, they take the excess cash flows or at least a portion of them, and buy back stock at two to three times. So, we are seeing share counts drop-
Tobias: [crosstalk]
Vincent: -but by 8% to 12% per annum. On the other hand, I see you guys own and we own it as well. It’s not the greatest part of the calendar year for met coal right now. You own Warrior Met Coal. Warrior Met coal is in the opposite approach. They’re CapExing a new mind that once it comes into fruition in 2026 and 2027, assuming met prices stay roughly where they are, slightly higher or at the lower end of the seasonal spot right now, the cash flow should just gush– You’re talking about a stock again is trading at between probably 2.5 to 5 times EBITDA depending on the price. Those are the things were looking at. I wouldn’t blindly go out and buy the XLE right now, because its run up so much this year.
Porter: Let’s go back to The Acquirer’s Multiple list of stuff that shows up in the screen. Number two on the list in terms of market cap, BP, that’s on there. Petrobras, Ecopetrol, which we’ve owned for over two years now. And then there is a M&A. I want to pronounce it wrong, but Chord or Chord energy, C-H-R-D. They did an acquisition. That’s on the list too. That’s in the XOP. So, there are names out there. Just got to go around and look in. When that M&A came out, we looked at this thing and we’re like, “I’ve never even heard it before.” So, we took a look. It was cheap, and they were buying another cheap stock– I can’t speak for the reserves and all that kind of the of stuff, but it looked really interesting. So, there is a lot of stuff to do. You just got to poke around and do your research. So, think out of the box.
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Market Outlook: Good Year, But Not Euphoria
Jake: So, in general, do you guys in your entire careers, as far as opportunity sets go today, how do you feel like this ranks?
Porter: I don’t think we’re not jumping up and down at stuff. We’ve had a good year so far this year. Thankfully, some of our shorts have worked too. But Vinny and I would be happy if we closed the books right now.
Jake: Sell in April and go away? [laughs]
Porter: Yeah, sell in April and go away. But I think that I have no reason to sell these companies right now. I actually think that Petrobras clears a lot of this noise with regard to the extra dividends and the CEO. The stock could be on a big move after that. The question is is “Do you buy it after that?” You can easily buy it after that news. So, yeah. [crosstalk] Go for it.
Vincent: We are finding idiosyncratic– I agree. I was thinking scale of 1 to 10. I would say we’re probably at a five or six right now. We are finding idiosyncratic opportunities, but one offs. It’s just interesting stuff that because they’re probably small cap or micro-cap and they’re very compelling or there’s a certain binary outcome to them that its down 30% if we were wrong, two to three bagger if we’re right, you’ve got to put a certain amount of capital towards that, you can’t bet the farm, but those are nice things to happen in the portfolio. So, that’s why I’m saying there are opportunities. But in terms of where life’s easy and you could own just the fundamental thing you like and everything’s cheap, no, that doesn’t really exist right now.
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Geo Group, Sable Offshore, and Insider Buying
Porter: We’ll talk about another stock that was on the Acquirer’s Multiple list was Geo, the prison–
Jake: The prison rig.
Porter: We wrote it up on our annual letter and we wrote all these sectors, these stocks, blah, blah, blah, blah, prisons. People immediately are like, “Ah, these guys are idiots.” [Jake laughs] Like, “They’re nuts.” And yes, it was a prison story and more funding from the government and all that kind of stuff, but they had a debt stack that was reifiable. It was still cash flowing like crazy. Once they got the cash in the door, they had a huge debt stack to refi. And the stock is absolutely ripped. And so, there’s plenty of stories out there still. The market is very inefficient. There’s a lot of names to buy.
The stock that I was talking about, where the CEO bought a $115 million of stock is called Sable Offshore, SOC. I don’t know, it probably is a value trap. But if they get the approvals, the stock can go to 20 bucks or 30 bucks. That’s two to three times your money. And so, there’s opportunity like that where you can take shots on goal. Listen, we can take a bunch of those shots on goal and not have it kill us if we’re wrong. There’s room in the portfolio to take a couple of these educated shots where you don’t know inside information at all, but you see what the CEO knows or you see what the CEO does. He must have pretty good information when he’s going to put $115 million of his own money up. So, that’s the type of stuff that’s like—I don’t know, it’s pretty interesting to me. It’s priced off of Brent, which is now 90 bucks, so the price target’s probably even higher from here.
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Small-Cap Financials: An Overlooked Niche for Value Investors
Tobias: What about the smalls? Do you ever dig through the smalls? Anything interesting in there? At the moment, I can find operating businesses in there that seem pretty good value, pretty good businesses, pretty good valuations. I think I said that. But pretty good business, pretty good valuations.
Vincent: Tobias, when you say the small, the small caps you’re saying?
Tobias: Yeah, small. I think Diamond Hill, Value Line, Big Larry, those kind of names. So, they are all pretty interesting.
Porter: We don’t own a lot of those things. And the funny thing is, we’ve been buying some small cap financials recently. [crosstalk] The markets are just inefficient. Robinhood came out, and they offered a 3% cashback card. And as a good value investors, Vinny and I, are cashback card holders, and so we go, “Holy crap, 3% cash back? Let’s do it.” And so, we signed up for the Robinhood card, which everyone should, and we said, “Crap, who’s doing this card?” And we found this little bank called CCB, Coastal Community Bank. They’re taking most of the operational risk, but not taking the credit risk, which Robinhood blow up on the credit card. But that’s three or four years down the road. And they won the Walmart contract recently too. So, they’re about to be the card behind Walmart.
And so, I’m sitting there looking at the stock, it’s average value for a bank, but they have two massive catalysts ahead of it. And no one cares. The bank investors, we talked to, like, “Ah, there’s risk. There’s this. There’s operational. Oh, these are rented banks, and the regulators hate the rented banks.” I got that. Do your due diligence. But there are small cap names. Listen, you know better than anyone. Small caps are very inefficient, because there’s not many eyes looking at it. Everyone’s doing ETFs, and the active managers are all in large cap stock. So, there’s a lot of orphans in small cap.
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The Durbin Act and Small-Cap Banks: Why Walmart Chose CCB
Tobias: Why would Walmart partner with someone as small as CCB?
Vincent: Tobias, great question. This specific product is a deposit product that Walmart is trying to roll out. So, this gets into some of the nuances of financial services, and this arbitrage that exists under the Durbin Act. If you’re a bank that’s under $10 billion of assets, any card you issue under your bank name, a debit card, you get to charge premium economics as if it’s a credit card. So, Walmart, if you’re issuing a debit card and you want to garner premium economics on anything that people use on their debit card, you can’t go out and choose-
Jake: J.P. Morgan
Vincent: J.P. Morgan, whatever. You have to go to a small bank. We used to call them rent a banks, but the fintech people astutely realized that calling something a rent a bank is a low multiple business, so they turned it into BAS, bank as a service. [Jake laughs] I can’t say I necessarily love a lot of the operating practices of these BAS players. But in general, I don’t make the rules. They don’t allow me to for better or worse, probably for better. And as a result, it is what it is, and these things are allowed to do what they do and they got the Walmart contract. That’s the reason why Walmart would choose them over say J.P. Morgan or Wells Fargo, or Bank of America or you name them.
Tobias: What’s the policy reason for doing that? Keep them in business?
Vincent: Going back, way back when, the community banks, which were a very powerful lobby, lobbied to keep the premium economics. So, your local community banks, and probably your credit unions were correctly said, “This is a big part of our business. Don’t take it away.” Of course, the grifters came in and made a business out of it. Should they change the law? Yes, they should. Will they change the law? Probably, 95% chance the answer is no.
Jake: Do you guys agree with–? [crosstalk]
Porter: The funny thing is all these fintech companies, I think Square, PayPal, they’re all using the rails of these smaller banks. And then they stay under $10 billion cap, they take them and farm them out to disperse these things all over the place. And so, it’s a nice little niche business model.
Vincent: I can’t believe I’m giving the bear case while I’m bullish on one of them. These small banks, if they ever get deposits in excess or assets in excess of $10 billion, they sweep the deposits off their balance sheet to people who need deposits for a fee. CFPB, you should listen to this. It would be properly regulated, but I know you’re not, so I could shout out through the rooftops that you should be doing this and they won’t. Not even just CFPB, but Congress. But yeah, it’s a small little cottage industry within the financial services industry, that if you’re one of the clowns that play in the fig sandbox, like, we have our entire career, the rules of engagement.
Porter: But again, it’s what we do is, you find a value name and you start saying, “Hey, what could go right?” We have this stock. It’s still our biggest holding. Not the best company in the world, but it’s called BGC, and it’s an interdealer broker. It was sitting there, left for dead at 5 bucks. Stock hadn’t done anything for 14 years, and has anything changed. We thought the business had finally inflected, and things changed. Another stock I’ll bring up that may or may not be in The Acquirer’s Multiple list is virtu financial. I believe that’s in the zig. And same thing. It sat there, hadn’t done much.
But lo and behold, when all these bitcoin ETF’s started up, Blackrock doesn’t hold the– They’re in a trust. So, when subscriptions and redemptions come in, Virtu and Citadel, all these guys, are the facilitators of these trades. Because there’s so many different exchanges in crypto land, there’s a lot of ability to arb the different price spreads. And so, they’ve been making huge profits. Just read the transcript. The four Q transcript, they talk about it.
And so, you can see where Virtu stock finally inflected. Sitting there, cheap stock, what could go right? And that’s an example of what could go right. We do a lot of that. What could go right on a cheap stock and get back to the insider buying. “Hey, why is this guy buying stock? What’s going on? Why did an insider of Dr Pepper just buy $17 million of stock?” Again, not a stock we own. But I asked the question myself, what the heck’s going on here?
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Market Manipulations and Misinformation
Jake: Do you guys agree with Buffett’s recent–? In his letter, he said that he thought today’s markets were more speculative than they were when he was younger, which is quite a statement, I think. He tucked it in there, but–
Vincent: In ways. Look, I believe that the entire system is more levered and geared. And as a result– [crosstalk]
Porter: One could call it irresponsible.
Vincent: Correct. And as a result, probably more speculative in ways that maybe people don’t think about. Every generation has a moment where they get rinsed. For my generation, it was the tech burst. And others, it was 1987, where the markets teach you not to be too euphoric.
Jake: For me, it was 1973, 1974.
Tobias: [laughs]
Vincent: Jake, to me, 2022 was supposed to be that moment for this younger generation and the powers that be blinked. I think it’s an interesting discussion of why. But blink they did, and as a result, we now have just as much speculation as we had– maybe not as much during the COVID era, but the speculation that that fever is still there to buy really stupid shit too.
Porter: Listen, I’ll go back to– The bigger irresponsibility is the fact that Congress is running a 7.5% budget deficit during full employment. Like, where are the adults in the room? Where are they? You’ve got Vinny and I screaming and no one gives a shit about Vinny and I. That’s for sure. And there’s about seven other people that are jumping up and down and everyone thinks we’re nuts. So, that’s where I think that the problem is. And it goes back to what I said like, “Will this problem get better?” I don’t see it. I don’t see how it can mathematically at this point. We’re 125% debt to GDP. It’s not a great place.
Vincent: And let’s not forget, there’s an election to win. So, at the very least, over the next three to six months– Look, I’m more bearish on our fiscal situation than three to six months. But at least for the next three to six months, the last thing you will ever hear from Biden’s mouth is, “We need to tighten our belt,“ or at least believe anything that comes out of his mouth of tightening the belt. It’s just not going to happen.
Porter: Where we’ve been wrong– Every time the Fed’s been painted into a corner, they’ve escaped. The bond market went to 5% in October. Every stock was on the lows. And Yellen flipped the bill and coupon issuance, and voila stock market rips, bond market drops 125 bps. And so, not to say that we can’t get out of this, just the conditions for where we aren’t great.
Tobias: It’s a funny macro backdrop where you have the Fed tightening or staying pretty tight, but also saying where we plan to cut six times in 2024, three times in 2024. Next time we meet, we’re cutting– Everybody’s waiting for the cut, which means asset price is probably going to levitate. At the same time, the fiscal side is priming the pumps as hard as they can. Debt Jubilee or not a Jubilee, but student debt forgiveness.
Jake: Yeah. Debt orgy, I think is what you’re looking for. [laughs]
Tobias: Massive.
Vincent: If you think about it through our lens, where debt is unsustainable and you can’t—Like, if you try to run fiscally prudent, you can try, but the S&P is probably going to drop 30% to 50% and with massive unemployment and the like. So, once you look at the macro and fiscal policies through that lens, everything they do starts to make sense. A few weeks ago– I can’t believe they did this one year after SIVB. They put out some, I forgot what it is, rules of proposal or advice to FDIC to relax this wonky rule called SLR in the banking industry, which would allow them to base for banks to buy treasuries without it being included in the calculation of risk weights.
Now, the reason why they want to do that is because we need somebody to buy our debt. Banks are constrained by the capital rules of which they have to adhere to. However, if they’re strained by the capital rules, why don’t we change the capital rules? Now, we always thought that this was going to be the preferred option that they were going to initially choose, because the banks are the best people to buy treasury debt, because the executives are compensated off of assets, so they can get fat rich buying treasuries with deposit capital. However, with SIVB, I thought that– Now I can’t do it. Look what happened to SIVB and First Republic and all that. SIVB blew up because they had a duration mismatched liability of excess securities.
Now, Vinny, they need to do it and so they’re going to go about and do it again. And they have to, because someone has to buy the debt up. Sucks, but when you feel the way we feel, a lot of the moves they make are very easy to see. You don’t start questioning what they’re doing. You just know what they’re trying to solve for.
Tobias: The Fed has that ostensible mandate which is stable money supply, full employment. We’ve got the full employment stock markets at all-time highs?
Porter: Yeah.
Jake: [chuckles] That wasn’t one of the mandates. [laughs]
Tobias: I think it’s funny. You look at the Fed balance sheet, it has been continuously ticking down since it peaked a few years ago. It spiked when Silicon Valley bank went nuts. But it’s now below that. But at the same time, the monetary base just inflected, maybe October 22, something like that.
Vincent: Yeah. And that was not a coincidence. That was the time when the Yen blew out initially. And more importantly, the UK pension system was close to tapioca and they were about to suffer a margin comp. So, that was their moment where it was not a whatever it takes to get inflation down. It was whatever it takes to get inflation down until something breaks, and then I have to change the rules and go into an easing cycle.
Porter: We have a CPI print coming out tomorrow. Vinny and I are great conspiracy theorists. The BLS is in there doctoring up numbers of the Fed. [Jake laughs] Whoever does the number, they’re doctoring numbers to make it– So, it’s not inflationary. One of the things someone wrote about recently was the doctoring of the EIA oil numbers. They have this production number, and then they have this adjustment factor. And for 10 years, the adjustment factor is flat. And then in the last six months, it just hockey sticks up higher. So, the adjustment factor is, “Oh, we just produced all this oil in the shale patch,” And sure enough, it was an adjustment factor. Try to short the government is like trying to short Elon. They come up with these miraculous saves when they’re on death’s door. So, that’s warning to all you short sellers out there.
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Wile E. Coyote vs. The Road Runner: Can Anyone Catch Elon Musk’s FSD Hype?
Vincent: I have a question for you, guys. But first, this morning, just as a running joke, because Friday after the close, Elon pulled one of his great narrative shifts of FSD in a definitive time date. We were playing for about 10 minutes, 15 minutes and it became a bit addictive and intoxicating. Porter sent me a YouTube of the Wile E. Coyote and the Road Runner, and just saying, “Well, we know who the Roadrunner is Musk, and we’re the Wile E. Coyote.” And every time you think you got him, he just goes, beep, beep, and he just blows you out and like, you just can’t really catch him at all. It was a good 15 minutes laugh knowing that you were probably going to get squeezed today again because of this robotaxi narrative.
Recently, it’s not where we typically play, but some of the consumer discretionary names like Starbucks, Nike and the like have really come in. McDonald’s. McDonald’s, not discretionary, but have really come in hard. Have you guys started looking at them or thinking about them?
Tobias: There’s a few things in the screen. I see FIS, Lacroix and a few other things that I have seen. But I wonder if there’s a bigger– [crosstalk]
Jake: My guess is that’s China related. Both Nike and Starbucks, a big component of their future growth expansion plans are China related. And so, if you start to chop that terminal value out, you can bring the price in a fair amount.
Porter: They tell me Lululemon tight pants are out of style. I don’t know, I’ll take the over on that.
Tobias: Well, there’s half my– Was it finished?
[laughter]Jake: I think, yeah, someone mentioned Hershey as well. A few things have come in. I think a lot of that is direct to consumer. Like, a lot of stuff that was had to go, he had to advertise and then you had to get it in. And Keurig Dr Pepper might be another one.
Porter: Look at Hershey. Stocks come in, but it’s still 20 times earnings. Jake was asking us about inflation. Cocoa prices, it looks better than Nvidia. So, their input prices have just quadrupled and the stocks still 20 times estimates. As we’ve talked about a lot, there’s a big gap between where ETFs growth people buy stocks and where real people buy stocks and cheap valuations.
Tobias: Where did you get to on Keurig Dr Pepper? Did you–?
Porter: I haven’t done the work yet, honestly. But I was intrigued.
Tobias: In those big shifts, when those guys make those big buys, is it enough to move the stock?
Vincent: No.
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Porter: One of our best friends made his fortune with the K-cup originally which went from like 30 cents-
Tobias: Long or short?
Porter: -in the Green Mountain coffee for 36 bucks. Shoutout to John Grimley.
Tobias: That was a big short of Einhorns too.
Jake: Yeah.
Porter: Yeah.
Tobias: He was very anti-Green Mountain for a long time there. When the patent rolled off and you could get the– Anybody could make the cups. I think that was his big thesis. I think it’s still doing okay.
Porter: Dr Pepper is 12 times EBITDA. Not expensive, but maybe something is inflected. I don’t know.
Tobias: Fellas, we are going to be running out of time here a little bit. It’s always fun having you on. If folks want to follow along with you or get in contact, what’s the best way of doing that?
Porter: What is the easiest place to find us? A lot of people ask questions and like to mess around single stock ideas. You can find us, I’m @seawolfcap.
Vincent: And I’m at @VD718, and we are on Twitter, refuse to call it X. I think my DMs are closed. But if you send me something and it’s intriguing, I always email you back. I try, because I don’t like talking single stocks on a broad spectrum like that. But I don’t mind doing it, or at least what I think is-
Tobias: DMs.
Vincent: -in DM’s, which I think are at least less to the broader public.
Porter: And except for Tesla, we don’t talk about shorts.
Vincent: True. Try not to.
Tobias: Thanks very much, gents. Vinny Daniel, Porter Collins, Seawolf Cap and Jake Taylor.
Porter: Appreciate it, guys.
Tobias: We’ll be back next week. See you, folks.
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