The Global Investor

Episode 3: Harris Kupperman on Finding 5x Returns in Undervalued Companies

May 25, 2019 Season 1 Episode 3
The Global Investor
Episode 3: Harris Kupperman on Finding 5x Returns in Undervalued Companies
Chapters
The Global Investor
Episode 3: Harris Kupperman on Finding 5x Returns in Undervalued Companies
May 25, 2019 Season 1 Episode 3
Obris Podcast by Crown Private
Harris Kupperman, founder of Praetorian Capital, explains why undervalued companies are such amazing investments and actionable insights into how to start.
Show Notes Transcript

Important: Harris will be speaking at our July Panama City event in Panama. To meet with him and many other like-minded investors while learning about a variety of valuable topics such as Panama residency and taxation, visit https://obrisinvest.com/panama2019 for more information.

Harris Kupperman has been successfully investing in the markets for over a decade. In 2003 he started a hedge fund, Praetorian Capital and just five years later, a dollar invested on day one was worth over $26 before fees. On this episode of The Global Investor, Kuppy shares a bucket-load of raw and actionable insights and strategies he used to gain such remarkable results.

Speaker 1:
0:00
[inaudible].
Speaker 2:
0:10
Welcome copy.
Speaker 3:
0:12
Hey there. How's it going? Hey
Speaker 2:
0:14
for joining us today. Happy to, happy to have you.
Speaker 3:
0:17
Hey, thanks for inviting me to speak. Absolutely. So where do we find you today? Oh, I'm in Miami. I'm, I'm home for a change. Oh, those rare days. I'm in Miami.
Speaker 2:
0:27
Nice. Well, in a bit, we're going to get to some of the places you've been recently. Uh, what I want to do is I want to start with a little bit of a history. I told our listeners a little bit about you, but why don't you tell us your history with, uh, obras what was previously Serafin capitalists x exploits.
Speaker 3:
0:45
Yeah, sure. So, uh, you guys originally came and visited me out in Ulaan Baatar Mongolia. It's about eight years ago. Uh, I had been reading, uh, what was capitalists exploits at the time. I'd been reading that for much longer. I invite you guys out there at the time. It seemed like a pretty good place to go invest. Um, and since then I've stayed at a low term reader. I've visited in Columbia, in Austin. I'm going to Panama next month there. I guess in two months. And really excited about it.
Speaker 2:
1:15
Well that was a cue and I was looking for in terms of promoting Panama's. So we love having you come and join us. We love having you speak and hearing your perspective, but we also just love being able to hang out with you. So, uh, we look forward. I personally, and I know others are looking forward to that for our meetup in Panama. Uh, so you have a very specific approach to investing in rather than me going into great detail about it. Um, why don't you tell us about your strategy and how it's worked for you.
Speaker 3:
1:48
Yeah, sure. So the way I think about the world is that, um, over time the opportunity sets keep moving and you have to evolve with the opportunity sets. And right now we're on finding the best opportunities are in blowups. These are stocks that are down a lot, these are in sectors that are hated and despised. These are in equities were a portfolio manager says to themselves, uh, you know, it's probably dead money this year and I have performance pressure cause I have to produce quarterly, weekly, sometimes daily performance numbers to keep the assets under management I have. And I just can't be in a company that doesn't have a clear catalyst til next year. And because of the way the dynamic is in a fund management today, you have a lot of these stocks that are great businesses. They're undervalued. They're substantially below where the private market values would be.
Speaker 3:
2:47
Yet a fund manager's just can't own the things. And I just keep finding opportunities in those sorts of places. Uh, which is very different from what I started my career where the opportunity was small illiquid companies where yeah, these portfolio managers that said, you know, there's things that have enough trading volume or you know, why am I going to waste an analyst time to look at a company? It's below a hundred million market cap. And you had all these great businesses that are growing very fast. They're trading at five, six, seven times earnings and growing 50 or a hundred percent a year. But yes, they had a 50 million market cap and a traded 100,000 a day, but at the time and you know, 100,000 a day, it was enough liquidity for my needs and a lot of these ended up being five and 10 baggers since then.
Speaker 3:
3:33
A lot of other people have gravitated, gravitates that sector. A lot of computers have gravitated to the point where you don't have to spend it analyst's time. Look at these companies and these things now trade not just on multiples of earnings but even multiples of sales that make no sense. And I've still found a few winners there over the past few years. If you follow my blog adventures and capitalism, I wrote about quite a few of these. Uh, the joint.com was better than a double within a year via med was a triple in a year. We've, I've found a few of these over time, but for the most part, the opportunity is in stocks that are just down a lot sectors that are down, companies that are hated, uh, particularly if it's very difficult to model quarter by quarter what the earnings will look like. Something like an energy stock today. If you don't have the inputs you need, cause no one knows what the price of energy will be. I'm talking about oil and that gas, uh, tomorrow, much less a year from now or a quarter from now. No one knows how to model these. And since you don't have a linear ability to model, they just slipped through the cracks and they're all horribly undervalued. And that's where I've been fun to the opportunities these days. So how do you know where to look?
Speaker 3:
4:41
You've been doing it for years. So, uh, give our, give our listeners a little insight in a, and what, what you're seeing and, and how, how you, how you find these food companies. So, I guess I'm kind of embarrassed to admit it, but, um, the best way to find really, really cheap stocks is to just talk to your friends. Uh, I'm very lucky. I've been doing this for almost 20 years now and I have a lot of really smart friends and just sitting around beers and talk to them and I kind of asked the same question, what have you bought this year or last year that you down a lot on? And they say, oh, there's this stock. It's so cheap. And then it dropped by half. And you know, that's what gets me excited because it was really cheap and now it's even cheaper. And here's someone who I know who's really, really smart and I could buy it at half of what they paid.
Speaker 3:
5:28
And that's really where the best opportunities are. Um, you know, just looking through what your friends are already. Oh, and they've already done the work for you. You can just look through a portfolio of 10 or 20 names they have and cherry pick one here and two there and try to have a best of portfolio with the names that are down a lot. Outside of that, I'm usually scanning through the usual places, a seeking Alpha value, investor clubs, some zero, a lists of new new logos, new all time lows, blow ups, corporate events, your change of CEO Changes, strategy, spin offs, all those sort of a event driven strategies. But I really tend to find that the best stuff just comes from looking at my friends and seeing what they're suffering from.
Speaker 2:
6:15
Wow, you're really look for the negative, don't you? But I'm not curmudgeon or anything. No, you don't. You don't tell them that you've bought a half what they paid for?
Speaker 3:
6:24
No, no. I, of course I do. I Brag about it, but, and you know, that's where you find great ideas. I'm sorry to admit it.
Speaker 2:
6:32
So I do like your point though, because I mean, I think, I think of the overall community that's, that's how we do it as well. I said, you're with your friends and you're sharing where you're gaining and where you're losing and we learn from our friends. So I was expecting something much more educational, something really that I have. I appreciate that. Hopefully as we get further into the podcast folks, we'll, uh, we'll hear more about kind of where, where you're coming from because I know it's not that you're just looking with shallow eyes. You really do have some deep rooted, uh, oh, of course. That strat strategies, something that you refer to is, I think you're going to say something so I'll,
Speaker 3:
7:11
oh, I was just going to say like, once you have an idea that's only a starting point. From there, you have hundreds of hours of work reading filings, talking to people in the industry, in the sector. You know, you don't just take some of this down a lot and hope it recovers. Uh, but at the same time with my friends have already done a lot of the work. You know, they can send me their spreadsheets, they're a analysis, their talking points, all the data. They've analyzed it. I mean, there's too many companies in this world for you to just sit there and start from scratch. You need friends, you need contacts and the relationships. Otherwise you're just gonna be sitting there with a download from Bloomberg of all the stocks that made new lows this week. And that's always a good starting point. But it doesn't really tell you anything. You have to go learn a couple of hundred companies simultaneously. You won't even make it through the A's and B's before the next week starts. And you know, you're not going to be very productive that way.
Speaker 2:
8:02
So you are known for, uh, choosing these, this is, I believe this is your words, exceptional companies. So you're looking for, for companies amongst that wealth of, uh, companies that are struggling. You are looking for a specific specific traits in those companies. What do you consider exceptional companies or what are the traits?
Speaker 3:
8:25
So I guess there's two parts to this. Um, going back to where I was 15 or 20 years ago in small growth companies, I was looking for companies that are growing fast, that had some sort of a moat that had a CEO with a lot of equity, vested interests and high returns on capital. And you know, the usual stuff that people look for. But I was looking for it in a mid single digit earnings multiples. Uh, yes, it's their Yeezy. And if you find one of those, you buy as many shares you can cause you're gonna make a lot of money. The odds of you finding one that you're going to find about one every year. And that's with looking at hundreds of these. Um, what I spend most of my time on are these blowups where you know that you're not looking at the best companies, they're not the best businesses.
Speaker 3:
9:10
You know what you're getting into. You're just hoping to buy it so cheap that you can't get hurt. And these are at the cigar butts that are going out of business over the next few years. These are cyclical industries where you know what the problems are, what you're trying to figure out is what makes it get better. And just because something's down a lot doesn't mean that it's going to go back up. Sometimes some this down 90% can drop another 90%. We need to figure out is one what the balance sheet strength is so that you have enough runway to see the sector or the company or whatever it is. You need to be able to see the recovery. So you need a a runway, which means you need liquidity, you need to make sure there's enough acid value. Then if they need to borrow more money or do something else that they're not just going to dilute you.
Speaker 3:
9:57
Then you need to see something that tells you the sector's turning. Um, you know, I think a lot of value investors just go into a stock that's down a lot and they say, look, it's really cheap based on asset value or it's cheap based on some other metrics and that's all great and good. There's a lot of, uh, undervalued companies. I mean there's a lot of companies have traded for less in cash right now. It doesn't tell you anything. What you need to know is why it's going to get better and that's the real hard part because sometimes these sectors never turn, you know the the, there's industries that will just melt away for the rest of my life until they don't exist anymore. And there's other industries that really will turn and the good thing is that usually you're in these sectors that no one cares about and we're going to talk about some of the sectors later, but everyone who's bought for the last few years has lost a lot of money and there's no new capital coming into the sector.
Speaker 3:
10:50
People are just mentally worn out of hearing about the sector so that when the turn comes, yes, the stock will start to rise. A little peon got probably be able to buy it 10 or 20% off the low. You don't have to get the low tick. You have to get it when you have a very high confidence that there is a turn calming and that you can see the light at the end of the tunnel, that things are getting better because yes you can own it and by the absolute low tech and you can sit there but it might just bounce along the low for two or three years, in which case your IRR is terrible. But what I've always learned is that the move from really shitty to sort us shitty is usually a huge percent move. Remember going from down 90 to down 70 means you triple your money and you don't need to recover all of the original investments.
Speaker 3:
11:34
Sometimes with these cyclical industries, they actually go back to the old highs and beyond. But just capturing that recovery is a huge percentile, a change. And what you're trying to do is figure out how to do that in a timely way so they don't have to just sit there and wait that you actually grab the juicy part, which is the recovery and your experience long. Do most of those ended up taking before you've actually, uh, capitol is done that recovery, there's a lot of stars, there's a lot of really smart people in the stock market and they work really hard. And what I've found is that the first quarter of a recovery, you might get a little bit of a balance, but there's always this view that Oh, there's been a few false starts and then things got worse again. And you know, you don't really see that bounce because what happened is so many people got so burned for so long and usually there were false recoveries.
Speaker 3:
12:26
And so it's not the first quarter since I was like the second quarter. But by the third quarter that you have sequential progress in whatever sector it is, people start to notice if not people, computers start to notice. You remember the world is full of a creepy crawly things that go through all the filings and just by based on a sequential change. And so by the third quarter you will start seeing a recovery. Oftentimes these things of short interest in them. I don't know why he'd short of stock and half a book, but a lot of these things do have short interest just because that trade has been working for awhile. See a shorts they need to cover and you start to see that recovery that I, uh, I was talking about previously, but it usually takes about two or three quarters, which means you have plenty of time to figure it out. You don't have to just buy on the low tech.
Speaker 3:
13:10
Do you ever short? Not really, no. Uh, I shorted it in 2007 a bunch of financials stocks that no longer exists. Um, and I was about a year early calling the financial collapse and a lot of these copanies doubled and tripled before they went bankrupt. And I learned that they're a good lesson. Occasionally I'll buy, puts a I when some puts on Tesla. Uh, but for the most part, uh, adult to do that, uh, well what I've learned is that if a company's going to be a criminal enterprise and they're going to fake all the numbers, they'll just keep faking the numbers and you're never going to be able to figure out what the catalyst is that finally short circuits, that process of being able to fake numbers and raise additional capital.
Speaker 3:
13:53
Let's dig into something practical. Uh, let's look at one of the sectors that I know has been on your mind, uh, and then, uh, build upon what you were just sharing with us. Shipping Industry, knowing something you focused on lately. Yeah, let's, let's talk about shipping. Uh, let me start with a caveat I guess or a disclaimer. It's a terrible sector. No one should ever own shipping stocks as a longterm investment. They will 100% of the time destroy your money between related party interests and the fact that shipping in general destroys capital. It's just one of the worst place you could possibly invest your money. That said, every once in awhile you can make phenomenal amounts of money. That is because shipping in general has two characteristics. One being that there's a massive amounts of financial leverage, which means when you're right, you're really, really right.
Speaker 3:
14:43
And two, you have the factor that, uh, this huge operating leverage because operating a boat is almost a hundred percent of fixed cost. So incremental revenue goes right to the bottom line. And what that means is that when things go well, you could have a boat that, you know, just take an arbitrary bode has 10,000 a day of operating costs, including SG and a for multiple years. Uh, they'll only, or 9,000 in charters, which means they lose $1,000 a day, times three 65 a year. You're talking about a lot of money to just hold onto this stupid boat that's also depreciating, uh, while you're holding it. And then if a, the shipping rates go to 100,000 a day, you're making 90,000 a day, times three 65, and you're making them an obscene amount of money. And that'll last for maybe a few weeks, a few quarters. At some point they're going to produce a whole lot more boats or they're going to change the demand for the boat.
Speaker 3:
15:36
And you know, you're going to go back to losing money for the next decade. But during that, uh, brief a glimmer of profitability, you can make obscene amounts of money, especially because these things are usually leveraged multiple times. For the last, uh, decade, uh, I guess taken basically starting in 2006, there was a mass of spree of ordering of new vessels, of all types. These vessels started showing up on the market in 2008, right when the world economy got a little shaky and they just kept showing up, uh, QE a zero interest rates, negative interest rates, all that meant that people would just keep ordering more boats. Then you had the Chinese, the Koreans, they all subsidized their ship yards by providing cheap financing. It pretty much she ignoring insolvencies in the sector so that they can have make work programs. And what this all did was led to an epic glut of boat of vessels of every time for the last decade.
Speaker 3:
16:33
And basically no one's made money in shipping for the better part of 15 years now. And it's just been an awful run. And if you look at any, uh, shipping stocks, most of them are down 99.9%. They've had to raise money multiple times if recapitalize. Some of these have been in and out of bankruptcy twice now. He's just been so awful that nobody even pays attention anymore. But here we are and the number of new vessels coming online has slowed to a trickle. A lot of the shipyard's finally went bankrupt. So even if there is demand for new vessels, uh, no one is around to produce them. Uh, the global economy keeps growing a few percent a year, which means to man keeps growing a few percent a year. So you have demand growing and you have almost no supply. And a lot of the vessels that were delivered in 2006, seven, eight those vessels, and now 15 years old, and they're going to need special surveys.
Speaker 3:
17:28
They're gonna need a ballast water systems install, which costs money. And finally you have a Imo 2020 coming up. And what I'm a 2020 says is that starting January, 2020, which is next year, all boats neat, all vessels need to have uh, a scrubber or the to burn low sulfur fuel and low sulfur fuel is substantially more expensive than the current high sulfur bunker fuel that fuels that they use. Which means that people will either install a scrubbers and the cost of two to 4 million a vessel or they'll have to burn this much more expensive fuel, which is going to add a few thousand dollars a day of operating costs to a vessel. And when you think of a, a vessel that's, say operating at 10,000 a day, all in and in three or 4,000 is a substantial increase in costs. And what I believe this will do is a number of things.
Speaker 3:
18:16
One, it will lead to a lot of older vessels getting scrapped because they're not going to make the investments in the scrubbers too. I think you're going to see a lot of guys slow steamed their boat, their vessels, which means they're going to go slightly slower. So if all the vessels go 10% slower, they save a lot of fuel and at the same time, which, which lowers the operating costs. But by going slower, you need that many more vessels on the water and that will restrict the total supply globally. I think you're gonna see a couple other changes happen. For instance, just putting your vessel into dry dock to put a scrubber on is going to reduce supply because, uh, those vessels aren't gonna be operating while they're getting a scrubber. And I think you're gonna see a situation where supply, which has been over supplied for the better part of 15 years is going to finally start to constrict it right at the time when demand is actually increasing.
Speaker 3:
19:03
And I think there's gonna be a lot of opportunities in shipping. A shipping kind of bottomed in Q one. A lot of these stocks are up a bit from the bottom, but there really haven't started moving. Most of them haven't really even earned any profits yet. It's just an anticipation that I am a 2020 will be a catalyst to make things better or as I said earlier, less shitty. Um, and do you want me to talk about Scorpio real fast? Of course. So is my largest position. Uh, it's, it's up quite a bit since I purchased it. I'm at my cost base is around $17 and we're about 26 today. But uh, the stock still trades for less than book value, which is in the mid thirties. So you're buying a bunch of steel for about 70 80 cents on the dollar for the, the, the current market price of these boats.
Speaker 3:
19:50
But Scorpio is the biggest player globally in product tankers and product tankers are the type of ship that will be used to transport this low sulfur fuel and demand for low sulfur fuel is going to increase by about three or 4 million barrels a day. And that increase in demand is going to lead to a substantial increase in the need for product tankers at a time. And there's very few new product tankers on order. You'll a lot of product tankers that are likely going to get scrapped. You also have a lot of product tankers that are north of 15 years old that aren't gonna be able to be used in the clean trade markets. Plus I think, uh, the Imo 2020 in the first couple of quarters of implementation will create quite a bit of chaos. And that chaos is always good for shipping. A disruption means that vessel's sit at port, they sit off shore waiting for a product to move at a, that sort of stuff.
Speaker 3:
20:40
It dramatically increases a charter rates. Uh, we saw the summer of 2018 was the lowest, uh, tanker rates for product tankers I in decades and by the fall take her rates are already recovered to 10 year highs. This year. In the spring we had a spike back to 10 year highs. Uh, they've since come off quite a bit. We're right out with the low of the year, but that low is being caused by refinery maintenance. And I expect that in Q three and Q four we'll see a 10 year highs and maybe even 20 year highs. I think this is a fighting good shits at Scorpio earns more than its market cap next year. Hmm.
Speaker 2:
21:19
So, uh, if you were speaking to a, a novice, uh, at the shipping sector, uh, what guidance would you give them for where, where do I even start exploring and
Speaker 3:
21:33
looking for their Scorpio? Well, I would start by looking through all the sub sectors. I think that a lot of investors make this mistake of thinking of shipping is being this monolithic sector, which it is. But what's good for the Baltic dry index isn't going to always be good for the Baltic clean index, which might not be good for LNG tankers. They're all their own separate things. So start there, analyze the different sub sectors and figure out which ones have favorable a supply demands, uh, characteristics. You know, some have very rapidly growing, uh, supplies, some of rapidly growing demand. Some are going to be victims of the trade war that seems to be escalating. Some will be beneficiaries of this trade war. I think you need to look at what's happening and analyze which sub sectors you want to be in. From there I would uh, look at the individual companies.
Speaker 3:
22:24
Each sub sector has multiple companies. Try to get familiar with the assets. They have the balance sheets, they have their liquidity runways, particularly the personalities involved. A shipping is pretty notorious. I'd say it's actually worse than junior mining for attracting true, true criminals. Um, and just get a sense for who these people are, what they're trying to accomplish, what sort of related party deals they have with the company. Um, almost all of these companies are getting alluded in some way and just try to figure out how you can get comfortable with the people involved. Uh, in certain cases I've gotten comfortable with the people involved and there's certain people I would never want to be a shareholder, a of a company they're involved in. But I think if you piece your way through it, there's a lot of opportunities, a lot of shipping stocks trade at half a nav still, even though they've rallied quite a bit at one point, there were in a quarter of Navs some of them and what I'm saying Nav, that's the replaced, that's the current market value of these vessels and the vessel trademark.
Speaker 3:
23:24
It is a very active market in the sale and purchase market and you can pretty quickly triangulate what the true values are, adjusted for cash and debt and other on balance sheet assets and liabilities. A adjusted for current charters in place, whether they're above or below market and then figure out what the true value of the company is. And just a point that a, the stated book value oftentimes has no relation whatsoever to the current market value of the vessels stated book is just the purchase price minus depreciation. So don't get caught up on that section. You sound like a successful detective. It's a fulltime mission and I kind of enjoy it obviously obviously. So,
Speaker 2:
24:09
but I think that that's, uh, that's great advice to the rest of us and for, for really any of us involved with investing. It's whether if we're just relying upon other people, that's one thing. But if we're actually going to do our own, uh, work in identifying companies, sectors and companies, I think that it'd be worth, uh, someone, uh, pushing this into the slow mode and uh, taking down notes on what the way you've just walked through, uh, how you found Scorpio, uh, in, in one sentence,
Speaker 3:
24:41
let me tell you how I found a Scorpio. I had been reading about this Imo 2020 change. I had been a well aware of it for the past few years. Um, and from there I said, you know, there's going to be a huge increase in demand for product tankers. And I started learning about the sector, learning about what was gonna happen with refinery, just try to educate myself. This isn't a multiyear process in regards to Scorpio and I just been watching it, but I'm not the only one who saw an increase in demand for product tankers. All the shipping companies still have the same and they ordered a bunch of vessels. And the thing is a lot of these vessels showed up on the market in 2017 and 18 and really depressed the market and subsequently led a lot of these companies to blow covenants and have to raise more capital.
Speaker 3:
25:30
So bye buying more vessels and getting ready. They basically screwed over their shareholders, you know, welcome to shipping. Um, but now you don't have a lot more vessels on order. And the catalysts that these guys all order these vessels for is finally happening. And I've followed shipping for 20 years. I knew enough not to buy until these vessels had made their way onto the water and you still rate started into a strength and a bed. And so I just been sitting there watching. I'd met with the management team of Scorpio a few times and I was just waiting for the right moment. And when a tanker rates started spiking in, uh, November and December, I knew that was the time and that's when I made my first investment. But I've been watching it and kind of stalking this thing. Uh, you know, the stock, uh, it's since had a 10 for one split, but I'd watch this stock since it was about six or $7 and I bought mine where there's a dollar 70. Right. Good for you. Good for you.
Speaker 2:
26:27
Before we move on to a different topic, what are some other sectors where you're finding value today?
Speaker 3:
26:33
All right, let me talk, uh, briefly about energy. Um, I find that truly fascinating that, uh, if you overlay a chart of any sort of energy index, uh, of the equities, you know, and there's a lot of these ETFs with the price of oil. They sort of tracked each other for the better part of a decade or two. And then really recently there's been a divergence where the price of oil is up quite a bit off the lows. Uh, and none of these energy stocks have recovered. And I think there's a couple of reasons for this. Uh, one is that a lot of these energy companies over promised and just lit money on fire. Um, and I think a lot of people lost a lot of money. I think there's a lot of energy focused hedge funds that got liquidated in 2018, uh, near Q four.
Speaker 3:
27:25
So the number of people that watching this sector is less. It's a very complicated sector. Generalists like myself don't always understand it. Uh, I'll tell you that I'm a novice myself, but you have a lot of, uh, equities that are down quite dramatically. The price of oil is up quite a bit since then and these companies haven't recovered. And that gets me quite excited. Uh, you have a sector that's just destroyed a lot of capital for a long time and no one is looking anymore. A, I'm going to talk about a company called Sandridge, which is, uh, I believe my second biggest position, um, sandwich is a company that went bankrupt and the guys who were running it literally just lit money on fire. They spent $12 billion drilling holes that mostly were uneconomic. They spent $100 million renovating their corporate headquarters. They spent, uh, $26 million in a zen garden next to the corporate headquarters.
Speaker 3:
28:25
Um, you can't really make up some of the stuff they spent money on, so it's so insane. Um, then the, it came out of bankruptcy. Most of the debt got eliminated and this fellow named Carl Icahn, who's one of the smartest people alive at $17 a share out of bankruptcy. He bought 13% of the company, kicked that management and took control, put five is people on the board and it controls the board. Then Q four, 2018 happened to the stock, dropped from $17 to seven, eight. Here we are where Carl ICAHN's cut costs, improve the business, gotten rid of a some non core assets, move the pieces around. Um, he's created a decent amount of value and not so much time per new CEO in place and the stock has recovered from seven to nine. Then my average is about eight and a half. And when you look at, this company's got a 300 million market cap today.
Speaker 3:
29:23
Uh, the corporate headquarters worth about a hundred million dollars. So it's got about a 200 million eve. There's a little tiny sliver of net debt. So about Twitter million Evie, I have to go do about 200 million of cash flow this year. And you're buying it at about one times cash flow. Uh, there's really three components of it. There is a Mississippi lime asset, which is producing cashflow in somewhat in runoff. It's a nat gas, mainly asset. You have northwest stack, which has a Drillco. So they using someone else's money to drill holes for them. And then finally you have assets in Colorado, which you've done a good deal better than originally expected, and they're putting money into those assets and drilling them a gun. To my head, I would be buying back stock here at one times cash flow. It's way too cheap. But Carl Icahn smarter than me and in some cases I just delegate the responsibility and hope he does the right thing.
Speaker 3:
30:18
And so anyway, I mean, look, going back to what I originally talked about, where you go to your smartest friends. I've never met Carl Icahn. I wish he was my friend. But here you have one of the smartest people alive. And I bought a bunch of stock at half of what he paid. And we all know he isn't stupid. He and he's still in it. Clearly. Yes, he's still at it and he's definitely not stupid. So I mean, when you have a chance to do somebody like that where you can buy in at a half of what were the smartest people alive, paid, you're, you're smart to do it. And I love these sort of situations.
Speaker 2:
30:54
Wow. Well, okay, so this is an incidence where you're really kind of following his stream. Uh, I believe you also get actively involved in some of the companies in which you invest. Is that correct?
Speaker 3:
31:06
Yeah, sometimes I try not to. Usually I don't see myself as an activist and I'm actually found a lot of activists, uh, almost counterproductive in that the yell and scream about something and try to fix it. But the problem isn't really the management team in place. It's just that they bought into a bad situation. Okay.
Speaker 2:
31:28
Tell us about Amia.
Speaker 3:
31:30
So Amy, it was my biggest winter last year. Um, it was a situation where I had to get actively involved. Uh, it wasn't gonna solve itself. And um, you the a situation where this company was just run by morons and they were having a fire sale of assets to their drinking buddies and they actually sold one asset that was profitable for a negative price, which I've never seen done in my entire career. They actually paid someone more than a hundred million dollars to take a division off their hands that produce $50 million. Um, and I said to some of my friends, we have to get involved here. We have to do something. And eventually I took it upon myself. Ah, I'm not an activist. I didn't want to hire lawyers. End of the money to do that or the time to go file a bunch of documents. And I just said, um, let's run a no confidence campaign against these people in Canada.
Speaker 3:
32:26
If you don't get more than half the shareholder votes, you have to resign from the board. And so I wrote on my blog adventures in capitalism that I have no confidence in these people. They're criminals. And you shouldn't vote for them. And a funny thing happened, uh, all these other guys that own shares start calling me up. And these are guys who own seven, eight figure positions. They're saying, yeah, our firm never really votes. That's just not what we do, but we have 3 million shares and fuck, these people were going to vote against him. And we actually got 48% of the vote. Uh, a friend of mine. So my article, he wrote a press release. Uh, I got, uh, some journalists in Canada to do an interview with me and basically, let me explain why I was a voting against these guys, but we got 48%. We almost got a enough to have these guys resigned.
Speaker 3:
33:14
Uh, which was surprising because the idea of having these no confidence vote hadn't even come to me until a lot of people are already voted. And when you get to be that close, it's a large high profile situation. I think a board members, you know, they, they look at their, uh, legal risk and we had a situation with a CEO resigns. Number of board members quit over the next year. Uh, and adults finally got into control of the company. They hired a new CEO, a while respected a hedge fund or a asset manager out in New York who had the largest block. Uh, got two board seats in, funnily had adult supervision. And from the time I launched my, uh, withhold vote campaign until, uh, the results came out, uh, about a month after that, uh, Aeroplan, sorry, ah, Air Canada bid for the whole company. So from the time I started my process to a about six weeks later, the stock more than tripled, which was quite good as it theirs.
Speaker 3:
34:16
It was my largest position at the time. And one of the reasons I was up so much last year and it taught me a really good lesson that, uh, if you're going to be an investor in the stock market, you can't just, uh, own a few shares. You have to be willing to throw your weight around. You can't be a victim if you end up in a company with true idiots running it. And you never really know until you see these guys do something. You have to be able to go out there and threatened to go activist. You have to be able to afford the lawyers, you have to be able to buy a big enough block to do something about it. And with Amia I was just managing my own money and I just didn't have enough shares to get angry publicly and in a way that I could force the issue, uh, until I did the no confidence.
Speaker 3:
35:00
And that's one of the reasons I decided to relaunch my hedge fund. Uh, not, not because I really wanted to manage huge quantities of capitol, but I wanted to know that if I ever had to call up the CEO and say, you know, I disagree with you, I had the force of weight that I could say, I'm going to go to nine, nine or 19 nine and we're going to go hire some lawyers and we're going to get ready, get radio. And I didn't have that ability before. So I mean, that's why every lotion management, and that's something I've learned. You just, you need to have that big stick and you know where to use it often, but you need to have it. We're, um, we're going to hit on that in a few minutes. Uh, but what I want to make sure is that we don't miss
Speaker 2:
35:38
the, um, the educational moment that you said you really prefer to not be an activist. Uh, not to be active in the companies you invest, however clearly. Okay. When, yeah, it's called for you rally all your resources and troops and do exactly what you need to do. And in this case with a amia that actually was beneficial,
Speaker 3:
36:02
right? We w I guess myself and then some of my friends created a lot of value. And just to be clear, we weren't a group. We actually didn't coordinate this and it just kind of happened organically where we all said, screw it. These guys need to go. Um, I mean, speaking of activists, I'm not opposed to activists. There's a lot of, uh, bad CEO's, a lot of overpaid CEOs, a lot of truly inapt and corrupt board members. These people need to be gotten rid of and shareholders can't be victims. They have to speak up. At the same time, I see a lot of these, uh, activist funds that sit around and kind of go through lists of companies and they're like, who should we target today? And it's kind of like a extortion racket. You guys do this or this happens and you know, just levering up to pay a special dividend or forcing their buybacks, overvalued shares, like some of that stuff doesn't make any sense. You have to be able to actually force real change through and just change the capital structure isn't always the best idea. And I see a lot of companies then suffer because of activists later. Um,
Speaker 2:
37:07
for all of this thinking, all of this processing, all this, uh, stepping into, uh, activism temporarily led you to relaunch a Praetorian capitol, correct? Yes, yes. Tell us about that. Look.
Speaker 3:
37:23
So I'd close with a fund in 2013 and I decided to relaunch it mainly because of the Amia situation where I said to myself, you know, if I'm going to own a insufficient shares to influence the outcome, then I'm going to be the victim again and again. And I don't usually focus on very large companies with very large companies. If someone does something incompetent or criminal, you can count on an activist showing up. But when you're a company like Aimia, which was a 200 million market cap, it was just too small to interest in the activists. You know, they would have to go then by 10% of the company. And that takes time and it's only a $20 million position and you're gonna spend a few million dollars in lawyers and you know, your turns aren't going to be enough to justify it. And I just realized that if I'm going to be investing in smaller companies, I need the credible threat that you can, uh, you know, swing a stick at these guys and have them take you seriously. You don't want the CEO just to be like, oh, that's nice, you have an opinion. Thanks. And so, um, it just seemed like the logical thing to, uh, raise some capital.
Speaker 2:
38:30
Absolutely. And folks can follow that on your, your blog, correct as you develop, develop that.
Speaker 3:
38:37
Well, I don't really talk about my hedge fund in my blog. I mean for legal reasons I can't actually, but if you want more information, just please email me directly.
Speaker 2:
38:44
Absolutely. Absolutely. Um, all right. Well, um, I want to shift gears one more time and I think we're gonna run out of time fairly soon, but, um, you're out and about in the world all the time. Uh, I know you've been a few places just in the last month or so. Uh, I remembering a year over a year ago when you just happened to be in Bishkek and you decided to go to the stock exchange and, and the amount of information that you, uh, developed just from that, that small incident and the steps you took. That's just my preamble of saying, where have you been lately that is particularly interesting. So I just want people, our listeners to get a glimpse of, of how you see the world.
Speaker 3:
39:30
So I travel quite a lot. I'm always looking for investment ideas. I think I've, so it's soured on the frontier markets versus the US just because you don't really appreciate the value of rule of law and liquidity and transparency. And so he goes somewhere that has none of those, but I still go overseas quite a lot and look for opportunities. And this, uh, past month I was in Cyprus looking at Bank of Cyprus. Cyprus is having a recovery and Bank of Cyprus at the time seemed like the right way to play it. Uh, I wrote more about that on my blog. Uh, I was in Azerbaijan. I spoke at the value x conference, put on my put on by my very good friend Isaac Schwartz. And it spoke about value investing. Uh, he has a unique take on this and that, uh, there's a lot of conferences in Manhattan and usually everyone just kinda has a beer or two and goes home to their family.
Speaker 3:
40:21
And he wanted people to actually have a chance to network. And so he puts these conferences in places where you can't just go home, you're kind of forced to go out with other people and stay out till 3:00 AM, uh, talking, which I think is a great idea. Uh, I was, after we drove around a Azerbaijan's and friends afterwards I went to Georgia and drove around there quite a bit and just takes time to learn some of these countries and learn what's going on, what's the politics, what's the economics. I always try to reach out to prominent business people would have in these countries. It's amazing who's willing to actually sit down for dinner and uh, you know, tell you what's happening and how they see things. And it's a lot better than just reading Wikipedia or some travel guide or something to have someone who is a prominent person at country a really take some of their time and explained stuff. And I've been amazingly lucky over the years that friends of mine who have great contacts set up great meetings. [inaudible]
Speaker 2:
41:19
uh Huh. So, um, what were your conclusions on Cyprus?
Speaker 3:
41:25
So is definitely recovering. Uh, that's for sure. Uh, they had a banking crisis. The banking crisis is abating somewhat. They still have a lot of, uh, uh, an NPE exposures. But what's happening with Cypress that I think is interesting is that you have a population of just over a million people, which means you don't need a very big change in total GDP to have a very dramatic change for a lot of these banks. Uh, just given the denominator in terms of number of people and you're seeing property values start to appreciate when you think of a domestic bank, it's really a levered play on property. So what happens is they make a bunch of property loans when property prices decline. A lot of these people actually have money, they just don't feel like paying their mortgage. And if property prices appreciate again and suddenly the property's worth more than the mortgage, they get current in a hurry.
Speaker 3:
42:17
So while the banks can sit there and your bank of Cypress has sat there for the better part of five years trying to solve these NPE exposure issues, the only way to solve it is you need property prices to go up because you can't just yell at these people pay us cause they just say we don't have the money. And then suddenly the property gets into money in terms of the asset value being higher in the mortgage and these people do have the money. And what's driving this is a couple of things. Uh, Cyprus at very low tax jurisdiction in Europe. Uh, tax evasion is always a bull market. And uh, you see a lot of corporates move to Europe to restructure. You see a lot of individuals move, sorry, corporates in individuals moving to Cyprus just for tax purposes. But Cyprus also discovered a lot of nat gas off shore and you have, uh, quite a lot of investment into that nat gas.
Speaker 3:
43:07
Even though it's gonna be a number of years until it's actually starts flowing. You're seeing a large companies go there to put the infrastructure in place. Uh, when I was in, uh, Cypress, I sold the offshore drilling rigs. I still have the supply ships. That's a lot of money going into that little economy and that's the reason why there is a recovery and that's the reason why these property assets are getting into the money and that that's the reason I went to go see bank of Cyprus, which incidentally trades at about one third of Nav at about one to two times a preprovisioned income, which is normally cheap for a bank. Could, going back to what I originally talked about, uh, the, the Bank of Cyprus went bankrupt. It came out of bankruptcy a since dropped about half since coming out of bankruptcy. And it's that exhaustion factor where it's been a number of years since it came out of bankruptcy.
Speaker 3:
43:56
Everyone who bought in the bankruptcy or right after the bankruptcy, they just got exhausted by owning it. They had no performance. Their funds got redeemed. You have this exhaustion factor sets in because every quarter was the same. We had to keep increasing our reserves. We had to keep increasing our reserves. We've made no progress in the NPE more reserving so that you have this exhaustion. Finally, when it does start to turn, it is starting to turn. No one really cares. And that's usually the point where I start getting excited. Just just for anyone who's watching at home. Uh, Bank of Cypress came public 2017 at about three and a half a share. Today we're at about a buck 30 a share and it's been pretty much a straight down. It's not like a strict, it's not like a big drop. It's just kind of a fade.
Speaker 2:
44:42
Sure, sure. All right, well, hey, this is going to be the last, uh, last question, uh, before we wrap up. You're joining us in July in Panama and at the global investor summit. So when you get off the plane and you are heading your way to the hotel looking around the city, um, what, what are you looking for? What do you see or what are you hoping to see? What are you expecting to see? Uh, just give us a glimpse of how you view entering into a new city.
Speaker 3:
45:16
Yeah. So I've been to Panama, I haven't been there in about five years, but I'd been there about five, six years ago. And you know, Panama City is quite nice. Uh, my wife and I, we rented a car and toured around Panama quite a bit, a beautiful country. It really is. At the time there were a bunch of a retirement communities spread all throughout Panama that looked like they had ran out of funding and the sales offices were abandoned. Uh, there was a lot of construction in downtown that looked like it was slowing down pretty rapidly. Uh, no, it's not hard to figure out which direction things are going. You just need to see if the cranes are moving or they're staying still. That usually tells you if there's a liquidity and capital. Um, and at the time the cranes weren't moving. Uh, so I'd be interested to see if these projects got completed. If, uh, the cranes are moving, if it looks like new stuff's broken ground. Um, I think that's the easiest way to tell in the end. In Panama, you know, there's not much to the economy there. And a lot of it is a financial system based or it's a retirement based. So if that's driving the economy, you want to see that moving.
Speaker 2:
46:25
Well, I'm going to ask the same question of you, uh, after your second day, uh, with, uh, with us. Uh, so, uh, I'm looking forward to having you there and looking forward to hanging out with you. I actually want to build on something you'd set a little bit earlier when you were talking about, uh, when you're in Azerbaijan, the conference you were at and your buddy, uh, uh, when he puts the other conferences, he forces people to network. Well, we don't force people to network, but that's one of the cool things about the Oprahs events is that we give people many an opportunity to spend time with each other and to spend time with our speakers like yourself. So I'm really looking forward to, uh, forcing you to hang out with that. Now. I know, I know. You'll love it. You wouldn't, you wouldn't be coming to join us, otherwise, we'll just,
Speaker 3:
47:10
right. I mean, I'm excited to go, actually have quite a few friends going and, uh, I'm looking forward to, it should be fun.
Speaker 2:
47:16
Any last words you want to share with us?
Speaker 3:
47:19
Nah, just keep looking for opportunities. There's always opportunities there. You just gotta put the work in.
Speaker 2:
47:24
All right. Well, Hey, uh, Kapy I, uh, appreciate how you see the world, certainly educational for me and I'm, I know it's educational for our listeners as well. I look forward to seeing you in July, so it looked forward to it too. Perfect.
Speaker 1:
47:39
[inaudible].