Good Investing Talks - Joshua Collinsworth, what are opportunities in health care services?

Episode Date: September 12, 2023

Joshua Collinsworth recently started Nomadic Value Partners. Our fund starter interview discusses Joshua's way into the investing field. Furthermore, we look at his investing approach at Nomadic and discuss investing in Healthcare services.

A warm welcome to the Good Investing Talks podcast. I'm your host, Tillman Fiersh, and I'm very happy that you're discovering underfollowed investors and underfollowed companies together with me. Before we jump into this conversation, I want to thank my supporters. They help me to keep this channel free and public for everyone. Thank you very much. If you also want to join the Good Investing Supporters Club, please click on the link below. You're very welcome.

And now, one last step. here's the disclaimer for you all we are doing here is no advice and no recommendation please always do your own work and now enjoy the video dear audience of good investing talks it's great to have you back on the show and today we are portraying another emerging manager we just started this format in the last podcast with marco kassman of alpha star and today i'm having joshua collinsworth on it's great to have here joshua a way are you based in the world Well, thanks for having me on here, Tillman. We've known each other now for, I don't know, like three years or so,

and just really respect what you're building at good investing. And I've gotten lots of introductions with people from it and some ideas. And it's a great platform. Thanks for having me. I'm based in Denver, Colorado. It's a pleasure to have you. And it was a pleasure to already have met you in Omaha and now to the podcast. You're an interesting guy.

Today, it's two bearded man and two microphones. So it's time for an investing podcast. And at the beginning of this podcast, I also want to talk a bit about your background. And you're an interesting guy. You have this different backgrounds that are not typical in investing. So one is farming, one is solar power constructing company. Yeah. And one is the allocator.

So maybe let's go all three of these. and all combined with the question, what you learned from the different tasks there for that I'm relevant for you as an investor. So maybe let's start with farming. What have you learned from it? Yeah. Yeah. I mean, I grew up in a family farming business.

My father bootstrapped from having a job and saving money. He bootstrapped buying one location to multiple locations by the time I was in college. And I was a part of that business growing and part of the team of people working on the farm all the time. And it taught me a lot about small business and what's not what businesses like several, like lots of industries are not good industries. Farming is really tough. And it taught me some things about just like cash flow management, you know, how a business. like depreciation is like a real expense you have to in like the whole concept of amortization when you have hard assets you want to extend the life of that asset well beyond what the

depreciation schedule says it is and if you can do that you know well over a long period of time you can actually generate some cash flow out of a very low returning business that was like instilled in me in a really young age and and did not, I kind of always knew I wanted to be a business person. And back in high school, I even had an interest in stocks. I've been buying stocks since like 15 years old, but didn't know that it would be a, like, it would go into being a stock picker, like as a profession. But so I left the farming world and went to college in a town that was like an hour

and a half away. And I got into the solar development business at the time because a lot of funding had come from the government to a finance solar, and I joined a group that had done it before back in the 70s, back when Jimmy Carter was president and had, you know, initially done some funding there. And then that kind of went away when Reagan got elected and oil got cheap again. But it's, it came back and it's back for good now. But I joined this team that had done this for a really a long time. And they were really good engineers. And we were building solar throughout the southeast, which was kind of contrarian. The economics of solar arrays in the southeast back

when I was building them was not very good. But we were still getting projects done. And big projects. I mean, we did some small stuff in commercial scale, but we went all the way into megawatt scale projects that I was a project manager on, which kind of touched all the the functions of engineering and product procurement, a little bit of inside sales even, and then construction management and then commissioning the projects, like all that touching a lot of things, a lot of busy work,

but also a lot of like risk management of you have a budget and you're trying to bring a project to completion within time and budget. But yeah, I did that for several years. and then got the opportunity to join a what I call a concentrated family office. Labie, let me quickly follow up. What did you learn for investing from the solar power construction company? You know, I think today that I've learned that, you know, I've thought about this. And I would say that I had a really good boss and he gave me a long lead.

and I had control of budget, you know, at like 22 years old and made some big mistakes. And, you know, in the boss that I had let me make those mistakes. I would slap my wrist when I lost his money. But, you know, I would learn from that. And so, you know, there was just general like mentorship and like how you interact with mentorship. I learned through that period, but also I'd say today from an investing program, I would say that I know the renewable energy space pretty well because I networked a lot during that time and a lot of folks that I met at conferences or just out doing business are now like kind of

who's who in the renewal energy space, specifically solar. They're out with big businesses or have sold businesses and started new ones. So I have a pretty good pulse of the development land. landscape because of that experience. Yeah. Yeah, I don't know about any like stock picking takeaways from it, but it was a good experience. Yeah. Continue with the allocator point.

Oh, yeah. Yeah, I got a chance to join what I call a concentrated family office. So it's a multifamily office, but not just your run-of-the-mill wealth planner. It was someone who, who, it was a team that worked on a, single family that had multiple siblings, so it was multiple pools of capital, but we managed it like a single family office. And we were allocating to concentrated stock pickers, long only, long short, some of your traditional, like long short hedge funds that aren't just concentrated, you know, that that aren't just concentrated, but more maybe quantitatively driven, but with a fundamental bias. some real estate distressed credit i joined that team when um we were coming out of the financial crisis and uh and uh and we had some investments in distressed credit so i learned that space

uh pretty well um and i was there for i don't know almost five years uh and then left there to join a university endowment uh where specifically i was working on private equity And what is your takeaway from these two positions for investing? They are more close to what you do today, but yeah. Yeah, you know, a lot of folks have like a very coherent thought about their life at a certain time or whatever. And I would just say that with mine, it has been a slurry of getting to know myself and learning about investing and where I want to be within the world of investing. um in business uh and uh you know as an allocator uh they're good jobs i mean you get to travel the world and meet like the best investors in the world and support a mission that has real

impact in the world um and uh and then turn it off at 5 p m you know uh like like that's uh that's a that's a that's a sought after job it's a good role um but really over my experience there and learning more about investing and spending time with what I'd consider some of the best investors in the world, seeing how they manage and how they think and how they invest. I was really developing my own investment style and really learning more about myself that I really like to be the person that has the pulse on the risk being taken and not having a very large, broad portfolio and pushing the risk. being taking to the managers, I found myself wanting to be the manager. And I had proven to myself in my personal account that I could manage a concentrated long only strategy and that strategy was in formation over a period of years. And I'd really say that it really clicked with me when I was at the university endowment

and spending a lot of time in private equity, which kind of rounded out my equity investing allocation background, that I could really apply this to public markets and I think that I could raise some money to experiment and see if I could actually grow a business doing this in my own strategy. And that whole process was a little bit like pulling hen's teeth, we say, in the south of just like being in my like mid-late 20s and going through your first career crisis that everyone goes through at that time, and just needing mentorship and guidance. And if you're listening to this, stock picking managers that have given the advice and guidance, thank you.

You know, I really got directed right and was able to launch nomadic value partners. And so far, been able to grow it to a sustainable place. so why didn't you go into private equity when you had this experience and why did you that for public equity yeah that's a good question uh because i do think about my investments in the portfolio like a private equity investor lots of folks say that uh and and lots of folks mean it uh and it is very different than thinking that you're that you have a stock that you're trading. So, like, we do own stakes of businesses. And, but I also, uh, private equity is, is very much a, uh, networking, uh, almost political, uh, hustle, uh, trying to, in a very competitive

market to get deals. Uh, so you have, uh, and this is where I deviate from private equity and my strategy is the approach is the same is that we're looking for long-term growth opportunities, typically in market share gaining companies that are on the right side of change, and that will create value for a corporate strategic that might take out the company, or the company is so unique and special, it's creating real terminal value for itself, and really identifying how a company would choose to compete and take market share as a preferred strategy to do so. And you identify that through a lot of research and hustle of networking and working through talking to experts and other investors and folks that work in the industry that

you're researching and companies that you're looking at. And once you kind of identify what you want to own, like the preferred asset to own, that's where I deviate because we're in public markets and I wait. for the right price to where I can generate a forward IRA that is acceptable, which is not only high, but inclusive of all the risks, that accounts for the risks. And a private equity investor then has to go find an asset to buy, and then they have to convince that asset to sell, you know, they have to convince the founding team or whatever or another GP that owns a stake in the business to sell the mistake.

And that is a very different thing than pure investing. At the same time, I also, I would be lying if I said I didn't find the drama of public markets interesting and volatility, interesting. So it's just, it very much suits my personality to research like private equity and to execute my investments like public equity. So you like soap or parrass. to market. I wouldn't say I like soap offers, but I definitely, if a stock's down big in the day, it definitely motivates me a little to get to researching. It's not what drives my research process, as stocks being down, but like it adds a little bit of drive to my research efforts when there's blood in the streets, let's say. What is the acceptable IRA you're looking?

for an investment. Yeah. Or you can also say it's like acceptable IRAs because you have different buckets of investments you're looking for. Yeah. You know, it, that's something that has evolved with me. And, and you know, I approach, and this kind of gets to portfolio construction too. It's going to be hard to wrap it all together into something in a bow.

That's it. But, but like it, you know, I'm. I'm looking for opportunities that are very, like, ideally balanced across revenue growth, margin enhancements, capital returns, changes in valuation, right? Are the drivers of an equity return? I don't want to build a portfolio full of revenue growth, and that's it, because you generally find yourself with a bunch of multiple fade. And if you look like it, if you build a strategy like that, and then you have a great

decade coming out of like the 2010s and then you find yourself owning a bunch of momentum and you didn't realize that until too late, which I think happened to a lot of folks in 22. And so like I try to balance that. So like I home some companies that have high revenue growth, some companies that are margin turnaround stories almost, some stories that have some capital return involved with revenue growth. And then some stories where, And stocks aren't just stories. I don't know why I'm saying stories right now. But, you know, some, some stocks that we own, where the multiple, leading up to 22,

it was always a one or two percent kind of forward IRA on the portfolio of multiple headwind. And coming out of 22, that doesn't exist anymore. And we've got multiple tailwinds. And that's positive, right? But so with all that said, you know, I try to build an IRA that at least beats the portfolio, right? The weighted average IRA of the portfolio. And I say that I've evolved because when I started, I was like 20%, you know. And the reality is you can find high teens with relatively low risk.

you can find high 20s with much more risk and much more levered to and leverage not the right word, but much more correlated to or overly exposed to one of those value levers that I described a second ago. And it kind of gets the portfolio out of balance. So I've learned to keep a really close pulse, you know, as quarterly as companies release their financials. And it's tracking along with a thesis that I have, and I'm updating some intrinsic value or some trajectory of revenue growth or margins or something. I'm updating that quarterly, and the weighted average forward IRA of the portfolio is kind of the reference IRA for new ideas, right? With that said, I will let stuff drift as it trades up. I'll let stuff drift down to 10% or so of a forward IRA that I'm expecting.

When you start to get below 10%, and that's happened to me a few times since I've started Domatic, when you start to get below 10%, I don't think it accounts for the risks involved with you being wrong. So if you were to be wrong on something, you could cut your IRA in half down to five. Yeah, no, and that's not, that doesn't be cashed today. So, like, I start to exit positions, even though they could be great companies and the thesis has proven true and they're still, they're still, you know, executing towards that.

I start to sell it then. Yeah. It's time for a quick advert Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks? Then please check out what my friends at Stratersphere are building. They have built a great tool to visualize data, to get ideas about ownership of stocks,

and many more information that's helpful in the analysis process. You can find the tool where the link below and feel free to sign up, it's free. Thank you for your attention. And now, Edward Tillman, and we already deepen the weeds with portfolio construction. I know, I know, I know, but it's important. I mean, it's, you know, when you think about what's your required rate of return, it's, it's, it's, reference to the portfolios, weighted average return, and you have to get into it. So, yeah, I know. No, it's great that we're into this.

And I think you said stories because it's also a bit of a strategical thing you can do. You're not private equity. You have to be in this name when you just bought it in the stock market. We can be strategical and also say, oh, the story has played out. And I go to the next one. It's the flexibility we have. Yeah. Yeah, exactly.

And it has to show up in, like, a thesis. You know, I call myself a thesis-driven, you know, like I have a thesis-driven research process. That's a commonly used phrase in, like, the venture community. Lots of people could, and I would even say this, you could sit back and say, well, we're all thesis-driven, right? I mean, but what I mean by that is, like, really developing a view of how to best compete in an industry to capture market share. And there's unit economics attached to that. You should be able to take those unit economics and build it up into your thesis to support it. And it should be expressed, like the thesis ultimately has to be expressed through those value levers of a company, revenue, growth, margins, capital returns, change in valuation.

Capital structure, too, is a part of that. So like, you know, a company that has the ability to leverage the balance sheet over time and, return cash shareholders, but it, and you can tell too, it gets circular. But it, uh, it has to be, a thesis has to be distilled into those, um, those economic variables, right, to build up a forward IRA of a stock. Let's jump over a bit to the structure of your business. And one of the classic questions I often ask is about the name of a company. So your company is named nomadic value. So why nomadic and why value in the name of the company? Yeah, so, you know, firm names are interesting because, like, we were talking before this call,

you know, a lot of, lots of people just end up with the name of the street, right? And, and, which is great. It's a geographic location. It might mean something sniffing to the person, too, who, you know, lived on the street or had family home on the street or something. Mine is I really like to backpack and I've been increasing the distances farther and farther the intensity and that has really evolved over a decade plus period for me where I've really my relationship with long distance walking and nature has just evolved and I in like a

really good way, uh, that I kind of see parallels to investing where we evolve as investors. Uh, so, you know, we're a homeless sapiens. We were nomadic peoples. Uh, there's some, you know, there's something to walking, uh, and, and the evolution of, of, uh, learning. And so I think nomadic value distills that, um, uh, really that experience that I've had through long walks. And value is what we're, you know, we're investing for buying misprice securities and things below their intrinsic value. So you put them together, nomadic value partners. And, you know, partners is a, you know, my structure of my business is I don't have a hedge fund

vehicle. They're separately managed accounts. So partners does not imply, you know, a limited partnership or anything. it's but it does and it does imply how I view my clients when we are along this journey together and so I've spent a lot of time actually it's in my firm slide deck there's a couple slides in there actually Graham Rhodes helped me with this a little bit Graham Rhodes with Long River, who I followed him on the internet for some time, but actually met at Berkshire this year in person. He helped me with helping distill stuff that was already trying to communicate

in my slide deck and the way I thought about starting a business. And this certain book called The Model by Richard Lawrence, he started Overlook, which is a really successful stock picking firm focused on Asia. And that he just, Richard Lawrence distilled what made overlook great so well. And I was like, yes. I mean, this is like, I've been trying to figure out how to communicate this of like being fully aligned with the client. And so like I, the word partners is a really key word in nomadic value partners. yeah what kind of partners or slash customers are you targeting with your partner it's not your partnership with your firm yeah yeah well they're certainly not customers but uh they're you know they're

i mean they're clients that are requesting a service right of money management but uh in and an performance of you know of an index or or their alternatives uh but uh um you know i started like most stock picking firms, you know, single, single manager, but in this case, single analyst PM, stock picking firms where you start with friends and family, right? I don't have a track record from a previous firm. I need to build one. And that was really the idea when I started was I'm going to get friends and family initially. And I'm going to kind of keep my head down and build a track record for about three years, which is what the industry kind of wants, right? And then from three years to the five year record, which is what a lot of institutions want to see, you know,

for staying power and confirmation of track record and skill. You know, then I'll just, I'll start reaching out and hopefully can grow into new clients. What I've been able to attract and start as friends and family and then some other private equity investors that I've known from from back when I was an allocator. And, which has been great. because they're actually a collaborative with research with me. And one small charitable foundation, which was in formation that I've been able to help grow,

which I'm proud of. And now I'm reaching out to larger, like family offices and institutions. I will say I have a couple wealth manager clients that have their clients that have their clients invested in my strategy and they've been great clients because they're you know relatively sophisticated investors and and from an allocator point of view and and it keeps my overall communication times you know time spent on communication down because I have just a select

set of clients that doesn't require a lot of time to still spend impactful time communicating to them but yeah how would you describe your circle of competence as an investor yeah I think is really difficult these days to be a generalist and not be you know resourced to your eyeballs with with alternative data and the ability to get almost any bit of information in the world almost within seconds so if you're playing a different game than that and like long-term focus

it's still really hard because there's lots of long-only shops that have been around for decades and have institutional knowledge of industries and companies and opportunities don't last very long so as an investor you have to spend time really understand

an industry in all the players and where the industry is going to be able to feel confident in any kind of terminal value or any kind of intrinsic value, whether it's not a high terminal value, you know, some special situation in a company or something where a company is in structural decline, but you can find value there with a catalyst. That's not what I do, but folks do that. frequently in public markets, but that's getting harder if you're a generalist coming, trying to get up to speed on a name in a few days. Like that, like, I'm not sure you're set up to outperform in that, in that scenario. You have to really, for me, and there's lots of ways to

make money. You learn that as an allocator, too. There's, there's lots of strategies out there, and if you're consistent with it, you can find a way to outperform. But for me, it is, I have, I slow myself down from reaching out into companies, and I'm a generalist, I would say I'm a generalist, but I'm just not going to buy something that requires me to get up to speed in a few days or a few weeks, even. It's, it is long-term efforts, understanding an industry and all the private players in the industry. So it's public, you know, all the public companies, I call them the large public incumbents and then market mapping

and truly understanding all the private players who has financed them from a private equity point of view. What's their track record in this industry? Where do they see value and where do they target that and they're doing it again? You know, like lots of these private equity firms will do the same playbook three, four times. you know and and it's understanding you have to understand all of that and it's a continual work in

progress and I think that you have to build years and years of that build an institutional knowledge of an industry and all the players in it and then you can move quickly and with conviction and be accurate on your you know investing investing is predicting the future right and that's really hard to do so i think you've got to focus in areas where you really know so that it increases your odds of getting the future correct and for me that's just been a specifically that's been a small handful of industries and i'm working to grow new industries all the time but you're not going to see me take positions and companies and something that I've been working on for a few months.

You know, it's going to take longer than that. But, you know, for me, it's, it's been industries that are like mission critical to society. So like health care services, right, which is a big one for me, energy and specifically renewable energy. We kind of touched on it earlier. Some niche financials, like asset management. you know, like I'm in that business. I know that business pretty well, right? I used to be an allocator. I know a lot of the folks folks and a lot of the firms that are out there trying to

raise capital and what their track records are like and what their team, you know, how their team members have turned over and things like that. So like you have to get really in the weeds in this stuff. But for me, it's these big slower moving industries that are generally highly regulated, which kind of slows down the change, but are still undergoing, like, an evolution as an industry into some positive direction, right? So like healthcare services is this big, you know, alternative payment models around pushing risk closer to the delivery of care. That is a very slow moving trend, but it is the future of healthcare, right? And you, understand how the incumbencies work and how entrenched they are and that they're not going

anywhere. And to be a healthcare, like there's like one key insight in healthcare services that if you get right, you can find opportunities that are like perpetually mispriced, that that generalists move through the market, short sellers, pod shops that are trying to catch the next quarter or short sellers that don't understand the business, but move in quickly and aggressively. Like all these things keep these share prices, you know, the valuation of these companies in places that are undervalued in my view on some companies. And it allows me to hold with conviction. And I think generate outperformance. But it's, yeah, that's been for me. It's been those slower moving, relatively regulated, but moving into a positive new shape and form. And you can get into the

right side of that and apply that private equity lens and public equity discipline of owning the company at the right price and not owning it at the wrong price. And it allows me to stay concentrated and focus you already mentioned healthcare as a sector um you've done deep work on and did all the puzzling and hustling and to get an idea about this sector what is important to not lose money as a investor in healthcare yeah lessons yeah i'm not say healthcare services so like healthcare is nearly 20% of GDP and that it that includes a lot of of like pharmacy and biotech and things. But like healthcare services is where I'd say

that I know a fair amount about. And I'd say the one key insight with healthcare services is if you don't own one of the large payers, the large incumbents like United Healthcare or Elevents Health, which used to be Anthem, If you don't own one of them, then it is just really difficult to compete. You're like razor thin margins. You've got concentrated market shares in these large payers that have lots of market power.

Healthcare is really local. So you've got these large companies that are all over the country, but they compete zip code by zip code. And so like understanding how local health care is and that one company, if you're, say, like a health care provider, say primary care provider, for instance, and you're doing well in Florida or like a specific county in Florida, that does not mean you will do well in Arizona, right? And so understanding the locality of health care is important. And then I'd say like the key insight outside of that is if you are a business that's trying to be on the positive side of change within this value-based care shift, for me, it was like my light bulb in that was the only way you're going to be successful. taking market share and scaling a business that has any shot of being a really large and be profitable is you have to solve problems for every single stakeholder in that health care services value chain. So that's the that's the centers for Medicaid and Medicare services, the CMS, which is the regulatory body. You have to you have to be on the right side of what they want.

the future of healthcare to be. And they tell you what that is. You can read all kinds of white papers. They have all kinds of webcasts. They can, like you can, there's a little bit of politics in that, but actually it's been pretty insulated from politics. It's, so it, they've been pretty consistent with the direction.

So you have to understand that. You have to understand what the payer wants. So the payer obviously wants some profits. They want more members. They want to be in alignment, with what CMS wants them to go. So you have to scratch the edge of the payer. You have to solve problems for the provider.

So say you're a primary care provider, it's the example, and I've got a company in the past that I've owned that I can talk about that highlights this, but you have to solve the problems for the provider, which is the doctor. So you may be a corporate-owned primary care clinic across the country, but, you know,

Like an asset management business, your assets walk in and out of the door every day, which is your doctors, right? So doctors are overworked. Doctors spend too much time on admin tasks. Doctors don't get to see the follow through and the impact with their patients enough. If you can solve those problems for a doctor, then you don't have near the issue as a corporation with recruiting doctors, which has been a big limiter on growth. And you have consistency with doctor-to-patient relationship, which creates outcomes. You have to, and then the most important, you know, last here in this example, but the absolute most important is to have outcomes with the patient, right?

The patient has to be healthier and live longer and be like mentally satisfied, emotionally satisfied with it. And that shows up in NPS scores, outcomes from like lower hospital readmets and better outcomes post surgeries and shows up in for, this is also where a group like a primary care provider that generates the best outcomes, they will also generate savings to the system, which they can get paid as a bonus, but they also lower churn of health plan members. So if you're a health plan and you have a member that's seeing this certain primary care provider, if that primary care provider is in network and that patient loves that primary care provider and has gotten better outcomes from it and has better satisfaction, they're not going to churn from their health plan near as much. So the health plan actually gets this patient acquisition funnel from the primary care provider.

So you see that there's like this ecosystem of, of stakeholders that are all related and they all, you need to solve problems for all of them. I say that if you're not one of the big giants with lots of market power in a local market, that's the only way you're going to scale. So like all these telehealth providers, all these clinic providers that have poor outcomes,

they're just dead and they're already dead. And either they can get growth by underpricing and having, and having large losses, okay, or they could try to eke a profit and not have the outcomes and they can't grow. So they're going to get a really low valuation. So like it, it, you've got to solve, you've got to figure out how to solve those problems. And once I realize that, it, it like, like, changed my life with, with health care services. But like it, it is the key insight. You know, Lee Lou talks about having a key insight. is once you have a key insight that that separates you from the consensus,

you have got to trust in your work and you have got to load up, right? There's like a famous lecture he gave at, you know, the Graham Dodd Center for Investing or whatever, the Columbia Business School class, you know, back in like the middle 2000s or something. But like, if it's a key insight from this interview, it's the take the key insight lesson from Lee Lou and learn about the key insight that I learned about it. But no, it is. It's, that's the, if you can get those things right at health care services, first of all, it will, it will filter out like 90% of the companies that are in your universe and then will allow you to really understand the strategic value of these companies. So the example being like, so I own shares of this. company called Oak Street Health. And Oak Street Health is a Medicare-advantage, senior-focused,

primary care provider. And what I mean by that is they're a doctor's office that has a brand. They've built a brand around it. And they've got a clinical program that generates results and not only way better outcomes and longer life for seniors and better satisfaction for the experience for seniors, but has... scratch the edge of the payers because they're out there acquiring patients for this new health plan, right? And it generates savings, and the health plan likes it because they can share some of those savings with Oak Street. And the plan can use the savings to craft better benefits for their health plan and accrue more members and get higher revenue from higher star rating. So I'm not going to get into all those details of what that, but it's complicated.

but Oak Street was solving problems for everybody. CMS liked it because they were generating health outcomes and directing health insurers in the right direction. That company, I actually knew about that company before they went public because I did a big, long project on understanding primary care providers and where that was going within this alternative payment and risk model.

business model. And several companies came out of that that weren't public yet, but then went public, a company called Iora Health, which was actually the dog of the bunch. I didn't like them. Cano Health, which went public via SPAC, CARMAX, that I knew Deerfield, which was the, they also went public via SPAC sponsored by Deerfield, which is a healthcare investor I knew actually back when I was an allocator. I knew that they were kind of wanting to do something in that space, you know, via their SPAC. So I didn't know about CARMAX,

but I knew about CARAMX after they announced it and studied it. But I knew about Oak Street from their late stage BC rounds. And like Oak Street, you talk to folks in the industry, you talk to other experts that have done business with them or in and around them, talk to doctors that work there. I talked to one of their really early hires that had been promoted consistently on the battlefield in that company. And Oak Street was just separated from the pack. They had built this amazing culture.

And they had built, I should back up and say that the company was founded by a couple of guys that were health care consultants. and it was founded post the Affordable Care Act in 2010, which allowed for these risk-based models to really take hold. And so the company was founded in what I call like the Petri dish of incubating these business models. And it was a huge success. And they standardized the model, built an organic growth engine for patient acquisition.

So a lot of these primary care providers were just acquiring practices to acquire patients and then coming in with some kind of set of technology, like a suite of technology to better deliver value-based care. But they were acquiring practices. And I had identified that is not the preferred way to do it because it's adverse selection. You're basically buying a practice from an old doctor that doesn't have much. intention of bettering their practice. Now, there may be young doctors in the group that want to, but you basically, you're

buying a mature practice for full value versus Oak Street, which was creating new practices from scratch and going out with community outreach organizers, they call them, to get patients. And if you'd done the math, and I'd gone. back and there were some assumptions that had to be made, but that were that were triaged with other, uh, uh, you know, a collaboration of work with folks that I knew in private equity world, as well as experts talked to it, uh, that, uh, Oak Street was creating like, so like from like a cost per patient acquisition. Oak Street was creating patients at one third the cost of their competitors.

And so they were, they knew they had a good thing. thing. So they went out and raised a ton of money from General Atlantic and a couple other firms in a late stage round before they IPO and raised some more money. They were blitzscaling across the country. And so they were generating enormous losses because when you split scale across the country, there's a lot of startup costs in each market, as well as when you acquire a new patient, that patient, and the way risk-based primary care and Medicare Advantage or any of these CMS models in traditional Medicare, where it's risk-based, the way it works is you lose money on that patient the first couple of years. There's like a J-curve on basically riding the ship

on the patient's health and getting them into the practice several times a year and staying on top and following through with procedures the patient needs to get healthy. And after a couple of years, the patient starts to inflect into profitability for the company. And in those later years, they're very profitable. And so there's some math to be done on a per facility-type unit economics. and they had proven it in Chicago and I guess where the company was based

and there was contention in the street there was contention on on Wall Street that these unity economics were going to scale elsewhere. Also COVID. Right in the middle like they IPOed and then like COVID and then their medical loss ratio

which is not quite the same as an insurance company because they're farther down the value. chain, but like it people like to compare them like that, like ballooned because of COVID and because of their growth rate. And it was hard to disentangle what was driving that. And then the valuation was pretty rich. And so, you know, as markets were selling down in 22, as interest rates rise, that had some effect. And then there was this like DOJ civil investigative demand that came out on the company for their marketing practices, which I dug, you know, spent a lot of time into to realize that a civil investigative demand is not an investigation. And they can write

their wrong, and they did. It didn't really cost company anything. But all these factors came out in the company, like, I think it was like from peak to trough, was like down like 80% or something um and uh my mistake was we sized it up too soon um but uh after doing lots of work uh like i went to their investor day and met management team and um talked to lots of short sellers uh that there was there you know i think jim chanos was on tv talking about these businesses all being bankrupt and the business models broken and and uh there were some hope some high profile folks that were just against these businesses. And they're just wrong.

And the reason why I bring up this story is it highlights that, you know, we were able to get our cost bases down to really low. And we ended up driving a significant money-weighted returns outperformance of the index on the name, despite from when we first bought shares to when we finally sold shares when they got acquired by CVS, it was a negative. of time a time we return. We still made lots of money on the name. But I bring all that up to say CVS ultimately bought them out.

And it was because there's a little bit of like CVS wanted a primary care platform because other large companies were buying them. And they wanted one too. But at the same time, Oak Street was the premier asset. And there are synergies. There are lots of high impact synergies within CVS and Oak Street. being combined. And that is where, you know, having this view of if you can solve problems for everyone in the system,

there is enormous strategic value to this company to a large player in the value chain. So like a United Health Care or a CVS or an Elevance or something. And I don't think any of the short-referraltar. sellers out there or any of the nays saying long onlys that are watching but don't own it i don't think any of them saw that coming and uh and uh and it's just uh those opportunities are out there and uh and so within health care that is my working model uh you know that i'm not sure how how much that i mean i the whole like uh shared uh what's that econ um the whole Costco thing everyone says which is Scale economy is shared.

Yeah, yeah, yeah, yeah. So, like, there's models like that in other industries, right? And, and, but they rhyme, but they're not the same. So you just have to dig in there and find, what is it, you know, and then look for it. And, you know, the Oak Street example for Nomadic was, I think it highlights kind of that private equity approach, the understanding of where this value, both sides, the public, like the, what the public equity incumbents want and what the private equity guys want and are investing for and kind of arbitraging the two views, right, and finding where the intrinsic value this company is.

Thank you for already answering a lot of my questions on the healthcare space in your long explanation. For the ones that want to hear more in a fresh idea from Joshua, they're in invited to apply to the Good Investing Plus community because in this interview format we also do an idea pitch that will be exclusively released in the community. So feel free to apply via the link. And to Joshua, thank you very much for this part of our interview. And all the listeners, thank you very much for listening till now. I hope you enjoyed it. Thank you. And bye