We Study Billionaires - The Investor’s Podcast Network - TIP425: Top 5 predictions for 2022 w/ Andrew Walker

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have Andrew Walker from Rangley Capital back on the show to provide an update on the Discovery merger with Warner Media and to discuss his top five predictions for 2022. In this episode, we also explore how the price of discovery will perform post-merger, why value stocks will outperform this year with a special focus on sporting goods, retailers, and cyclical commodity companies, the bullish case for cable companies, the fall of Peloton and how the price to value looks today, the law of large numbers, how high-flying tech companies might have their wings clipped,

Starting point is 00:00:35 how spacks will fare since their recent bubble bursting, and much, much more. Andrew is always so fun to talk to because he's full of ideas and very knowledgeable on the topics he brings to the table. So without further ado, please enjoy this discussion with Andrew Walker. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast.

Starting point is 00:01:16 I'm your host, Trey Lockerby, and today we have back on the show Andrew Walker from Rangely Capital. Andrew, welcome back. Hey, thanks for having me on for the second and a half time, Trey. Well, I'm super excited to dig into your top five predictions for 2022, but I'd be remiss if I didn't bring this up. Last time you were on the show is June 2020. We were talking a lot about discovery and its potential merger with Warner Media. That was episode 359. And a lot has happened since then. Some news came out today. I thought it'd be great to just check in on that merger and see what's

Starting point is 00:01:50 happening, how it's progressing. Yeah, I think everything is proceeding as planned. Just this morning, as you and I were talking about, they just got regulatory approval for the deal. So, you know, that was kind of the last gating path. We're on track to close in the next couple of month. And I'm just still super excited for once this deal closes the combination of discovery and Warner Media together, it's going to create the third global scale platform with some of the best brands in the world. The other two would be Netflix and Disney. I think Warner Brothers, they've got Warner Brothers, the DC universe. You merge that with Discovery and all of their channels, all of their brands. You put those together and I just think you've got a really interesting company trading very

Starting point is 00:02:28 cheaply. It's going to gush cash flow. And I think that combination is going to be very powerful. Yeah. And for all that bullishness, the stock is still pretty depressed. I mean, it's trading around the 2019 levels. But for those who remember, it shot up to 3x in early 2021. It turns out Arkegos was buying a bunch of stuff leverage five to one and it kind of collapsed after that. But why is the stock still around 29 today, especially getting that regulatory approval and knowing that this merger is kind of going through now? Yeah, so I think in our last episode, we actually really talked a lot about all the Archegas stuff and everything. So I'll refer people to our last episode for that.

Starting point is 00:03:05 But, you know, I think for discovery. So this is not the discovery merchant business, the core discovery business. People looked at them and they said, hey, this is a company that has terminal value. Because Discovery, they own the Discovery Network, HGTV, food, all these brands that were great in the linear cable bundle. But I think people looked at them and said, as that cable bundle dissolves, what is the place for discovery. Do they have a reason to exist? And the answer might have been no. If you wanted discovery like programming, you might just go to Netflix and Netflix had a planet Earth competitor and all this different stuff. So you could get it from Netflix. You could go get Nat Geo on Disney and stuff. People were

Starting point is 00:03:41 really worried about the terminal value for discovery. And I think the merger with Warner Brothers solves a lot of those issues. You put Warner Brothers, there was this great article in the Wall Street Journal on how HBO Max, like 10 million people signed up for it when Wonder Woman 1984 came out. And within seven days, 50 or 70% of them had canceled or something. So you combine all of those headline grabbing things that people want to sign up for that HBO Max has, their new movies, their Game of Thrones spins and stuff. You combine all of that, which Discovery has content that people watch a lot of, but it's kind of more than mindless content, you know, 90 day fiancee, Shark Week, Chip and Joanna Gaines, Food Network. You can watch a lot of that. That's the type of stuff that reduces churn.

Starting point is 00:04:22 It's so good at reducing churn. You combine that with the headline grabbing stuff HBO Max has, And I just think this is going to be a killer system. So I think the terminal value issue gets solved from this merger. Oh, and then why is the stock not moving on all this positive regulatory move? And I think the answer is, A, this is a hundred billion dollar merger. Those are rocky. That's big. There's a lot of integration to come.

Starting point is 00:04:44 They're going to spend a billion and a half dollars to realize the synergies that they want to realize. That's a billion and a half dollars on severance, costs firing people, all that type of stuff. It's going to be rocky. And from a technical dynamic, I think a lot of people are really scared. to step in front of this stock before AT&T gets rid of WarnerMedia. And how that's going to happen, it's classic special situations type of stuff. Discovery is the fish that's swallowing the whale in WarnerMedia. For every one share of discovery outstanding right now,

Starting point is 00:05:09 four shares will be created through this merger with WarnerMedia. And what's going to happen is Discovery will give 80 million shares to AT&T, and AT&T will spin those shares out to all of their shareholders. And I think a lot of people are worried AT&T shareholder base is a very dividend-focused. and very retail heavy. People are worried the guy who's had 500 shares of AT&T in his brokerage account since the 90s and lives off the dividends. He sees Discovery stock in his portfolio one day. He wakes up and says, that thing doesn't pay a dividend. I invested in a telecom company. And he sells. They're worried there's going to be waves of selling pressure when AT&T spins this out. And there's

Starting point is 00:05:46 no real way to hedge it because so much stock is going to AT&T. And people are very scared to step in front of that technical overhang. And I get it. That's a concern. But to me, when I look at Discover trading right now, trading in probably eight times forward EBDA for a global third-scale entertainment company with all this IP. It'll be gushing cash flow. Huge synergies. They haven't even talked about revenue synergies yet. When I look at that combination, I think it's just too powerful a combination to ignore at these prices. Yeah. So Discovery right now has a 10% free cash flow yield, which is pretty tasty. And after this merger, I'm just kind of curious, it'll be a four and a half X levered merger, but they'll be able to pay that down pretty quickly, and they have a good record of doing so.

Starting point is 00:06:29 Let's say that retailer does have Discovery stock now in their portfolio. Can they expect that a dividend might come in the near future, given the free cash for they're throwing off? I think, I always say the most instructive place to look at a company is their past actions. Past actions probably predict what a company is going to do going forward. For Discovery, they did this great merger with Scripps Networks back in about 2017. And when they did the merger that was Scripps Network, I think they owned food and a couple other TV channels. but it was basically merging two linear cable channels together. And when they finished, they were four or five times levered.

Starting point is 00:07:00 And they said, hey, guys, the synergies are going to be huge here. Our cash flow is going to be great. We'll pay down debt. We'll get back to a reasonable level. And guess what? Synergies were better than they expected. Cash flow was gushing. Within 12 months, they hit their leverage target.

Starting point is 00:07:12 And then what did they do? Discovery is a John Malone company. They started buying back shares. So I think what happens, the share buybacks are on pause right now because they're in a merger. It's a big merger. There's going to be a lot of debt. But once this is through, I think history runs. They're going to merge. Synergies are going to be a lot bigger than people think. Cash flow is going to

Starting point is 00:07:29 come in even higher because of those synergies. They're going to pay down debt rapidly. There's going to be so much cash. The debt is going to come down so fast. And then once that's done, I don't think they pay a dividend because this is John Malone company. I think they buy back shares aggressively and they shrink the share count. And you know, if it's a 10% free cash flow yield, they'll buy back about 10% of their shares every year. And eventually the shares start going higher just because the cash flow numbers get So, also last time we were talking about this, there was a prospect of Comcast maybe coming and entering the picture and disrupting this whole deal. Is that still on the table? Or have we passed that at this point? No, I, it's unfortunate. I think when you look at the media landscape, there are

Starting point is 00:08:06 two companies that stand out as subscale and in a bad place. And that's NBCU, which is owned by Comcast and ViacomCBS. And the reason is, look, they're just subscale. If you look at their assets and the interest in them versus Netflix, Disney, and the merged HBO Discovery, I think they pale in comparison. I thought NBC should step in to this business and try to win either HBO or Discovery, you know, lob in a topping bid, try to win one of them so that they could be the scaled player. They didn't do that. And I think when you look two years forward, if you play this forward, I think HBO Discovery is going to be in such a good position because there's another merger to be done. They could buy either ViacomCBS or NBC, and they'll be buying a weak subscale player from a

Starting point is 00:08:49 position of strength. So I think they can get a really good deal. And they can also say, hey, NBC, merge with us or else we're going to go buy Biacom instead because Viacom and NBC, they just can't merge together because NBC and CBS together, that's a no-no. I mean, they could try it and they'd have to sell NBC or CBS. And that scenario, Warner Brother Discovery would be a great buyer, but they still basically be winning by buying that way. So I just think Comcast should have stepped in here. And I would not be surprised two years from now if there's another big merger, HBO Warner, Discovery, merging with either NBC or Viacom. So the stock today is around $29.

Starting point is 00:09:23 Bank of America analyst Jessica Reef Erlich just upgraded Discovery shares to a buy and raised her 12-month price target to 45. She had it originally at 34. Do you have a price target similar to that in mind? Yeah, look, I think I don't read tons of sell side, but I do think 45 seems reasonable. You know, at $45 per share, if I'm just doing my math rate, this would be $100 billion dollar market cap company. I think in 2023, they could do

Starting point is 00:09:51 $8.4 billion in free cash flow to equity. So that's fully taxed, after interest, everything, just free cash load to equity. So at $100 billion market cap, you'd be talking about 12 times free cash flow. That seems very reasonable to me, especially because I think earnings will be growing after

Starting point is 00:10:08 2023. In 2023, they won't have fully realized all of their synergies. So there'll be more synergies to come in 2024. They'll be leveraging more of their investments into content. You know, everyone's over investing in content right now to hit scale. So they'll be leveraging more of that. So it's not just 12 times price to free cash flow.

Starting point is 00:10:24 It's 12 times and I think growing pretty quickly and we'll probably be getting starting to share buyback thing. So yeah, I think 45 sounds reasonable. You know, I think three to five years out, it doesn't take a crazy amount to go right for you to be looking at the stock and saying, hey, this could be $60, $70, $80 in three to five years just because of those cash flow dynamics and everything that we've talked about. Fantastic. Well, thank you so much for that update. I'd like to now move on to your top five predictions for 2022. Prediction number one is that deep value finally outperforms. So let's talk about what's been happening with deep value stocks and why they continue to be so depressed and maybe talk to us about which sections you're seeing with the most promise.

Starting point is 00:11:08 Yeah. So on the blog, you know, just at the start of the year, I do a predictions thing. This year I had five predictions for 2022. And number one was that value outperforms. But I think it's really easy to say value outperforms, but how do you define value, right? Like, is it low price earning stocks and everything? It's really hard to kind of like point back and say I won or I lost on that. So I took it a step further and said, look, there are two sectors that I'm seeing lots of interesting things. I'm seeing really low multiples, record results, aggressive share buybacks and insider buying. And those two places are cyclicals. So, you know, steel producers, oil and gas explorers, lumber, that type of stuff.

Starting point is 00:11:45 And the other area I'm seeing it is retail. And retailers spans the gamut, but the areas I was really think of is specialty retailers. So names like Abercrombie, Bedbath and Beyond, that type of thing. Or sporting goods retailers, which are the ones I'm really interested in. I think we'll talk about in a second. But things like Dick Sporting Goods, Academy Sports and Outdoors, Ithibit Sports and Sports and Warehouse. And again, all of them, they're trading for crazy low multiples, great balance sheet, gushing cash flow, buybacks inside of buying.

Starting point is 00:12:14 And I've just been looking at them saying, like, why is the market trading these so cheaply. What am I missing? What is the market missing? Yeah. So when people are stuck in their house, they're trying to pick up new hobbies or maybe going camping. They're finally buying things like for activities that they maybe weren't in the past. So there was this big surge. And the idea is that that will kind of taper off now that people are kind of getting back into the world. Is that correct? Yeah, that's exactly. Especially sportsmen warehouse, Academy, sports, and outdoors. There's a lot of outdoors activities. And people say, hey, did these guys, yeah, gun sales were going crazy in 2021. But maybe.

Starting point is 00:12:47 Maybe everyone who was going to buy a gun for the next three years has bought a gun already. So they're going to have this huge trial for the next couple of years. Or yes, people bought tons of Nike's from Foot Locker in 2021. But now they've got enough Nike's and maybe the purchases going forward look a lot weaker. So yeah, that's definitely the big concern. You said you want to circle back to Nike. Did we touch on that yet? Yeah.

Starting point is 00:13:06 So I think right now the market's concern, I can tell you, is they look at 2021 earnings and they say that is peak earnings. Earnings are going back to 2019 levels across the board. And I think that is painting it with too broad a brush for two reasons. Number one, on the outdoor side, if you are a person who, I'm just going to use a hypothetical consumer, if you are a person who lived in New York City, COVID struck, you took your family and you moved to the burbs or rural or something, and you picked up hunting, you picked up fishing, you picked up golfing, any of those three. You're not going to churn just because COVID had stopped.

Starting point is 00:13:38 Maybe you move back to city, maybe you don't. But if you took up golf, you probably invested in golf lessons, you bought clubs. I'm not saying everyone who took up golf hunting and fishing is going to stick going forward, but it's a habit. It's a habit and a hobby. Once you form that habit and hobby, a lot of these people are going to stay. So I think their customer base has expanded markedly. You talk about COVID and you've got these COVID winners who they were growing like this and

Starting point is 00:13:59 then COVID step changed them up. Yeah, they probably come back as COVID normalizes, but it's not back to the original baseline. It's a higher baseline. So across the board for the outdoors, I think they've got a lot of new customers. And then the other thing is, I think the competitive environment has really changed. It's changed in two ways. So Hibit, which again, they've got a lot of places and places that aren't quite as competitive.

Starting point is 00:14:17 And they say, hey, in a lot of our communities, within a 20-minute drive, there were two stores that sold kind of the type of goods we sold. Us and J.C. Penny. J.C. Penny went bankrupt during COVID. So now it's just us. So our competitive environment is much better because our competitors sold. And then the big overarching thing, that's just Hibbitt on one side. But I think that does apply a little bit to all of them. But the real change, I think, is Nike in 2018 or 2019, something long there.

Starting point is 00:14:41 they said, hey, we're focusing on our direct consumer business. We currently sell 2,000 of suppliers, customers, whatever. We're going to cut that down. We're only going to work with 40 of our key suppliers and everyone else is out. So the mom and pop store across the street might not have Nike anymore, but Dick's sporting goods still does. Big Five sporting goods, which is one of the companies talks about, I believe they got kicked out of the Nike program.

Starting point is 00:15:04 So, you know, when you compare their 2019 earnings, that's 2019 earnings with Nike. They don't have Nike anymore. I think I haven't studied Big. as much as I have the other companies, but those sales have to go somewhere. A lot of it goes to the Nike Direct. It also probably goes to Academy or Dix who still have the Nike stores. So I think the competitive environment is so much better because a lot of the competitors went bankrupt. And of the ones who are still there, a lot of them don't have Nike anymore. And that's huge. Nike's the most popular sporting brand. So I just think the competitive environment for these guys is a lot

Starting point is 00:15:33 better. Their customer relationship and their loyalty programs have grown leaps and bound. Their Omnichannel stuff is much, much better now than it was pre-pandemic. So I just think they're in a much better space where they're not going back to 2019 earnings. And by the way, you can also run the bath. What if they go back to 2019 earnings? You know, I'm looking at Academy. If we just said they go right back to 2019 earnings levels, treating it 12 times EBITDA and like 15 times unlevered free cash flow.

Starting point is 00:15:57 Is that crazy cheap for a retailer? No. But it's not like it's the most expensive thing in the world. And by the way, they've opened some stores up since 2019. So their earnings base, you should think, should think, should be a little bigger just because their stores have opened up. So I just think the market's so concerned about bad comps, but it's not kind of like reading through the complexities of the situation. So how are you playing this? Are you putting together a small basket of these sporting goods

Starting point is 00:16:20 stores? It sounds like you don't have a specific favorite out of the bunch. Yeah, I'm still really thinking it through. Each of them are different. Like Hibet Academy is really interesting because they're in the South. I think they're stores and I love their focus on outdoors. Sportsman Warehouse is really interesting because they just, just had a merger. We talked about HSR when we were talking about Discovery Warner Brothers. Sportsman Warehouse was going to get bought by Bass Pro Shop slash Cabellas. And the DOJ said, no, that's too much concentration. And a lot of rural towns, the only places that sell guns are a sportsman warehouse and a Cabela slash Bass Pro. If we let you merge, there's going to be rural towns that

Starting point is 00:16:57 there's only one gun salesperson there. So they blocked that merger. So I think there's been a lot of force selling at Sportsman Warehouse. And they got a big break fee from Cabellas as part of the the DOJ blocking that deal. So that's interesting. Hibbit, they run the AutoZone model where they just repurchase shares like crazy, very cheap, but it doesn't have that like kind of outdoor piece. One of the things I like about gun sales, I mean, leaving the politics aside, gun sales are very insulated from the Amazon risk. You know, Amazon doesn't sell guns or ammo. Walmart and Dix, actually, another interesting thing about comping to the 2019 environment. In 2019 and 2020, Dicks and Walmart, who were some of the largest sellers of guns and ammo in the nation,

Starting point is 00:17:33 they way pulled back on gun sales. Like Walmart, you can still go. go get guns, but the selection is really limited. You have to go ask for it. They've got ammo. But again, it's not like front and present. Whereas sportsman warehouse front and present, you go there, a huge gun selection and everything. And in 2019 is when they started pulling back.

Starting point is 00:17:50 And one of the things sports and warehouse said is, look, in 2019, Walmart was liquidating their ammo and gun sales. It was the worst environment for us forever. So if you're comping them to 2019 earnings, you're comping a really bad environment for them. So I like that academy and sportsmen still have that gun sales piece, which I think is a little bit uneconomically sensitive and, you know, it's very un-A-A-A-Azonable. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:22:15 That's Shopify.com slash WSB. All right. Back to the show. So you're predicting also that we might see some outperformance in, cyclical commodities. There seems to be this strange phenomenon happening where there's a lot of these types of companies throwing off cash and even exceeding their quarterly expectations, but the stocks aren't climbing. Talk to us especially about the commodities focus business and what's happening there. Yeah. So the one I specifically mentioned is U.S. Steel. And what happens is the classic thing

Starting point is 00:22:47 with cyclicals is everybody says, look, you don't buy them when the multiples are cheap because that's when they're at absolute peak earnings and things are really good for them. You buy them when the multiples are expensive because that's when they're at absolute trial earnings and things are probably going to turn around and the cycle is going to resume. Well, right now, you've got this weird thing where they've had really low multiples for about a year now. So everybody's been saying don't buy them with low multiples, wait for bad times and everything. But because they've had low multiples for a year and this economic boom, oil prices through the roof, steel prices through the roofs, lumber prices through the roofs, because it's lasted for so long, these guys are

Starting point is 00:23:23 minting an insane amount of money. You know, U.S. Steel, I think they made like, I don't have the numbers in front of them, but 30 or 40% of their enterprise value, they generated in cash last year. Like, it's just absolutely insane. So I've been looking at them and saying, okay, I know the old adage, but there's so much in cash coming onto their balance sheet. And, you know, every day that the environment doesn't fall off a cliff instantly is a lot more of their cash coming on the balance sheet. And similar to the retailers, insider buying, buying back shares like crazy. U.S. Steel, as we speak, I think it's trading around tangible book value right now. And that's for a company that right now is generating like 10% of their market cap in cash every quarter.

Starting point is 00:24:00 That's a really strange combination. So I just think those are interests. Oil is a popular one. Oil has gone from 60 to 90 over the past six months. Have the oil stocks moved? Yeah, a little bit. But they've probably moved at levels that would imply oil went from like 60 to 65. So again, right now they're just minning cash flow.

Starting point is 00:24:17 And it's just very strange to see oil, steel, lumber, aside from the fact they're all commodities and maybe a little economically sensitive, they don't have a lot to do with each other. And all of them have the same dynamics where these companies just aren't getting any credit for how much cash flow they're producing right now. All right. So let's move on to prediction number two, which is cable stocks. Another beaten down industry. What are some of the more compelling opportunities you're seeing with cable stocks here?

Starting point is 00:24:43 Yeah. So I've been a long time cable bowl. Right now, all the cable stocks have pulled back quite a bit over the past six months. Charter, which probably is the industry Bellwether, has gone from over 800 per share to about $600 per share. That's about 25% drawdown. That's a big move for any stock, but for a cable company that should be like pretty economically resilient, you know, low beta, that's a really big move. People are really concerned fixed wireless competition is coming.

Starting point is 00:25:09 T-Mobile was actually the fastest growing broadband company in America in Q4 with their fixed wireless business. They're worried about five or a home overbuilded. Every legacy telecom company, AT&T Verizon, Frontier, Lumen, all of these guys are trying to upgrade their legacy copper DSL to fiber. So people see lots of competition on the horizon for cable and they've been selling down the stocks. I've actually been doing it a series with Tegis with expert calls and diving into the cable. But my base case has been, you know, these concerns have been around for years and years and years.

Starting point is 00:25:42 And they haven't really impacted the cable companies. And my base case continues to be the cable companies are going to continue. continue to perform just fine going forward. They are gushing free cash flow. They are buying back shares like crazy. They are very well run. They are growing. And I think this year, the combination of that continued growth in cash flow and the share buybacks is just going to be too powerful of a story for the equity market to continue to ignore. And then the other interesting aspect is we've seen transactions in the space. So there's a publicly trader traded overbuilder, which an overbuilder is the company who comes in and there's already a cable system there. And they say, let's build a second

Starting point is 00:26:16 cable system. And that's a very poor business because it's not a monopoly. At best, a duopoly. And if there's a fibered home payer, it's a tryop. But it's a poor business, but it makes cash. And once the assets are there, the assets are there. Wow sold a bunch of assets for 11 times EBDA over the summer. And right now, Charter, Altis, Comcast, the implied prices of their business is lower than 11 times EBDA. So that's a worse business, a worse asset and the assets that Wow sold that went for a premium multiple. And we've seen kind of normal cable assets tend to trade for 15 to 17 times EBDA. So we don't have to do the math here, but 15 to 17 times EBDA on these stocks, it'd be a hefty premium from the current levels.

Starting point is 00:26:55 And Charter and Comcast in particular are much, much better assets than a lot of the even normal cable assets that are selling for 15 to 70 times EBDA. Yeah, I was just going to ask about the overbuilding. I'm glad you touched on that. Is there anything we should hit more on the cable stocks? Yeah, I think, you know, the only other thing with cable is people are really scared about the looming competition. fix wireless, fibers of the home. And again, that's been there for years and the cable stocks have done well. And I just did a series on discussing all the risk and people can go look at that if

Starting point is 00:27:24 they want to really dive in. We talked to the former head of the FCC, telecom industry experts and everything to frame that. But I do think people really dismiss the wireless opportunity that these cable players have. I think they've got a great opportunity in wireless. Charter and Comcasts are growing their wireless business basically as fast as Verizon. And, you know, Verizon covers the whole nation. And Charter and Comcasts each only cover a third of the nation. So for them to grow that fast says that there's a real value there. And you can see why. Right now, you could go sign up for an unlimited plan with Charter if you had broadband with them already. Adding a mobile line with Unlimited would cost about $20 per month. So broadband's about $50 per month. A wireless line from them is $20 per month.

Starting point is 00:28:04 You probably pay about $70 per month per line for your mobile service right now. So they could save huge amounts of money if you get broadband and wireless from them. So that's why I think it's so powerful. I think they're going to take huge, huge share in wireless going forward. And as they do that, Comcast's wireless business just hit profitability in 2021. Comcast will in 2022. So right now, when I mentioned earnings multiple, they're a drag because they're investing in them. And as you grow a mobile business, it shows losses. But once it kind of hits stability, it'll be profitable.

Starting point is 00:28:33 Once they hit profitability, I think people are going to be really surprised by how profitable these are, how quickly they're growing, the opportunity there. And I think when you add that in, it just the cable socks are even cheaper than they appear on the surface. Yeah, again, Charter especially looking just really interesting. Market caps at $105 billion today. Enterprise values at $196 billion. And just kind of an interesting observation there. Let's go on to your third prediction, which is that the COVID winners will win again.

Starting point is 00:28:59 I want to focus especially maybe on Peloton because that's become a bit of a meme as of late and almost this poster child for a greed and fear index. What is the bull case for Peloton moving forward? Yeah. So I guess I should caveat by there's like, if you talk to someone and they're like, oh, I love this stock. I love this stock. And you ask, hey, do you have any money? They're like, no, I don't own it. That's one thing. But if you talk to them, they're like, yeah, it's 20% of my portfolio, that's another. The first two are ideas and themes I've done a lot of work on I really believe in and we're invested in pretty significantly. The next three things we're going to talk about are things that I call it mouth betting where I've got a belief, but maybe it's not like so

Starting point is 00:29:37 firm that I'm ready to put money in there. So I'll just caveat with that. But Peloton, I look at at this company, it's gone from $20 pre-COVID to $150 at the height of COVID winners winning to $30 or $35 today. I look at it and say, hey, this is a business. It's not like all the subs they gain during the pandemic just go away magically. Like people got Peloton's into their home. They paid for them. They spent thousands of dollars on them. They form a relationship. You know, Peloton, people who love it, it becomes like a cult with them. They're using it every day. So I look at all that. I look at a company that trades, you know, if you just look at the subscription revenue line, the consumers, they're growing. I look at what it trades for. It trades, I think last I checked

Starting point is 00:30:16 about eight or nine times subscription revenue, which is very cheap for a subscription company. I think they've got all sorts of optionality. And I think the market's got a little too pessimistic on Peloton, Stitch Fix, Zoom, companies like this where their consumers love them. They were big COVID beneficiaries. And there's lots of tangential opportunities that they might be able to capture because their management teams are hungry and because consumer loves them. You know, like Peloton, the classic is, At some point, Peloton is going to have a giant apparel business. And why couldn't Peloton get into, I don't know, restoration hardware got into doing hotels and stuff? Why couldn't Peloton started opening Peloton branded jams, Peloton branded hotels, Peloton-branded lifestyle, stuff?

Starting point is 00:30:55 Like, I'm just spitballing, but I'm just saying these brands that consumers love have so much optionality. And when I look at the stock price and how depressed the market is on them, it doesn't seem like the market is recognizing that. And by the way, they're also probably pretty strategic. You know, you heard the rumors that Apple, Nike, Amazon, whoever might be looking at Peloton. Like, there's nothing quite as strategic as somebody who's bought $2,000 to put a product into their house that they're going to use five times a week or something. Yeah, the acquisition thing is really interesting. You saw Lulu Lemon purchase Mirror, for example, for half a billion dollars. It makes sense that some of these companies might be taking a look.

Starting point is 00:31:31 I'm not so sure I buy it yet, the speculation. Do you see much merit in, say, someone like Amazon actually purchasing Peloton instead of, you know, developing their own? Yeah. I think it's really tough to go and build your own thing. You know, people like to say, oh, a Peloton is just a bike with an iPad on it. If you've ever used a Peloton and then use like any competing spin bike, it's night and day. You know, like people used to say Tesla, oh, why can't the ICE companies do this and stuff? Well, have you driven a Tesla?

Starting point is 00:32:01 Like, it's really nice that people who do it love it. I'm not saying the stock's under overvalued here, but these things where it just works and it works like magic are really hard to recreate. And there's also a little bit of a land share grab. I have a Peloton in my house now. If Amazon rolls out Amazon Prime bike, even if it's the same or better than Peloton, I'm not going to get rid of my Peloton. Now, if they gave it to me for free with my Prime membership, maybe. But I also have like, I have kind of a relationship with the instructors I love and stuff. Those things are very sticky. So I do think when you look at these things, like if you're a company and you look at Peloton strategically and say, okay, millions and millions of members who use this

Starting point is 00:32:36 frequently, we get all sorts of data on them. We have a product that they're using frequently in their house. Like, why did Amazon want Alexa and Echo in these things? Because having something in your house that you're frequently using is the best form of building customer habit. Having a Peloton in somebody's house, there's lots of interesting ways you could use that as optionality. You know, you can have Amazon Prime shows on there. You can do product integrations. There's just like lots of endless opportunities there for them to dream big and things of ways to integrate it. it into the prime membership as an extra benefit to get more people in prime. There's just lots of things there that they could do.

Starting point is 00:33:07 And by the way, again, 8 or 10x revenue for subscription revenue for a very sticky service. Like, that's probably cheap in and of its own rate. Talk to us about why the stock fell out of bed. It was trading up around 80, 87, and then it woke up one day and it was in the 50s, right? So what exactly happened? Did they miss some earnings? They've obviously lowered their forecast a little bit. But what happened here with this huge, almost 60% drop?

Starting point is 00:33:30 So you and I are talking on, what is it, it's like Wednesday, February 8th or 9th. We just found out yesterday their CEO is stepping down. He's going to become the exact chairman. They hired a new CEO. I think what happened is mismanagement. In March 2020, demand for Peloton went through the roof. And for the rest of 2020, Peloton was trying to catch up. I got my bike at the end of 2020.

Starting point is 00:33:50 And it was like an eight week wait time. They were trying to catch up with demand far out stripping supply. They bought a bike manufacturer. They were ramping, ramping, ramping, ramping, hiring like crazy everything. right? And then, you know, around the middle of 2021, demand starts to normalize and they just bought all of this supply. So now supply is, they've probably over-invested in supply versus demand. And along the same time, they're facing a lot of other issues. They have the Peloton treadmill recall, which I think was handled abysmally. In Q3, they come out and the stocks at 70 and they

Starting point is 00:34:22 release earnings, which are a huge disappointment. They're pulling down guidance to everything. And somebody says, hey, like you guys, you know, you've got a lot of fixed cost. You've got a lot of investments. Do you guys need capital? And the CFO, if I remember said, nope, we don't need capital. Three weeks later, they go and raise equity, right? So it just all speaks to a company that was mismanaged. I know John Foley, who was the CEO, he built this business after tons and tons of venture capitalists, turned him down, said it was a silly idea. So he had some vision, but I think he was mismanaging it towards the end. They were kind of running from one fire to another. I think they burnt a lot of their credibility. And look, it has not been a great time in general for like,

Starting point is 00:34:57 kind of the COVID winter stock. So I think that all explains how we went from $80 to $30, $35, wherever we are right now. Okay, let's move on to prediction number four, the law of large numbers. What high flyers do you see falling and what high flyers now seem maybe reasonably valued here? Yeah. So again, this is not one that I've got like insane conviction in, but I just look at how Apple, Amazon, a few others are up like 30% every year, it seems like. And, And at some point, the larger law numbers has to catch up to them, right? Like, Apple's market cap can't be 15x the entire global GDP or something forever. And I just kind of thought this was the year because you look at them in A, a lot of them

Starting point is 00:35:40 don't look cheap anymore. You know, five years ago, Apple's P was like 10 or 12 times. And today it's like 30 or 40 times. I haven't looked post the numbers. But the multiples have expanded quite a lot. There is a lot of interesting competition and regulation that's coming. You know, we talked regulation and discovery, Warner Brothers, but. But regulators do not love Amazon and Apple size and everything.

Starting point is 00:36:00 And there's always things with break them up and everything. And in the short term, that might not matter. But in the long term, like, that's a headache. Look at what happened with Microsoft in the early 2000. Management's distracted. You can't do everything. It's really tough having that regulatory scrutiny. So multiples are higher.

Starting point is 00:36:15 I think regulators are coming. I think there's a lot of looming competition in some of their businesses. And I think you just put it all together. And I'm not saying that these things are going to go down 75% overnight. But I do think they can't keep delivering. market beating returns forever. And combine all that with rising interest rates, which, you know, 40 times PE on some of the largest companies in the world, I think part of that is the fact they can borrow money at 2% and buy their shares back. If interest rates actually did rise, I think you get

Starting point is 00:36:41 some P compression from that as well. Combine all those. And I think you've got the market for some stocks that kind of stall out over the next couple years. And then another company I mentioned was Tesla, which, you know, has just an astronomical valuation. And people have been saying competition is coming for Tesla for years and years and years. But I do think at this point, You are finally seeing, you know, you've got the electric F-150 and all of these things rolling out. I think you're finally seeing progress on the competition side. Again, not say Tesla's going to go down 75% or something. It was up like 12x from 2020 to end to 2021.

Starting point is 00:37:11 It just can't keep growing like that. I'm glad you brought up Microsoft because it seems like they've kind of broken through that regulation scrutiny, you mentioned, because, you know, they just announced a $69 billion acquisition of Activision Blizzard. And I think back in the 90s to your point, something like almost $70 billion. acquisition would trigger a lot of concerns from the DOJ, etc. But they seem to be moving without that kind of friction anymore. What's your take on that?

Starting point is 00:37:36 Well, I think you're right. You know, Microsoft, I remember a great tweet from a couple years ago that was like the bull case for Microsoft is they're the only mega cap tech company that can do M&A anymore. And when the government was going to force TikTok to divest, Microsoft was the only company that could buy them, right? So I do think that's true. But to your point on regulation, Microsoft, it's buying Activision. If you look at the spread, I think they're buying them for like 90 or 93 in cash or something.

Starting point is 00:38:01 As we speak, Activision is below, it's at 81. So it's coming a little bit. But that's still a big, big spread for a cash merger with a, you know, the most credible buyer in the world. Microsoft's going to take the cash off their balance sheets to pay for it. The market is saying there's a good chance that regulators are going to step in and try to block Microsoft Activision. So even Microsoft's running into problems with that. But yeah, as you said, they're buying nuance. They're doing lots of MNA.

Starting point is 00:38:26 they're the only person out there who it seems can acquire. I thought somebody put another funny thing out there. Facebook tried to acquire Jiffy or whatever, which makes JIFs, and they got blocks. And that was like a $200 million acquisition, but they can't buy Jiffy, but Microsoft can buy $70 billion Activision Blizzard. Like, is that serious regulation? It's just kind of hard to believe. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:42:10 All right. So moving on to prediction number five around SPACs. Last time you were on the show, you gave this very informative introduction to SPACs, but you're now writing that there's been this SPAC bubble that has burst. What's your outlook on SPACs nowadays? Yeah, so I think you and I talked in June 2021, which the height of the SPAC bubble was February and March of 2021. By June, it was very cold.

Starting point is 00:42:32 And since then, I'd say it's gotten even colder. But you know, what I've always loved about SPACs is if you're buy a pre-deal SPAC. So you buy a SPAC, most SPACs have about $10 per share of trust. You buy a pre-deal SPAC, they announce a deal, and you just hope, hey, they announce a deal on the stock market goes parabolic for the deal. And the best example of that would be DWAC. That's the SPAC that's merging with Trump's Fledgling social media network. And the day before they announced that deal, the stock was trading at or below trust. So it was trading around $10 per share. And as you and I are speaking, is trading at $84 per share. Now, unfortunately, I wasn't involved in that one.

Starting point is 00:43:07 I would have loved to be involved with that one. But that's obviously an extreme case, but that can happen. You buy a SPAC. You buy it below trust. You hope they announce a buzzy deal that the market loves and it goes crazy. You know, Rumble, another social media networks coming to public through a SPAC. And every time they tweet about Joe Rogan, the stock price goes up another 10% or something. So you just hope you get lucky.

Starting point is 00:43:26 And that happens to one of the SPATs. And if it does, you're going to make an outstanding return. And if it doesn't happen, well, you bought the SPAC. You bought it below trust. And I can give you some examples. And it'll liquidate in six or nine months. So you'll make one or one and a half percent of your money because you buy it at 985 and a liquidate for 10. So you make 1.5% of your money in nine months.

Starting point is 00:43:44 And is that the best return in the world? No. But it's a hell of a lot better than what you would get if you just parked it in like a cash account or something. And you're getting a better return than cash with cash like risk with the added optionality of if you bought it and the stock went absolutely bonkers. You know, it's interesting. The last I checked, there was around 500 or so SPACs. And there's still around $900 billion private companies, so 900 unicorns. to choose from that you think would all want to go public. So it's not like there's not a lot of

Starting point is 00:44:12 opportunity. Is it that the private sector is saying, hey, we're good right now? You know, they don't necessarily want to go. Where's a stallout coming from? So a SPAC is you go and raise the we study billionaire SPAC, right? And you get $200 million and you throw it in a bank account. And then what's going to happen is you go try to find a company to merge with. And you'll come and present it to your shareholders and say, look how great this deal is, approve our merger, give us our $200 million. and this will become a publicly treated company. But the reason I, as more like a kind of trader, like Spax, is you get the free look at it. You come to me with a deal.

Starting point is 00:44:47 If I love it, I can keep it. If I don't, I redeem it and I get my money back. And the reason Unicorns aren't going public through Spax right now is right now, everyone knows when a SPAC finishes this deal, the stock's going straight down. So everyone is redeeming. So you'll see actually Treb, T-R-E-B merge with a company. I'm forgetting what the ticker became. I'm going to look it up as you and I are talking.

Starting point is 00:45:07 It became system one, SST. And that was like a $500 million spec. And I think 99% of shares redeemed. So if it wasn't for outside financing, we can talk about them in a second. When they merged, they were like, great, we're getting three, four, five hundred million dollars, whatever was in trust. When they went to actually collect on the trust, there was only like three or four million dollars left in it. And what company wants to go through all the headaches of a merger, all the expenses of a merger and find out at the end that there was only $4 million. It costs more to do the merger than they're actually getting in some of these cases, right?

Starting point is 00:45:37 So nobody wants to go through that. So right now, every private company is hanging up the phone of a SPAC sponsor calls them because they're saying, I'm going to go through all this headache. And at the end of the day, there's not going to be anything left in trust. And my stock's going to trade like absolutely bonkers. They're just hanging up the phone on them. We can talk about the exceptions to those rules if you want. But people will say, oh, these SPACs, 200 million in trust.

Starting point is 00:45:56 There's lots of targets. No credible target wants to take your money because they know there's no money once push comes the shelf. Now, I know Rangely was big on the planet SPAC that has essentially busted from the start. Is this what we saw there with redemptions? Is that what's happened in that case as well? Yeah, so Planet, so that's more my partner, Chris. Chris has a really good relationship with Niclo, and Planet is a really interesting company. I can't claim to be a full expert there. I'd have to defer to him. But I think what happened there is, look, so Planet is different because they had a super credible sponsor. I believe he actually has done, his facts have done the best of anyone.

Starting point is 00:46:31 Super credible sponsor, super interesting company. We should talk about the financing a second because I think financing is a real key spec going forward. But what happened is that merger completed, and I think the stock was at 11 and people were really excited and it completed in like September or October. And then since it completed, every growth company in the world has fallen like 50%. And planet, I think has kind of been falling along with them. I don't think there's, that is, again, it's a unique case where it's a real company with real sponsors. I just think if you were a 30x revenue company over the summer, you're a 15x revenue company today. And I think they just got caught up in that trade. Let's talk about the financing issue you brought up with SPACs.

Starting point is 00:47:06 What's happening there? So I mentioned how if you're a SPAC and you've got 200 million in trust, you go merge with someone and at the end of the day, you're going to deliver 2 to 4 million. I think the only way SPACs are getting deals done going forward. And actually, there was a SPAC that called off a deal today I'll talk about in a second, but the only way SPACs are getting deals done right now is if they've got a sponsor who's going to commit a serious, serious check to the company. So we talked about Pershing Square Tontine last time, which unfortunately, that deal was

Starting point is 00:47:32 blocked by the SEC, but they've always had an advantage where Bill Ackman's fund is going to write a billion dollar check into whatever deal they get in now. So if you go public through Persian Square Tontane, even if everyone redeems, Bill Ackman has written a billion dollar check, there is a pot of gold at the end of that rainbow. I just mentioned Tread, which merged with System 1. 99% of shareholders redeemed, but they were backed by Kenei Holdings, which is Bill Foley's kind of like quasi-hedge fund merchant bank. And Kenei backstops a ton of these redemptions. So if it wasn't for that backstop, the company would have only delivered five million in cash on the back end, but because of the backstop, they still got hundreds of millions of dollars. So I think for a lot of

Starting point is 00:48:09 these companies, the trick is having a sponsor who's going to kind of put a check and put his money where his mouth is. And MBAC, which had a merger that got caught off this morning. It got called off because too many shares redeemed. And I believe in the press release, they said, hey, we're going to go try and find another spec deal because if your deal fails, you still have a little bit of time left to go try and find another spec deal. And they even said, we're going to try and find another deal. and in our next deal, we're going to have so much committed financing that even if everyone redeems, we'll be able to get the thing going through. So I think for SPACs to get deals done now, committed financing is the name of the game.

Starting point is 00:48:40 But a lot of the SPAC sponsors who raise money at the height of the boom, they just don't have access to that much committed financing. Like, not a lot of people can write $200 million checks to cover redemptions. All right. So are we talking now that SPACs are totally dead in the water or are you still seeing some interesting opportunities in the SPAC world? Yeah. So I think there are two really interesting places for SPACs right now. The first is, you know, I mentioned go buy a spec below trust and you're going to get cash or above cash like returns with that added optionality where if they announced the Trump DWAC merger, the stock could go parabolic. A couple I like on those lines. So IPOD and IPOF, which are both some of Chmoth specs. I'm sure everybody knows who Chimath is. They trade as we talk around 990 per share. Trust is 10. So they trade for about a 1% discount. And they've got to a lot.

Starting point is 00:49:28 October to announce a deal. So if they don't announce a deal in the next October is what, that's seven or eight months from now, you're going to make 1% over seven or eight months. Not the best return to the world. Everyone should consult financial advice or not financial advice, but unless you think like JPMorgan is committing fraud on these trust accounts or something, you're going to make that 1%. So that's your downside. And your upside is look at every SPAC that Shemoth has launched. Most of them go parabolic once he announced because he knows how to find Buzzy targets. You know, the IPOF has been rumored to merge with Discord, which I think would go crazy if you did it. There are plenty of other Buzzy Spacks out there.

Starting point is 00:50:00 What if you're invested in the SPAC that merges with Starlink, if that came public or something or SpaceX or something. So I think you get lots of optionality. So I POD, IPOF, I could see something Buzzy happening there. SoftBank has a SPAC, SVFA. That trades 2% below trust. It has until January to find a deal. So a little bit less than a year for a 2% return. if they don't announce a buzzy deal and who knows if they announce a buzzy deal.

Starting point is 00:50:24 And then CONX is Charlie Ergen of Dish Network, Dish TV fame. That's his spec. It trades about 2% below trust and that's got till October. So again, seven or eight months, 2% return if he doesn't announce a deal. If he does announce a good deal and Charlie Ergen is famous, famous for being a good negotiator, good at M&A and all that. If he announces a super buzzy deal, who knows what happens to the stock. So I like those.

Starting point is 00:50:50 And then on the other side, I don't have a particular example, but I've been looking a lot at DSPAC. So these are companies that have already gone public through a merger. And the beta for companies that went public through a SPAC right now is one. They all just trade straight down together. And I think you can find lots of interesting examples. So I recently wrote up Excel Fleet was one of the Buzzy electric vehicle spas. That trades for $2 per share right now. They've got about $2.40 per share in cash on their balance sheet.

Starting point is 00:51:14 So that's trading below cash. There's a lot of other spas that trade for very, very low multiple. I think those could be interesting. They're screaming for an activist to come in there and kind of liquidate or sell the company, right? And then the other area, so Iron Source IS is an interesting one. It's a real company. They came public through a SPAC. They're growing like crazy.

Starting point is 00:51:34 This year they're going to grow 60% with 35% EBODABABs. It trades for about 10x forward sales. So it's not the cheapest thing in the world. But it is a real growth company backed by it was went public through Toma Bravo spec, which Toma Bravo is the best private equity software investor in the world. They put in like $500 million into the SPAC at deal price at $10 per share to get the deal done. So they wrote a half billion dollar check at $10. Real company, real growthy.

Starting point is 00:52:00 It's trading at $7 per share right now. Again, I'm not an expert in the space, but that type of thing where you've got a real sponsor who put tons of money into it, knows the space well, and the stock's trading well below it. I think that's a great place to look for opportunity. Well, this is why I love talking with you, Andrew, because you're just full of these amazing ideas. And you've given us a lot of homework. I'm going to go study all these things and check them out. For those who don't know, you write an amazing blog with a lot of these ideas featured

Starting point is 00:52:24 there. So why don't you go ahead and give people a handoff where they can read about this stuff, follow along with what you're up to and any other resources you want to share. So my blog is yet another value blog. Dot substack.com. And we've mentioned a ton of the stuff I've done on there. I had to write up on Excel Fleet. And then if I can do a competitor, I also have yet another value podcast.

Starting point is 00:52:43 I have a lot of the guys that you've had on here come on and talk about kind of their best and most convicted idea. It's an hour, just deep dive into a stock idea. And, you know, it's not for everyone, but for people who love stock ideas. It's good stuff. Thank you so much, Andrew. Let's check back in, especially see how this merger goes with Discovery and some of these other SPAC opportunities. Super interesting. I would love to catch up with you sometime soon. Thanks again. Hey, I'd love to come back on. Thanks so much, Trey. All right, everybody, that's all we had for you this time. If you're loving the show, please go ahead and follow us on your favorite podcast app. You can always reach out to us. You can find me at Trey Lockerby on Twitter. And if you want to dig into some of these ideas, there's really no better place to start than the TIP finance tool. Simply Google TIP finance. It should pop right up and go have fun. With that, we will see you again next time.

Starting point is 00:53:29 Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to the Investors' Podcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP425: Top 5 predictions for 2022 w/ Andrew Walker

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