VALUE: After Hours (S07 E33): Why We Buy in the Orphan Period

During their recent episode, Taylor, Carlisle, and Will Thomson discussed Why We Buy in the Orphan Period. Here’s an excerpt from the episode:

William: It’s all operational things, basically. I said earlier, a lot of the companies I’m looking at are project companies. One of the interesting things that happens, and it happens in other spaces as well, the most notable being like biotech. When projects get going, you actually are progressing a project. And in theory, you’re reducing risk as you go. But in public markets, that’s the orphan period, and nobody wants to own it. And so, you get this trend, it’s called The Lassonde Curve, where you get– Over here, it’s geology, no one’s interested, discovery, it pops, oh, we got to build it, it crashes.

And then, you get an orphan period where that’s actually a whole management team doing stuff. A lot of things to due diligence, a lot of people to talk about or talk with, a lot of people with experience that can help inform your insights. But nobody wants to own it during that period. And so, that’s actually my favorite period to play in. So, most of the work we do is really about understanding the day-to-day operational tasks that have to get done in order to achieve some greater goal.

That greater goal is often well understood by the market, like, we’re going to build a mine or we’re going to build a refinery. That’s understood by the market. But the market doesn’t want to deal with the challenges associated with getting to that end goal. Whereas I’m like, “That seems like there’s a lot of stuff to do research on. There’s a lot of things to understand. There’s a lot of opportunity for us to really have a clear understanding of what our risk is.” So, that seems like a great time to buy.

As opposed to say, buying Barrick Gold. Yesterday, they came out with some good news about a mine that moved the stock, so there are exceptions. Barrick Gold is just going to trade with the gold price. So, what’s your risk? Your risk is your gold price forecast. I don’t want to have anything to do with that. I don’t know where gold is going. Generally, I think I’m directionally good on commodities, but beyond that vague directionality, I’m like…

Jake: Does that then mean, William, that your strategy is not as traditionally centered around inflation protection, which is a lot of times the story behind a real asset play?

William: Yeah. No, I mean, we pitch and marked our strategy around alpha. That’s our focus, is generating, maintaining a correlation of nothing to everything and producing as much alpha as possible with a very low beta. And so, that’s our strategy. Do we offer inflationary protection just by nature of the assets that we own? Yes. But my sales pitch centers more around–

I find that a lot of competitors, if you will, have portfolios that have bold macro bets on timid equity bets, and I want to have a bold equity bet on a timid macro forecast.

Tobias: It seems like it’s a little bit endemic in commodities that you’re a little bit more macro than a lot of equity guys say that they are, “Ah you have to have some view,” but you don’t feel like you need to have or you don’t trust the view?

William: There are definitely certain companies that I do at times feel the need to have a view on the commodity, let’s say. But oftentimes, I don’t feel the need to have a view on the commodity. It depends on the company. I think it’s really important to be crystal clear about what you’re betting at all times. As long as you’re crystal clear on what you’re betting on, it’s okay to have some macro bets, if you will. But you got to be really clear that you’re making a macro bet via equity. It’s like a derivative.

Equity actually becomes a derivative. Derivatives get complicated. They get complicated for a reason, it’s because the causality gets messy. So, I don’t like to make that bet. So, yeah, at times, I don’t feel the need to have an outlook or a view on the commodity whatsoever. It’s probably– [crosstalk]

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