Episode #285: Best Idea Show – David Marcus, Evermore Global Advisors, “Do You Sell Things That You Like To Buy Things That You Now Love?”
Guest: David Marcus is Co-Founder, Chief Executive Officer and Chief Investment Officer of Evermore Global Advisors, LLC. He co-founded the firm in 2009. David is portfolio manager of the Evermore Global Value Fund and our separate account portfolios.
Date Recorded: 1/13/2021 | Run-Time: 1:14:00
Summary: In today’s episode, we’re talking about David’s best idea: special situations in Europe. David’s been investing in Europe for almost his entire career and thinks now is the best opportunity for special situations he has ever seen. First, he explains what it was like for him to watch legendary investor Michael Price navigate the 1987 crash. Then David explains what led him to start Evermore Global and the firm’s investment philosophy. He touches on the different types of special situations he focuses on, including spinoffs, restructurings, and breakups, and why activism, catalysts, and cheaper valuations make Europe especially attractive.
As the conversation winds down, David talks about some of his current holdings and the benefits of investing in family-owned businesses.
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Links from the Episode:
- 0:40 – Intro
- 1:44 – Welcome to our guest, David Marcus
- 3:56 – Lessons from his time investing during the ‘87 crash at Michael Price’s firm
- 6:34 – Path to launching Evermore Investments
- 14:46 – His investment philosophy
- 16:11 – Partnering with others in their investment strategies
- 20:21- The Meb Faber Show – Episode #260: Joel Greenblatt, Gotham Asset Management, “Nine Out Of Ten Families In The Top Fifth Of The Income Chain Have Retirement Savings, Nine In Ten In The Bottom Fifth Have None”
- 20:25 – You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits (Greenblatt)
- 20:33 – What they look for in breakups and spinoffs
- 34:22 – Interest in companies that are transitioning or restructuring
- 40:53 – Overview on the foreign markets landscape
- 48:24 – Opportunity to diversify into foreign markets
- 56:33 – What it was like going through the markets in 2020
- 1:04:26 – Why the shareholder base is important for a company
- 1:08:02 – Most memorable investment
- 1:11:20 – Comic Wars: How Two Tycoons Battled Over the Marvel Comics Empire–And Both Lost (Raviv)
- 1:12:53 – Connecting with David: Evermoreglobal.com
Transcript of Episode 285:
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: What’s up, friends? Today, we have another installment of our “Best Ideas” series. Our guest is the co-founder and chief investment officer of Evermore Global Advisors, where he manages the Evermore Global Value Fund. In today’s episode, we’re covering our guest’s best idea, special situations in Europe. Our guest has been investing in Europe for almost his entire career and thinks now is the best opportunity he has ever seen. We start by hearing what it was like for our guest to begin his career under the legendary investor Michael Price, and how Price navigated the 1987 crash.
Then we turn to what led our guest to start Evermore Global and hear about his investment philosophy. We touch on the different types of special situations he focuses on including spinoffs, restructurings, breakups, and why activism, catalysts, and cheaper valuations make Europe especially attractive today. As we wind down, he talks about some of his current holdings and the benefits of investing in family-owned businesses. Please enjoy this special “Best Ideas” episode with Evermore Global Advisors’ David Marcus. David, welcome to the show.
David: Thank you. Happy to be here.
Meb: Where do we find you today?
David: Basking Ridge, New Jersey. So we’re about an hour west of New York City.
Meb: Nice and sunny there. I want to go back to a prior crisis in time, not the last one, the GFC, not the one before that, one before that where you, kind of, got your career started at a somewhat auspicious time, 1987, under one of the greats. Tell us where you got your origins.
David: Sure, yeah. I really was very lucky that I got to start in the business working for Michael Price, who really is one of the great value investors but really just great investor. I started there as an intern. I answered the phones during the crash of ’87. So it was, kind of, before and during and after the crash. June to December of ’87, I was a phone rep while I was in school. And back then, he had the office right around the corner from the stock exchange. So we were on Broadway, a minute away from the stock exchange. And it was incredible because I got to see it happening, how he dealt with the markets before the crash, how he was taking advantage of opportunities during the crash, and what they did after and it was just a great time to start because if you start in a crisis, you’re just going to learn a lot more than you are in a normal period of time.
Meb: Was this scene out of the movies where you’re like two phones on both ears answering the phones or was it totally quiet back then on that day?
David: Oh, it was like you needed four hands because it wasn’t like a call center, it was like two or three of us sitting around and there’s a bunch of phones and all the lights were lit up. People could buy on the phone in those days, they couldn’t sell on the phone. So people who had just bought the day before, were like, “I changed my mind.” You can’t change your mind. And, “How do I get out? I need to get out right away.” And people didn’t understand. That was back when you had to go to the bank and get your signature guaranteed and all kinds of things. And so it was a weird time but we just were sitting there all day long. The minute you hung up the call, there was another, another, another, all day long. And it was not for just one day, it was for I’d say a couple of weeks. It was incredible.
Meb: Any fond memories or things you learned from Price and crew during that period? I mean, I imagine we could probably spend the whole podcast on that topic but what were, sort of, some of the foundational teachings or mentorship you took away from that time?
David: Not to panic. That was one of the biggest ones. Take advantage. Stocks that they were buying a couple of days before were now down 20%, 25%, whatever it was. Use the cash, go out and buy those things. Maybe you weren’t just backing up the truck the first day but you used that as a period to average into the ones that you just had so much conviction in. And really, I watched Michael and the team just, kind of, thinking about what’s on our buy list, what should we take advantage of? But also, it’s the idea of if there’s a crisis, some things are down more than others. Should we take money out of things even if we just bought them recently to have more capital to buy things that have gotten much cheaper? So do you sell things that you like to buy things that you now love because things have changed?
Pricing and valuation change so rapidly. And just seeing that process of thinking it through, not freaking out, not hitting any panic buttons and I saw it then and I saw it in other crisis periods after that. I worked in his group for close to 14 years including that period and then after I graduated so I got to see all kinds of different markets and it was generally that, what’s your buy list on bad days? Not, let’s get out fast. And so that temperament, that style, I think it was, for me, very important to get right out of the gate.
You know, a lot of people get lessons…you get lessons all the time and you’re always absorbing things that you learn. But if out of the gate everything is just phenomenal and great and good, you think it’s always like that and so you could be really set up for a fall down the road when things aren’t that good. And so starting on the other end of the spectrum, I thought was great. And back then, he was in New York City and by the time I graduated, he moved the business to New Jersey. So I followed and I moved to New Jersey.
Meb: As you were talking about that, I mean, I remember cutting my teeth when I was at university, and this is during the internet bubble, and had an E*TRADE account, which would probably be a Robinhood account today, but just remember thinking, you know, looking at some of these stocks and one would be up 10% a day and I said, “Why do people say this is so hard? Stocks do 10% a year on average rounding. You could just buy this one and it’s up 10% a day. Like this is easy, like I’m amazing at this.” Maybe some rhymes with what’s going on today but give us a quick bus stop route to starting Evermore. What was, sort of, the quick path? And then we’ll, kind of, dig down into your philosophy and framework and everything going on today.
David: Sure. So started there, had mutual series as I mentioned, but the key is that I actually grew up in a house where my dad and my uncle, they owned a two-man stock brokerage firm. So they were just always talking about stocks and they were always looking for the next Xerox, the next IBM, the next something. And of course, I would, even as a kid, I’d be like, “Why do you need the next one? Why can’t you buy that one?” And so it was always healthy debate in the house or I’d go hang out with them in their office in the city. So I knew this was the area that I wanted to be in, somewhere connected to the stock market. So yes, I got lucky to do the internship that I did, came back after I graduated, I was a grunt in the back office, Michael gave me my shot on the trading desk. I was an assistant for him and the other traders.
And what was great was we sat in one big room. So everybody knew if you did a great job or a bad job. It was just clear to everybody, you couldn’t hide. And if you did well, you didn’t hear much and if you made a mistake, everybody heard about it. Again, another kind of environment where you just kind of get to learn, you learn quickly. You try not to make too many mistakes and you better learn from them. So as I said, I stayed there about 14 years altogether but what I did early on was I learned that there were other countries in the world where there were also stocks. So by the time I was 26 years old, I had never been anywhere. I’d never been outside the U.S. I grew up in New York and Long Island, I went to school in Boston, I had this job in New Jersey, and that was, sort of, the…that was my universe.
And all of a sudden, I discovered there were cheap stocks in Europe because Sweden was going through a financial crisis. So in the early 1990s, Sweden was going through a devastating banking crisis and as a firm, we had not really invested in those markets. It was a handful of other markets in Europe. And I asked Michael if I can get off the trading desk and become an analyst and he said, “No, but you can start showing me ideas on your own.” So I started pitching a few ideas. I had to, kind of, teach myself. I didn’t know what EBIT was. I really didn’t know anything. I just knew I wanted to be in this business. But I started reading about these conglomerates and holding companies where there were families behind them and these things were trading at 30, 40, 45 cents on the dollar because investors just hated conglomerates. And more than that, whenever there’s a crisis, most investors run away from it.
So in the banking crisis in the early ’90s in the Nordics, the foreign investors all went home. The Brits go back to the U.K., the Americans come back to the U.S., the Germans go back to Germany. I said, “I need to go there.” I had to get a passport. I had never been anywhere as I said. And so I went to Sweden and I thought, “Oh, this is an opportunity.” It was easy to get meetings with companies because they were desperate but I also quickly realized they were individuals and families that dominated companies. The Wallenberg family controlled Ericsson, they controlled Astra, which is today AstraZeneca, they controlled Electrolux, SKF, one of the biggest ball-bearing countries in the world. They just were a dominant player. The guys from H&M, the guys…all these other families, and I said, “I got to meet the families.”
So this is a core of what we do today is who controls the company, we want to get to know who that is because the CEO could be fired tomorrow. If you’re a 40% or 50% or 60% shareholder, I need to know how you think. Are you taking advantage of your shareholders? Are you letting them tag along with you? Are you doing something to create value for them or are you just using them as a bank? And so trying to understand that aspect of it and I said, “Okay, I got to go meet all these families.” And so I started in Sweden, I worked my way around the Nordics, I went to France, Germany, Italy, and I would just call on individuals and families that controlled companies. I was just trying to build my foundation of knowledge. And in many cases, we became shareholders in their companies.
That’s when I learned you’re betting on jockeys, not just horses. You’re betting on people to run these businesses. The long story short is that I left there in 2000. I just started to do my own business. I started a partnership. My initial partner was one of these families from Sweden, a guy named Jan Stenbeck. He was the chairman of seven public companies in Europe in telecom and media that he had built, real entrepreneur, real value creator, and we owned 8% of his holding company in our fund and when he spun off six other companies, I ended up with 8% of seven of his companies. That’s how I got to know him. And so I called all these families, I said, “I’m leaving, I’m going to do my own thing.” He said, I want to be partners with you.” And so I spent the weekend with him in the Bahamas on his boat and by the end of the weekend, I had $100 million commitment from him to kick off a fund to focus on Europe.
And for me, I thought, “Man, I made it. I’m a kid from Long Island who this titan in European business wants to partner with to only invest in Europe, not invest with a local guy in those markets but me in the U.S.” And he said, “Move into my office.” So he had the whole top floor of the City Court building in New York, just below that slanty part, and he allocated a big chunk of the space. I started building my team. And then sadly two years into it, he died. So when he died, his kids inherited this empire. His daughter had just started working for me as really a grunt. She was 24. She was the head of the family now. Her siblings were younger. So she inherited control of seven public companies and people were pushing her to become the chairman. My view was don’t do it, go to the furthest reaches of your dad’s businesses, learn your way back to headquarters and then you’ll know when you’re ready.
And so I think she essentially did that, she did a great job, and she asked me to help them. So I closed the fund, I returned the capital, I became the chairman of their U.S. holding company, which I helped them restructure, I started advising them on other businesses. So I went from being a stock picker to being inside helping make decisions. I went on boards, I helped restructure boards, fire people, hire people, and really set the stage. And so I was going back and forth to Europe all the time. I helped them build their family office, they didn’t have one.
And so once they were in good shape, I wanted to get back to what I love, which is picking stocks and investing in companies. And I partnered with a private equity group in New York who seated me…I had this idea to do a different kind of a fund. Let’s take a private equity approach to public companies. We’ll take big stakes in small and mid-sized European companies that were good businesses but they stumbled. And so we could take a couple of board seats and try to help them turn around. And I ran that fund from ’04 to ’08. Really, I wanted to utilize the operating experience that I had gathered and it was great. I was the chairman of some companies in the Nordics and in other parts of Europe and we really did a lot to really create all kinds of different value and think through how to really maximize businesses, breaking up some of these companies, spinning off assets, restructuring businesses. And then ultimately, during the financial crisis, I would say the private equity group and myself, sort of, had a difference of opinion on the world and I wanted to keep doing what we were doing. So I ended up winding that down…
Meb: Private equity has got a time horizon fuse usually. They got about seven years. They live to about seven years and then that’s about it.
David: And by the way, they like to mark it when it’s up, who doesn’t? Well, in ’08, it wasn’t up. It was the exact opposite. And you’re marking every day with equities. And so I ended up reconnecting with a former colleague of mine from Franklin Mutual and we created what is today called Evermore Global Advisors. So our idea that was born during the financial crisis was let’s take everything that we ever learned, public equity, private equity, venture cap, family office, restructuring, operating experience, and let’s bring it into a mutual fund format, charge a mutual fund price, and then we will offer the same to institutions and family offices as managed accounts.
And so today, we have our 40 Act Fund and then we have a number of managed accounts. Our fund is global. That’s about 70% in Europe. And then for some of the managed accounts, they only want Europe, so we’ll have the subset of Europe for those managed accounts. And we’re all about special situations. That’s really the focus of what we do.
Meb: Yeah. Tell me a little more about the philosophy and, kind of, y’all’s process, what you’re looking for.
David: Absolutely. We are, as we would say, special situations investors. We’re looking for things that are cheap but we’re looking for something that’s going to make them less cheap. You know, if you can find a 50-cent dollar and this…so I think there are two camps in value investing. There’s the guy who wants to buy $1 for 50 cents and says, “Well, over time, it’s going to revert to the mean.” That business died. Newsflash, it’s dead. And so you want to be in the other camp. It’s a cheap stock, you understand the reasons but you’re looking for what’s going to make it go up. What are the catalysts for value creation? Is it a breakup? A spinoff? A restructuring? Are they replacing a C quality management team with a B-plus or an A management team? What are the changes that should impact, ultimately, cash flow and profits and really transform this business? Is it a conglomerate?
So conglomerates are generally weak-valued at their weakest business, even if it’s a tiny piece of the pie. If they peel it out, then markets neo goes to the next weakest. So when you find companies breaking up these holding companies and conglomerates, that’s another focus for us. And just finding the idea and then understanding again, cheap plus catalysts is the way to go. And then of course, who are the people behind it? Because as I said earlier, we’re betting on people. We want to know who they are and then we populate our portfolio that way.
Meb: Talk to me a little bit about that comment. I know that I’ve seen a lot of research over the years, Credit Suisse I think tracks some sort of, I don’t remember what they call it, if it’s family-controlled businesses, but this concept of partnering with people who have a lot of skin in the game, you know, where they have a big stake and seeing something succeed. And obviously, you do have the groups that just use it as, sort of, their lifestyle piggy bank but in many cases, it’s very thoughtful, generational style management. What attracts you to that? What are the pitfalls that you’ve been looking at? Is there a difference between this sort of situation in Europe than U.S., all that good stuff?
David: There are a lot of pieces that go into that but we distil it down pretty simply to their value creators and their value destroyers. To get to the answer of which they are, you have to do a lot of work. And the key really is to, let’s take an example. You know, we own a company called Exor, E-X-O-R. Exor is the holding company for the Agnelli family in Italy. Exor controls Fiat Chrysler, Ferrari, Maserati, PartnerRe, which is a big insurance company. They control Juventus, the soccer club. They own part of “The Economist,” the magazine. I think they own 40-something percent of it. So it’s a holding company. The head of the family is a guy named John Elkann, and he’s in his 40s. He’s a young guy. So when he was in his 20s, his grandfather anointed him to take over the business one day. And so when the grandfather died, he became the chairman. He was in his 20s. And he is a value creator.
During the financial crisis, they bought Chrysler from the U.S. government when it was being bailed out. Today, it’s the core of the cash flow of Fiat Chrysler through the Jeep Ram. So they, again, taking a crisis and taking advantage of it. And along the way, they exited businesses. They used to own Cushman & Wakefield. They sold that to deploy the capital elsewhere. They just recently merged Fiat Chrysler with Peugeot, creating a new mega auto company. And they compound their holding company very well over long periods of time because they’re not investing for today. They’re not sitting in front of their CNBC or whatever saying, “Oh, I got to own this because it’s going to move this week.” And that’s what family-controlled businesses can do when they’re very thoughtful is they’re not investing for this quarter or next quarter. They’re investing for the long term, which can, in the long run, create much more value on a compounding basis.
And the report you’re talking about from Credit Suisse, they track 1000 companies. I think they call it the CS Family 1000 or something. And they’ve shown that over time, when you have a huge amalgamation of family-dominated businesses, they’ve tended to outperform the indexes by hundreds of basis points over longer periods of time because they are investing for the long term. Just using this Exor again, they’re constantly saying, “What do we have in our portfolio that’s not being valued.” So a few years ago, they IPO’d Ferrari and they convinced the world, it’s not an auto company, it’s a luxury brand, and they got a luxury brand valuation. And then after it got that, it still traded up multiples.
Now they own CNH, which is heavy equipment. They’re breaking that up into two pieces. Two years ago, they realized they have an auto parts business buried within their auto company. They plucked it out, they sold it to KKR for $7 billion, market value that had nothing. So Elkann just keeps going back through the portfolio thinking about how can I optimize the value for my family and my shareholders? And so we are in the same share class with them. They do have super-voting shares but the point is you either buy into them running your assets for you or you don’t. And so we like what he’s doing, I think he’s done a great job, and they’re ridiculously opportunistic in deploying capital. So that’s just one example but these kinds of businesses are all over out there. And the idea that they’ll peel them out when they don’t think the market values are properly, either sell it or IPO it or spin it off to shareholders. That’s another way to create value, and that’s why we focus on spins and breaks and restructuring.
Meb: Let’s walk through, kind of, these four or five categories that you guys look at because I was listening to an old Greenblatt podcast and he was going back to his old book about you too can be a stock market genius, where he’s talking about a lot of these spinouts and other ideas. But I’m looking at y’all’s classifications and it’s a lot of these broad topics. You got mergers and arbitrage, breakups, spinoff, restructuring, compounder, love that, and other. You want to pick one or two of those categories and, kind of, just give us an overview in, kind of, what you’re looking for within those, sort of, broad umbrellas?
David: I think breakup and spinoff is a great example. The market tends to not understand spinoffs. I shouldn’t say not understand, not focus on them. So companies get spun off and they don’t have sort of a natural shareholder base. If you have 100 shares of something and you get one share of some subsidiary, you’re like, “What am I going to do with this?” You get rid of it. So you find sometimes spinoffs trade down because shareholders didn’t buy them, they bought the parent company. I’ll use a quick example. We own a company that happens to be in Sweden, it’s called Modern Times Group, MTG.
Meb: By the way, I’m going to interrupt you because when I saw this initially listed, there’s a famous brewery called the Modern Times Brewery here in SoCal, they make the best beer, and I was like, “Oh, he owns this brewery with the largest position in his fund.” I was like, “I didn’t even know that’s publicly traded.” I actually think someone bought it but keep going. Wrong…
David: Listen, that would have been great. We could start making all the profits.
Meb: Wrong company.
David: And so MTG owns ESL. So if anybody understands eSports and gaming and mobile gaming, ESL is one of the largest competitive venue operators for eSports in the United States and in Europe as well. Normally, eSports companies would trade at ridiculously high multiples. This company has more than 20% market share. And it’s a portfolio of eSports and online and mobile gaming businesses and it was part of a larger conglomerate that had 3 million subscribers for their streaming business. They made their own TV shows and movies in the Nordics, they forecast Disney and others. They were like, I hate to say a mini anything, but they’re your provider for your entertainment, Discovery, Disney, they make their own things. On some level, there’s a mini Netflix here because they make their own shows and movies, and then they have a huge catalogue.
And then that combined company was actually in turn controlled by a conglomerate above it. And so it was a chain of holdings. While the parent company wanted to buy…through their telecom business, wanted to buy the biggest cable TV system in Sweden and the regulator said, “You can’t because you have these media assets.” Okay, we’ll get rid of them. They were going to sell the media assets to a Danish company. In the meantime, the Danish company got a bid from private equity and they couldn’t complete the deal. So they had a gun to their heads and that they had to get rid of these assets. They spun them off to shareholders. And they said, “First, we’ll spin it off and then we’re going to break it into two public companies, one eSports and gaming, and one the streaming business.”
And it fell right through the cracks and the market didn’t understand what it was. And so we put a lot of effort into it but this eSports business came out with a tiny market cap, about a $680 million market cap, it had $185 million of net cash. So you were getting a business that was just chock full of cash and the market couldn’t care less. We loaded up on the stock and we kept the streaming side. What the market will reward is focus. So when the streaming business became not a media conglomerate but a focused business, that stock is up 140% since they broke this thing up less than two years ago. The eSports side, eSports during the pandemic, guess what? You’re not getting 20,000 people in any place for a competition.
So that fell off a cliff but their mobile gaming business since everybody’s home is exploded. So the stock’s done very well. So both pieces have done ridiculously well. So now it’s a $1.1 billion market cap at MTG. They just announced they’re buying one of the biggest players in mobile racing games, you know, where you’re on your phone racing, and that business…so they’re closing that deal now but the point is, I know I made it maybe a little complicated, but you had a conglomerate spinning off assets and then breaking those assets up in multiple pieces, and they find their own, sort of, shareholder base over time and the key is looking at spins. I would always tell people, when you see spinoffs, look at them because most times, there’s a window of opportunity where the market doesn’t exactly understand what they got or why they got it and you can really take advantage of it as things are evolving.
And one of the reasons why Europe is so compelling is because there are so many conglomerates in Europe and they’re just at the beginning of a breakup phase. And I will say on MTG, we were paying for the gaming businesses. We got the whole eSports business for nothing. Now, the market will revalue it. Now they’re talking about maybe breaking the current business into gaming and eSports over time. So you might get another piece of paper. Now, it doesn’t trade here in the U.S., it only trades there. So they don’t always trade here. It doesn’t even have an ADR but I’m just using it as an example. Maybe just quickly, the next one I talk about are compounders.
Compounders, everybody has their own definition of a compounded. A compounder, to us, is generally a family-controlled or tightly-held business. They’ve cranked out huge total return over many, many years yet they still trade at a discount and they just keep cranking out good returns for shareholders and you just could sit back and they do all the work for you. And some of these you might know, we own KKR, the private equity group. Being a shareholder and an asset manager, if it’s a traditional asset manager, the market doesn’t really reward those well. You’re a private equity and alternatives manager, you’re getting rewarded differently. But something like KKR has $300 billion in assets under management so you have the recurring revenue.
And then they use a lot of their own capital. The employees and the founders, they’re all shareholders in the company, they own over 40% of the company themselves, they use their own balance sheet to start up and invest in their own funds. So they’re getting returns on their own investment. They’re not paying themselves those fees. So as a shareholder, you’re with them and it’s, sort of, this compounding machine of growing your equity. And it’s really exploded in fee generation. So I don’t want to invest in private equity funds, I want to own the management company.
Meb: Right. Own the goose.
David: Yeah, why do I want to…it’s like the old story about the mining guy searching for gold. I want to sell him the shovel for 1000 bucks. And so that’s what we look for. And you can find so many quirky things. In the last decade, we’ve invested on and off in fish farming, crazy area, right? And so this is something that we call other special situations because it doesn’t quite fit in any of the other areas. But the fact is we own a company called Atlantic Sapphire. So you have a Norwegian company that has operations in Denmark and actually here in the U.S., in Florida. And we spent a lot of time going to Bergen, Norway, where they have fish farms and getting to know sort of…Norway is like the center of the universe for fish farming. In most businesses, when you say to somebody, “Something is farm fresh,” they like that, right? Well, who wouldn’t like that? Except when it’s fish.
When you say it’s farmed fish, people have it in their heads that there’s something wrong here. It’s grown in a lab. The reality is there’s not enough wild catch fish in the world to satisfy the demand. So there’s what they call net pens. These are huge pens in the ocean where they grow out the fish. The reality is because humans exist and we do things in the oceans, over time, you have to give, depending on where you have these fish farms, antibiotics and things like that. Atlantic Sapphire to us is a game-changer. Why? They don’t grow their fish in the ocean. They grow them on…this is land-based salmon farming. What does that mean? It means they grow them in tanks. Now before people freak out, well, you have non-GMO, no antibiotics, you can control the fish feed, the oxygenation of the water. You’re controlling every aspect of the fish’s existence from egg to plate. And they move from tank to tank to tank as they grow.
And so the issues that can impact fish farming in the ocean just don’t really come into play here. So these guys concluded at Atlantic Sapphire that as the U.S. is one of the largest net importers of salmon, why not be a game-changer? So they spent a couple of years trying to find the best place to get access to freshwater and saltwater because you need a combination of the two for the fish and they ended up right outside of Miami. It’s in Homestead, Florida. So they have about 160 acres. It took a couple of years for them to build out the facility. So they were selling here in the U.S. from Denmark, which maybe has 3500 tons of capacity. They just opened their first 13,000 tons of capacity in the U.S. Over the next few years, that’ll grow to 200,000 tons. It’s a game-changer for salmon production in the United States.
They’re already selling it at Wegmans, they’re already selling it here in the Northeast, Shoprite and other stores. They actually have a website, bluehousesalmon.com. You can put in your zip code and they tell you where they sell it in your area. In any case, so because we had spent so many years getting to know the fish farms and investing in them, when new technology came along, we said, “This is such a game-changer, such a disrupter. The market is valuing it at as low, it’ll never make it, as low, it will fail.” So we invested very early in its existence. We don’t normally do early phase but because we understood the industry so well, we felt that we were…it was overly, sort of, cheap. I would say if the CEO of this company, who is the founder, had gone to the VC guys by where you are, a few hundred miles away, and pitched this as a new technology changing the food supply, you could run the whole thing on your app and all that, you’re controlling all the technology, he would have gotten a completely different valuation.
Well, they marketed this to family offices in Norway and so they got a traditional valuation. So for us, we were able to come in at a more, I’ll say, value price for what is an incredibly high-growth business. They’re selling out every batch of fish now that’s coming out. So it takes almost two years for a salmon to grow to full size for harvesting but they’re going to do everything with that fish. Not only will they supply it to the store, let’s just say they take the parts that people don’t eat and they work with the vitamin guys with fish oils and things like that. There’s a lot of things you can do with…you can optimize a fish. We don’t have to get into the guts of the story here, but you notice how I said guts…
Meb: Yeah. Well, I think I’ve seen this. I mean I may be mistaken and maybe it’s just my imagination but I’m pretty sure I’ve seen this brand in Whole Foods and elsewhere for lox but I was also smiling as you were talking about the VC guys. Now that all the VCs are moving to Florida in Miami, maybe you’re going to have the…there’s going to be the multiple rerating because all the VC guys are going to be in Florida and can…
David: And this one has an ADR as well. So it is a Norwegian stock. What’s amazing is the founders are the jockeys. They are the management, they are the founders, they are fish people. They have been in the industry for a long time. And as I say, I would tell people, go to this, this bluehousesalmon.com because they zoom in on the salmon, you just want to jump through your screen and grab it and eat it. But the fact is, this is a brand that will I think show people that you can have farmed food that tastes good. It’s done properly. You don’t have to have antibiotics and all these other things.
And this is an example where we are investors in old-line businesses but we love it when we can find ones that are taking advantage of technology, digitalization, transformation to, sort of, how things are evolving because you get to pay, sort of, for the old thing but you’re getting the new thing for nothing. Even though the stock has tripled since we bought our first shares a few years ago, it’s one of our largest holdings, I think it’s the second-largest, and we just like it for the long term because this should continue to grow as they continue to grow to their full capacity.
Meb: Yeah, the future of food seems like such an obvious theme that’s going to have a lot of runway with sustainability and people certainly caring about health and what’s in their food. I mean, that’s a trend that’s not going to reverse. There’s no going back to, kind of, the…I was joking with my wife the other day just about, you know, my son’s breakfast and talking about what we used to eat for breakfast was just like a bowl of Fruit Loops and the food pyramid from 50 years ago was a little different than today.
David: Oh, yeah. And if I could just say, you know, it’s not only is that the case, you have growth in the value price but you have disruptors. We love disruptors. I won’t harp on it but we also own the largest krill oil, a stake in the largest krill oil harvester and producer in the world. It’s called Aker BioMarine. It’s another Norwegian company. But if you go to any pharmacy and you’re getting the store brand of krill oil, so people are shifting to krill versus just normal fish oil, so as to have even more health benefits for your brain and other things. They’re starting to advertise and you see Kori krill oil advertised everywhere. That’s this Norwegian company. And, again, we’re getting a disrupter, a game-changer. They do many of the store brands as well as their own brand.
And so yeah, you’re right, the food pyramid, the way we treat our bodies, the way we think about what we’re putting in and how we can…we all want to live longer, at least I believe so, and these things are critical. So you have so many game-changers coming up and we can find value and growth intersecting. So I don’t like to keep harping on this value thing but the fact is that a lot of people think the word value is a bad word. I just think if you could get growth at a value price, that’s not a bad word. That’s what I want. I just don’t want to pay a lot for it.
Meb: I mean it’s two sides of the same coin and Buffett, you know, and others talk about it I think very eloquently. Let’s talk about any more categories you got here. This is fun because, you know, my favorite stock pickers are the ones that run concentrated portfolios, you guys. This is a leading bullet point for…I mean, this is the whole point in my mind. If you’re going to be a stock picker, move away from the zero-fee indices. You better be weird and different. And you guys, it looks like 30, 40 holdings. Nothing drives me crazier than seeing the act of stock manager that like you pull up a chart, it looks exactly like the S&P 500. You guys have a pretty high active share, about as high as it gets. Any other ideas, categories that you think we skipped over that are interesting?
David: So we talked about breakup and spinoff. We have companies that are, I’ll say, transitioning, restructuring cases. For example, we own a company called Scorpio Bulkers.
Meb: I like all the names of your companies. They would win a naming contest just across the board. Some of these are so good. Atlantic Sapphire, sounds like a casino.
David: Yeah, I know, it’s great. The funny thing about Scorpio Bulkers is that they are changing the name. I have to figure out what…I forgot the name. I don’t like the new name.
Meb: Is it going to have blockchain in the name? Because then it’ll get…the multiple will definitely get rerated if it does for that.
David: So it doesn’t but what’s interesting is so these guys are…they are a dry bulk shipping company. It’s moving goods around the world. And what’s interesting is they’ve announced they’re selling all their ships. They’re just selling them all, every single one of them. They start with 50-something ships, they’ll be at zero in a couple of months. They’re shifting the whole company from a shipping business, which really is not the most environmental-friendly, and they’re going to the other end of the spectrum to be, I’ll say, much more in the green category. Why? Because they’re transitioning to a company that will install wind farms in the ocean. So those kinds of ships, which are very efficient modern ships, which are less impactful to the environment, they put up these shoots monopolies, these stems that the blades are on for your wind farm, and the new wind farms are substantially…they have a wider wingspan, maybe 10 times the ones that you’ve seen 5 or 10 years ago.
And so it requires a lot of technology to do it. So they’re going to get all their old ships out and they’re buying new ships that are only for wind farm installation. They’ll actually go from being the furthest from the ESG checkboxes to much closer to it. And you just realized this transitioning, so this is not a large market cap. It’s like a $200-and-something million cap, the stock has come down over the last couple of years as shipping really took a bath during the COVID period, especially in the depths of it. In any case, they have more net cash at the end of this process than the current stock price but they will deploy that for shipping. So that transition is something that we’re participating in and we think that the market really has not focused enough on how much opportunity there is going to be in, sort of, the spending in Europe for switching to more green, more focused, more digitalization, and we can get into that in a minute but there’s a transformative event coming in Europe.
But maybe just keeping it more to my categories that I have just for another second, I just think that when you think about breakups, spinoffs, restructuring, compounders, looking at arbitrage or merger arb, you find all kinds of quirky things that can really be value-creating over time. We own one Asian-related stock. So we really are 70% Europe, 20% here roughly, we have a little bit in Asia, it’s one stock, MagnaChip, the symbol is MX. And to me, MagnaChip is almost a perfect example of the kinds of stuff that we look for. This is a company, more people have their product than realize it. So their primary business is OLED controllers for mobile phones. So it’s the sensors that are under the glass on OLED screens. As more and more OLED and phones, TVs, whatever, these guys are just perfectly positioned. They have a power supply business that’s good for all kinds of technology, small power supplies, and then they had a fab where they would produce semiconductors for other companies, everything that happens in Korea, except the listing, which is here in the New York Stock Exchange.
The short version of it is it’s like a little conglomerate now in three different businesses, there’s really minimal synergies amongst the businesses and it always traded at a ridiculously low valuation because this was a company that if you went further back in time, it had an accounting scandal before we ever looked at it. One of the vulture investors, Avenue Capital, took a big stake, turned it around, they owned all the debt, created the new equity, we bought some of our shares I think as they were exiting. But what happened was this is a company that said, “Okay, the market is valuing us at our weakest business,” which is the commodity business, the fab, and so they sold it. So they sold that business, I think it was the middle of last year. So let’s say the middle of ’20. And that basically worked out to about five bucks a share in that cash. Well, at the time, the stock was not even $10 I think. And so you had more than half of your market cap in actual net cash. And then they had the other two businesses.
Well, the other businesses are high growth businesses. So you went from having this anchor around your neck, which was a cash generator but a slow-growth, minimal-growth business, and as I said, the markets needle goes to your weak, your Achilles, it’s not your Achilles’ heel but it’s your weakest business. Once you take that slice out of the pie, the needle moves up. Well, the stock isn’t $10 anymore, maybe it’s $18 now and we think it’s worth a lot more even from here. But once they sold it, when you back out the cash, we were creating the business of it barely four-and-a-half times cash flow for high-growth OLED businesses that has an unlimited growth trajectory globally because you’re only in the early innings.
So we like to look at bottom-up stories. Some people are macro, they look at the top-down and find areas to invest, some are looking at individual companies and trying to find quirky, nuanced things that like I’m talking about. The fact is while we are bottom-up, something is going on in Europe now that I believe will change Europe from being a perennial tomorrow story in investors’ minds to the today story. It’s finally happening. And I don’t know if you want me to touch on that or…?
Meb: Yeah, I mean, you can’t just end on…Part two, part two with David and Meb. We’ll have to go back to it next time. Tune in, listeners. No, let’s hear it. I mentioned because, you know, Europe, as you mentioned, not just Europe but just foreign, in general, versus particularly the U.S., as we all know, these things wax and wane and oscillate over time but the last 10 years has really been a U.S. story. U.S. has been outperforming basically everything on the planet, which happens from time to time, but it’s not often. I think the last time really was the ’90s and before that, you have to go back to the 1910s I think when the U.S. really shone as much as it did this decade. But you got a European secret, let’s hear it. What is it?
David: The secret is going to come out right now, which is so here in the U.S., they’ve been doing stimulus throughout the pandemic, Europe has not done it. The only thing they’ve had was a massive bond-buying program. Well, they’ve put together a package of stimulus for Europe. So Europe, as I said, is always a tomorrow story. They’re always talking about tightening it up. And then inevitably, there’s a crisis or a problem and then what happens, they all devolve to what do we do for ourselves, each country. And they never seem to just yank it all together and lever that. Well, the new president of the European Commission, Ursula von der Leyen, I think her attitude is we got to take advantage of this and transform. So they’re basically…they’ve announced that they’re going to spend between 1.5 trillion euros and 2 trillion euros over the next couple of years for a variety of areas.
One is maybe the equivalent of a PPP to help businesses and individuals that work for those businesses. But the big pieces are there’s a green, the European Green Deal. So in Europe, green is not a four-letter word like it seems to be here for some investors. They’re not just going to turn things off. And so there’s a transition period that could be many years. So they’re going to spend hundreds of billions for a green transition. There’s hundreds of billions for digitalization. Europe is very far behind the U.S. on…look in New York City, you want to build a new building, you knock down the old one, then you put up a higher high-rise. In Europe, a lot of times, they just, kind of, rehab the old buildings. You get some new ones but a lot of it is retrofitting old buildings. So there’s hundreds of billions that’ll go into modernization, retrofitting, digitalization, going to next-generation telecom, broadband, and everything else but the EU doesn’t want to just do all the spend.
So a lot of these programs are designed to bring private capital in. And so you see how the brain starts working in the Nordics for example. A lot of the Norwegian companies or the families that were behind them that made all their money in fossil fuels, they’re at the forefront of green technology, creating carbon-capture companies, creating companies for digitalization, how can we take advantage of 5G and 6G? So the EU is trying to embrace, I’ll say, the capitalist environment and spirit to bring private sector in to make these transitions and leapfrog the rest of the world in areas where they’ve been behind historically. And so the amount of money is enormous. And we’ve seen so much of what this kind of spend did here to the markets. Europe, as I said, it’s been a tomorrow story for many years but there’s always been wonderful pockets within it that have worked exceptionally well.
I think that this is just coming in now and over the next few months, it’s going to kick in. And I don’t think investors have focused on it because it hasn’t started yet. In our portfolio, we have businesses that are an industrial Internet of Things that’s called S&T, it’s an Austrian company. They do the software and the sensors, huge growth opportunity. We own a company called LPK Laser. They literally do glass etching to make the round screens that can bend for phones. These are very high-precision companies that in the case of LPK, was buried in a conglomerate of all the research assets. A new investor came in and said, “Get rid of all this other stuff. We’re going to focus on one area.” That’s the stuff we look for, that change. But this crashing down from the top in Europe and the bottom-up where you have self-help companies doing the right thing, taking advantage of the environment and the opportunity, it’s going to smash into each other and I think it’s going to create phenomenal profits and opportunities but I don’t think it’s just, hey, let’s just get out there and buy Europe.
I still am of the view that if you can curate your list of names, you should be able to do even better over time because you’re really trying to have a very targeted list of names to adapt and take advantage of this and we’re just there. We’re, kind of, at the stadium but they’re just warming up. That’s part of the European story. The other part is that you have, or they have, other things that are kicking in at such a level. You have record M&A in Europe, mergers and acquisitions. That’s from a low growth environment where companies said we’re going to have to buy growth. They started buying their competitors, adding on products and services. And then the private equity guys, the KKRs, the Carlisles, all these other guys, have raised record funds for Europe and Asia but especially Europe. So that money is competing with strategic buyers.
So you have M&A exploding, you have shareholder activism that has almost been as close to piss-poor in terms of results as you could possibly be in Europe up until the last year or two because the Americans try to go American style, go and punch them in the face, tell them what to do. It just doesn’t work there. Some people might hate each other but they’ll hate the activist more. They’ll circle the wagons, kill you off, then will go fight themselves and each other after. What’s happened is the activists have realized, not all of them, but many have realized in Europe, you have to do it your style. Get voted on the board, work your way into the system, and then you can make change from the inside out. So we’re seeing a lot of change where they’re finally using the system. This is a key thing I’ve always thought about is you can’t win in another person’s game unless you understand the rules that person is playing by.
So the key is understanding how Europe works. Like if you and I go to Sweden right now, they may not let us in because I don’t know if the border is open yet but the reality is you can be an activist in Sweden without ever getting on a board because in Sweden when you determine who’s going to be on the board, you actually create a nomination committee. They don’t go to the board and say create a committee of you board members, a subset to figure out the board future, they go to the three largest shareholders, ask you to be on a nomination committee or nomcom, and you help determine how the board should look. And you can propose it at the next annual meeting and you could be very involved in how boards look by being on these committees. I’m on one right now for Sweden. We’re not nudging them to do anything except get great people on the board, which we have done.
The point is you can be a soft…we’re not an activist. We’re just helping this company but I think if activists really understood this opportunity in Sweden and Norway and how they work their boards, you’d see a lot more activism. And so understanding the rules that others play by allows you to potentially win that game. You’re not going to win it if you don’t really know what they do.
Meb: Man, that’s a great overview I think of a lot of factors, the growth, the activism, the catalysts. And on top of that, in general, it seems like across the board, stocks are cheaper too. The valuation is relative to the U.S. If you had to make a blanket statement, they seem to be a little bit cheaper. I’m sure you talk to a lot of investors, investment advisors, RAs, institutions, individuals, and like everywhere, the U.S. has a home country bias and U.S. is even a bigger starting point, you know, 50% market cap, probably 55% now of the world. Most investors in the U.S. put in 80% of their stock allocation to U.S. What do you say to these investors about the opportunity? I mean you outline most of the, kind of, bullet points but if someone’s listening to this and they have an almost entirely U.S.-centric portfolio, what do you say to these investors?
David: Well, look, I’m not…this is not a knock on the U.S. at all. It’s just that there’s additional opportunity and it’s, in my view, a lower risk opportunity because it’s not predicated on starting the day at multiples that we have here. So you have the discounts. So I don’t tell people you should get out of the U.S. but I think you should add this component. So maybe you reduce some of…you can’t just add without…if you’re fully invested, you have to take it from somewhere. So my view is it’s a key piece of a portfolio is to have this kind of exposure where you have catalysts at work, game-changing environment, the tomorrow story becoming the today’s story, and you have…the pandemic has really created, as I would say, enhanced this what I think is an exceptional special situations opportunity because at the beginning, everything just shut down and it’s just starting to pick up again, the M&A, the activism.
Those things have done so much to create value in the U.S. over the years, the fact that they’re finally kicking in, sort of all converging now. That’s why I keep saying, sort of, the tomorrow story is finally the today story because it’s finally…all the stars are lining up. In the past, we had like two stars lining up, now you have like eight. And so I would say to that RAA or family office or individual, you need to have a piece of this in your portfolio because firstly, you’re starting at a…you’re buying a cheaper…it could be worth the same in the end but you’re starting at a much lower cost. And so you don’t need every one of those points to hit to do well and I think it’s something that investors have shied away from Europe because the headlines have never been good and people seem to hit buttons, I’m in Europe, I’m out of Europe, I’m this and that. And I really think sticking around longer…The key is I’m not actually saying buy Europe, maybe that’s what I should say. I’m saying buy companies in Europe that are doing this and taking advantage of this opportunity. Not everybody is going to take advantage.
So will the rising tide lift them all? Probably. But I think you’ll do even better if you, as I say, curate it and figure it out from an a la carte standpoint and look who’s running your business. This is true everywhere. Who’s running your business? What’s their backstory? Where do they come from? Are they talkers or are they doers? Have they delivered? What have they done before? And I just think that most of the businesses we look at in Europe, they’re actually international businesses. They just happen to be based in Europe.
Meb: Yeah, I mean there’s a good point because the borders are becoming increasingly meaningless. I mean, you have a lot of examples where companies are domiciled or in indexes in the U.S. or U.K. and they literally have no revenue in that country. And people love my two favorite citations because I talk a lot about this, ad nausea, to the listeners, but I say the starting point in my mind should be the global market cap portfolio. So the starting point is half in the U.S. and half foreign. I said if you’re enterprising and value-based and little weird like me, you could even get to GDP eight, which is only a quarter in the U.S., and everyone says, “No, no, no, Meb.” Two main reasons I always hear, one, the U.S. has a much more stable geopolitical situation. And twitch, I always say to people, “Have you been watching anything?”
David: Does your television work?
Meb: By the time this publishes, just for reference, we’re recording this not too long after the capital protests, who knows what will happen in the ensuing period but I always say, I kind of laugh at that. And then second, people always say, “Well, Meb, you know, I’m diversified already because I invest in the U.S. and we get 40% of the company’s revenues from abroad.” And I say, “Well, that’s interesting because do you not expect the opposite to be true?” And of the list of foreign developed countries, the U.S. ranks actually last on percentage of revenues outside of their shores. So in a world of globalization, the actual domicile is less meaningful, the flag is less meaningful.
David: A perfect example is a company called Vivendi. So Vivendi is a mega-market cap…or mega, relatively speaking, so it’s a $37 billion market cap. It’s a French company. But what’s their largest asset? Universal Music Group. So they owned 100% of Universal Music up until about a little over a year ago and they’ve sold 20% of it to Tencent, the Chinese company. If you look at the 6 billion euros that Tencent paid for the 20% of the company, it’s effectively crystallizing the value of all of Universal Music, kind of, in a roughly $36 billion, $37 billion cap range. And Warner Music IPO’d last year, look at that, it would give you an even higher relative perspective. And so for the value of the one asset, you’re getting Vivendi yet you’re also getting their gaming business, the mobile big gaming. They have one of the largest pay-TV companies in Europe, Canal+, they own 30% of Mediaset, the largest media conglomerate in Italy, they own 25% of Telecom Italia, the largest phone company in Italy.
They have all kinds of businesses at Vivendi that are not being valued by the market. You’re literally getting them for free. Just by looking at UMG, which has Taylor Swift and you name it and a catalogue going back over 100 years. And so it’s just remarkable that you can get this high growth music business, anybody who has Spotify, Apple, Tidal, whatever, the minute somebody pays for music, Universal Music is making money. And so I don’t think anybody is streaming any less music during the pandemic, I think they’re streaming more. And so you can get these growth businesses at value prices and we’ve owned this stock 7 years and I’ll say, look, it’s gone from 12 to 27, it doesn’t sound like a lot, but we got 11 in dividends along the way on top of that. So it’s tripled in seven years. And so you just realize you can…they’re hiding in plain sight sometimes and oh, and it’s controlled by a family in France, the Bollore family.
Bollore is a 200-year-old conglomerate. It trades as a public company. We own it in our portfolio. The seventh-generation is taking over. The sixth-generation is there, he’s handing it off to his kids, and they just keep thinking about this long term dynamic. And they came in as aggressive investors in Vivendi as activists. So sometimes the activists are these families. They want to take control of certain assets. Oh, I forgot to mention, they own Havas. Vivendi owns Havas, which is I think the fourth or fifth largest advertising group in the world. They own 100% of it. So you’re just getting all this for nothing. And so it’s finding stuff like that, but as you point out, a lot of investors are very U.S.-centric. It has served them well. I’m not saying to somebody that they’re crazy because they’re only here but I think they’re leaving a lot on the table if they’re not looking at this because this really is the time to look internationally, especially in Europe, especially because of this confluence. And I think they’ll look back and regret it if they don’t take advantage of it. You don’t get these kinds of fat pitches that often.
Meb: Well, you’re starting to see, I think, two inflexion points too. These are always obvious in hindsight. The one being certainly the market bottom last year, which has seen a U.S. dollar shift really, the U.S. dollar has been, kind of, going down ever since. And then post-election, you’ve seen a lot of regime changes on market structures, U.S. foreign, value versus some parts of growth depending, large, small. Talk to me a little bit about last year. We began the podcast talking about you starting your career in 1987, selling what you like for what you love. 2020 offered nothing but certainly volatility. I think in Q1, many styles, strategies, names, you could have closed your eyes and the quotation be down 50, up 100, you know, it could be anything. What was, kind of, the year like for you as a PM, somebody who’s been through it a handful of times? Walk us through, kind of, the year.
David: Sure. The year kicked off kind of weak for us because we had a fair chunk of the portfolio in Bronco commodity-type businesses. So we had a variety of shipping stocks and chemicals businesses and so forth, but the shipping stocks really were negatively impacted pretty quickly because in addition to the pandemic kicking off and people assuming that all trade would cease, which it did for some period of time or reduced, you also had this mega fight between Saudi Arabia and Russia which decimated the price of oil that impacted some of our other shipping companies or tankers until people realized that the tankers would become floating storage. So in our case, we were impacted negatively. And we really took…as the pandemic was kicking in, we kind of took a hard view of the whole portfolio with our all-hands meeting, because just because you’re getting punched in the face, yes, you want to react but you don’t want to make changes that you then look back and say, “Why did I do that?”
And so we look through every position and our conclusion was the shipping opportunity that we thought was evolving in 2020 because there were regulatory changes on fuel emissions and other things that were going on, which were changes that were so impactful to the industry, they were the biggest changes in 20 years and they were just kicking in, our view was that’s going to be pushed out. It’s just going to be pushed out. It’s a dead year for that. We’ll be lucky if it’s next year meaning now, this year, ’21. So we slowly reduced our exposure to the shipping companies but at the same time, if you’re reducing your exposure as things are selling, you’re potentially locking in losses. We did. So we took advantage of locking in losses so that we would have capital to invest in other areas that went from being stocks that we liked to stocks that we loved. And that’s when we really ramped it up in some of these businesses like the LPK Laser company that I talked about before or the Internet of Things business, S&T, in Austria.
We made a conscious effort to…we bought a substantially larger position here in the U.S. in IAC, Barry Diller’s company, which falls into the compounder bucket, the breakup and spinoff bucket, it falls into a lot of my buckets. And we really took advantage of the weakness early on of some of those types of businesses but also exiting other ones. And frankly, we did a test for each of our companies. It’s the test of management and the business combined. And what we realized is there are three kinds of managers out there. There’s what we call good-time Charlies. Good-time Charlies are managements or CEOs of companies that are exceptionally good in good times. They could outsell, outgrow, out everybody in good times. In tough times, they’re not so good. They make poor decisions, they kind of get it wrong. And then there’s the other kind.
So you have the good-time Charlies, you have the ones that are wartime Charlies. They’re only good in tough times. They can only make good decisions in tough times. And then you have the other guy or gal who’s good in all times. And frankly, when we went through that process as well, we just, again, we pruned things out and we refocused the portfolio to this concept of value plus growth. And it really transformed the complexion of our portfolio. And so we actually ended the year down for the year in the kind of mid to upper single digits and the fact is, we started to see in the second half, especially in the last four months, the positions that we had really transitioned to had really been huge contributors to diminishing the pain that we had taken earlier in the year. I think they’ve set us up well. I mean, look, we’re two weeks into the new year, we’re off to a nice start, it means nothing in the long run but the fact is, these kinds of positions are really helping the portfolio and I think we have one of the cheapest yet most compelling and vibrant portfolios maybe that we’ve ever had because we’ve taken advantage of it and we did it throughout the process.
And one of the things that I think we’re very good at is sourcing opportunities and deals, especially when they might be only offered in this country or that country. One of the things you can’t undervalue is your network and we’ve spent years on building…I’ve built a network with families, individuals that control businesses, bankers, all kinds of ability to source deals and I push my team to do the same. So if all of us have our own networks, the leverage effect is huge. We’ve been able to get involved in deals. There are so many interesting companies being brought to the market in renewables, in digitalization. All these things that are coming in Europe, this transition from hard assets that were polluters to more renewable transition, so you’re paying for the old because it’s cheap but you’re getting the new.
And so we accelerated the way we source ideas with keyword searches, the way we screen for ideas, the way we look for things. If you do it the same way as everybody else, you’re going to get the same thing as everybody else. And so it’s critical to take the time to understand it. I think we’ve created what I’ll call a coiled spring that’s been pushed down because there’s the growth potential. You don’t need the top line to grow much for the bottom line to explode in a lot of these situations because the companies went on a diet. They took out so much blubber over time and restructured how they do business. They used the crisis to their advantage, that with the same revenue they should do very well, it will take up in growth and they can have explosive earnings. And so there’s a lot that can go from the top or the revenue to the bottom line pretty quickly because they’ve done it, they’ve taken that fat out.
And so it was a grueling year for us but at the same time, we came in every day with the idea, okay, how do we continue to optimize? How do we take advantage? What are we missing? Constantly challenging ourselves. And that’s why it’s important to talk to your…you know, I talk to the team every day but we’ll do a group meeting at least weekly, we do a quarterly off-site where when we could be in person, I would take everybody to the Jersey Shore in the winter, for example, there’s nothing going on down there and we’d just spent three days going through the portfolio, lessons learned, mistakes, always looking for ways to find something different. It’s like screening. If you ask 10 people that you know, let’s say value guys or growth guys, in any slice to do screens for you, you’re going to get a lot of overlap within that slice. I will tell you our response is going to be very different. Why? Because we don’t screen on numbers, we screen on keywords, spinoff, breakup, restructuring.
If you put together patriarch plus died plus holding company, for years, you’ve got Asian conglomerates that were transitioning to the next generation. Now in addition to those, you’re getting German mid-sized industrial businesses where the kids don’t want their parents’ business but they want the money. So you’re getting M&A, you’re getting deals, you’re getting listings, you’re getting all kinds of things happening. And so doing these keyword searches, a company might announce that they’re taking a review of their businesses and we’ll make a determination if they should spin off non-current assets. Boom, we get an alert, we do our homework. Do we think it will break up? If it does, is it worth more than it’s trading at, how much more? Not every catalyst is a money-making catalyst. We have to spend time on catalyst assessment.
Meb: I like your model and approach because to me, so much of it falls under this value add, what we call almost like a frustration arbitrage where frankly, the simplest way to say it is it’s just too much work. It’s where having to get your hands dirty even if some of these show up on a screen, they may not reveal the true characteristics of the business. You mentioned some of the businesses transitioning from a shipping company to a green energy wind company, that’s not going to show up in one of my quants screens and having the relationships and everything else, you know, in a world of passive indices. I think there’s still a ton of value in this old-school value-added approach.
It’s a lot of work, It’s hard, particularly all the spinoffs and everything else but I think you really touched on a couple of interesting points for listeners, I mean, the one being the shareholder base is important. And I think that’s a topic that if a company, whether it’s a spinoff or transition or even just doesn’t fall into a neat and tidy category, that has a huge impact. It can have a huge impact on the natural buyer and flows over the next 1, 5, 10 years. And if you get it in the right time for those, that can be a tailwind over time rather than a headwind too.
David: I couldn’t agree more with what you’re saying. The simplest example I’ll give you on this will be my last example unless you want to keep talking all day, which I’m happy to do. It’s even when I tell my kids and I’ve been telling them for years, everybody Googles and they look at the first 10 things on Google. Look at page 5, look at page 8, look at page 10, get a nugget that the next person didn’t bring to class. Get something. Is the CEO of that company getting an award from the local Kiwanis Club? Is he going through a bad divorce, or she? Something that may not be on the first page because it’s a smaller company, because everybody else is just looking at that first page. And so how can you outthink the other investor? This is a business about getting information.
When we looked at a franchise business once, the company wouldn’t send us a copy of their franchise agreements. We just wanted to understand how it worked, we weren’t looking for any secrets. Well, one of the guys on my team was like, “Wait a minute, there’s one state where you have to file your franchise agreement with the state. Let’s fill out a Freedom of Information.” Boom, we got a copy of it, publicly available, you had to figure it out. And so it helped us understand that we didn’t like that business. And so the numbers didn’t make sense for us and avoiding things is almost…maybe it’s more important than finding things. You don’t want to step on the mind. So the more information you have, it’s like getting a map to the minefield and that’s critically important.
Meb: I like your idea on the page five Google results. I was also smiling and this is because as you’re talking about some of the keywords and you’re talking about transitioning, I said in 2021, that’s going to generate some different gender-based not safe for work page five results so you got to be careful with what you put in.
Meb: I used to laugh because in the early days of blogging, this is over a decade ago, we used to have a widget that would show us what people googled to get to our site. And for a while, I had written an article about how all managers in our field, male predominated, had their best performance when they had a moustache versus not having a moustache. And so we would get, for some reason, people would be searching, googling Bill Gross moustache, and would end up on our site as the depth of the internet. You never know where people are coming from. This has been awesome. Like you said, we’ll have to have you back on. I mean, we could talk about 20 more stocks in your portfolio. This is super fun. We’ll definitely do it again in 2021. I look forward to doing some off-sites as well. I think we’re turning the corner on this puppy I hope. As you look back on your career, what’s been your most memorable investment? I’m sure there’s dozens to choose from. Any particular seared into your brain?
David: I guess I would say two things. One, at the beginning, I thought I knew everything and I bought Paramount Pictures, Paramount Studios. It was part of a company called Gulf and Western. I really didn’t know anything about it but I think Carl Icahn was attacking it then. I think I was like 15. He’s been around a long time. And it was such a wake up for me because what I did was I’m like, “Well, I’m tagging along with this guy.” Convinced my dad to let me buy the stock and I got slaughtered. Why? Because the activist took greenmail, I think, or something happened and he exited it when the stock went up, and I’m just a 15-year-old kid with the stock. I was left holding the bag. Let’s just say it took a long time to get back to my cost.
And I learned a valuable lesson on yes, you want to track people, you want to understand but that’s why you understand their motivations. Certain investors, you can track them, you can’t always follow them because they may do things and by the time you figure out what they’ve done, you lost. So you want to understand the nature of who you are investing with, whether it’s the management, the shareholders, whatever. That was a valuable lesson for me. But it also taught me about conglomerates and hidden assets and I always had that in the back of my head and over the years, I learned more and more about it.
But the greatest investment maybe was really during the financial crisis. I happened to read a research report put out by Bill Ackman on GGP, general growth properties, shopping mall operator, and it was like an 85-page report. I’m like, “This is interesting.” It was a penny stock. The stock was almost in bankruptcy. And frankly, it ended up going up more than 30 times but he wrote his 80-page report. Another hedge fund wrote a 75 report the other way saying why this guy is wrong. Well, wait a minute. I voted his way. I think that was the stock that made him his first billion and it worked. That stock put my kids through college. So that was before I started the business, Evermore Global, my business. But the fact is that the key is that you do look at these things and in these crisis periods like that, that was one of the great investments I ever had. I mean, one stock that just kept going, doing well, lots of volatility, and then it’s one of other businesses.
And so I always try to learn from everything that we do and the key is really, I mean, to say bluntly, it’s rolling up your sleeves, doing the work, doing your homework, just like you do, like so many of your other podcasts, the people on those talked about. It’s like you got to do your own work. And at least if you’re going to allocate the money to somebody else doing the work, make sure it’s somebody that you just love what they’re doing and how they think and their model and the way they do it. Because the more you understand, it just gives you the confidence to let it ride and let the investments work for you but the key is to be involved in it to some degree, I think.
Meb: And then hold on to those compounders. I was smiling as you were telling your two stories because I had a memory on both. The first was one of my most memorable investments, I don’t know if I’ve talked about it on the podcast. Again, also as a young guy, I grew up reading comic books and had invested in Marvel. Icahn was involved in that at one point as an activist and there’s a great book written on the topic, listeners, we’ll put in the show notes because I can’t remember what the name of it is, but a really fun book that’s like a choose your own adventure on activism and stocks, and this is pre-Avengers. So this wasn’t Marvel when they were killing it. This was early-stage. And that was one of my best investments. I remember it was a single-digit stock and it was a multi-bagger.
And then on the flip side, you know, Ackman, we talked a lot about this publicly this year because way back in my very first book, we talked about how in times of crisis that you can have these closed-in funds that will trade pretty far away from their net asset value. And in some rare cases, there are some of these hedge fund managers third point, purging, have these, they’re foreign-listed, often have funds that can trade a pretty big discount and in the financial crisis, third point got to I think a 50% discount to NAV. So here you are, you can buy a Dan Loeb’s portfolio for half off and it happened again this year with Bill Ackman and the funny thing with Ackman’s purging was that I don’t think the broad marketplace understood that he had also placed his derivative bet, which was public at the time. And I think he finished up darn near 60% or something last year.
David: I think it was even more, I read, like 70%, crazy numbers.
Meb: And so we were tweeting about this, which I almost rarely ever never do. I’m a quant, right? Like I’m not out here talking stock picks but I was like, “Look, this is something that people should really take notice to.” And, as usual, I get out way too early because I’m a quant but I said this discount is just such an obvious opportunity. Anyway, those both reminded me of those. David, look, this has been one of my favorite conversations of the year, the year is short, one of my favorite conversations ever I’ll say. I would love to definitely have you back on and chat fish farming and eSports and all the other million things we talked about today. People who want to follow you and they want to check out your fund, your writings, your quarterly updates, where do they go?
David: The website is evermoreglobal.com. Pretty simple, evermoreglobal.com.
Meb: That’s easy.
David: And we have all kinds of information there. And you could Google my name, David Marcus, and Evermore, and I’ve been around for a long time. So there’s a lot of stuff out there honest but the best place to start is our website.
Meb: We’ll post links to the show notes. David, thanks so much for joining us today.
David: Thank you, I really enjoyed it.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us a message at firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.