We Study Billionaires - The Investor’s Podcast Network - TIP758: Current Market Conditions & Investment Opportunities w/ Derek Pilecki

Episode Date: October 3, 2025

On today’s episode, Clay is joined by Derek Pilecki to discuss the current market conditions and the investment opportunities he’s finding in today’s chaotic environment. Derek is a managing member and portfolio manager at Gator Capital Management, which manages Financials sector long/short portfolios for private partnerships and mutual funds. Since its inception in July 2008, Gator Capital has compounded capital at 21.8% per annum versus 11.9% for the S&P 500 over the same time period. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 04:33 - Derek’s process of looking for a potential 26% IRR on new investments. 07:43 - How value investing has evolved over the tenure of running his fund. 12:23 - The moves he made during the tariff tantrum earlier this year. 15:14 - How Buffett has influenced him as an investor. 19:51 - The opportunities he’s finding in the market today. 23:00 - How he expects the Fed’s interest rate cuts to impact the economy, the banking sector, and the real estate market. 45:25 - What Derek saw in Robinhood’s stock before it increased by over 10x. 58:24 - Derek’s investment thesis in WEX Inc. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Derek’s fund: Gator Capital. Derek’s letters. Related Episode: TIP669: Quietly Compounding at 20%+ Per Year w/ Derek Pilecki. Follow Derek on X. Follow Clay on ⁠LinkedIn⁠ & ⁠X⁠. Related ⁠books⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses in just a few minutes each week through our newsletter, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠We Study Billionaires Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X (Twitter)⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TikTok⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Browse through all our episodes (complete with transcripts) ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠here⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠sponsors⁠⁠: HardBlock Human Rights Foundation Masterworks Linkedin Talent Solutions Simple Mining Plus500 Netsuite Fundrise Support our show by becoming a premium member! ⁠https://theinvestorspodcastnetwork.supportingcast.fm⁠ Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. On today's episode, we welcome back Derek Pellecki. Derek is our favorite guest to discuss all things financials, as he's the portfolio manager at Gator Capital Management. He launched Gator Capital weeks before the collapse of Lehman Brothers in 2008, and he has one of the best investment track records I've ever come across. Since the fund's inception in July of 2008, Gator Capital has compounded at 21.8% per year versus just 11.9% for the S&P 500 over that same time period.

During this conversation, we discussed Derek's process of looking for a potential 26% internal rate of return on new investments in the fund, the moves he made during the tariff tantrum earlier this year, how Warren Buffett influenced his own investment process, the opportunities he's finding in today's market, how he expects the Fed's interest rate cuts to impact the economy, the banking sector, and the real estate market, what Derek saw in Robin Hood stock in November of 2023, before it increased by over 13 times, Derek's investment thesis in Wex, Inc, and so much more. Also, Derek will be joining our Mastermind community for a Q&A a few weeks after this episode goes live. If you're interested in sitting in on that

discussion, you can join the wait list for the group using the link in the description. It's always a treat to bring Derek on the show, as he knows the financial sector as well as anyone. So with that, I hope you enjoy today's discussion with Derek Pellecky. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Playfink. Welcome to the Investors podcast. I'm your host, Clay Fink, and today I am happy to welcome back.

Derek, welcome back to the show. Hey, Clay, good to see you. Thanks for having me back. So I've really been looking forward to this conversation, as I definitely enjoyed our last discussion about a year ago, where you shared your humble beginnings of launching a fund all the way back in 2008, just weeks before the collapse of Lehman Brothers. Since we last spoke, you rounded out 2024 with a 41% return net of fees, and through July of this year, you were up another 21%.

And so it's looking like you're well positioned to have three years in a row of really strong performance. And that can even tend to be bad news for all of us because usually after a few good years, you tend to see a down year across the entire market. So before we dive into my set of questions here, I'd like to give you a chance just to comment on your recent performance and some of the things that you're seeing in the markets today. I think the story over the last three years is I navigated Silicon Valley and First Republic's failures pretty well in 2020. It was underway regional banks. After they failed, I drastically increased my weightings in regional banks,

and just doing a lot of work on where the deposit franchise is intact across the country. And, you know, the valuations got extremely cheap. So that was one big driver of returns over the last three years. I worry about the same things that you do, like three years of strong returns. You know, is it over or, you know, do we have some reversion to the mean? And when I look at the overall market, I mean, it looks expensive to me, like generally, just as an observer. And even within the financial sector,

I look at the very large cap stocks, J.P. Morgan, Progressive, Visa, they look expensive to me. But, you know, then why I look at a lot of small mid-cap names, they're single-digit PE still. And so how does that resolve itself? Like, can these small stocks do well when the big stocks underperform

and to get reversion of the mean? Or will everything go down and the big-cap stocks will just go down more than the small stocks? I don't really have a good answer. I don't know how. It seems like we're getting the effect of so many passive flows into the spy and all that money is going into the S&P 500 stocks.

The you know, the Russell's lagged for years. All these mid-cap stocks don't really have sponsorship and have cheap valuations. I don't know how that gets resolved, but I think over time I've just gotten uncomfortable. If I own cheap stocks, good things happen. And so I'm not looking at my portfolio and saying, oh, I wish I could sell this stock. I wish I could sell that stock. I still have an ideal list of things to buy of cheap stocks that look interesting. So I don't know exactly how it's going to play out, but I'm not running for the hills,

but large-cap stocks look rich to me. Yeah, that's definitely well said, and it's played out well for you to definitely stay long in the market and not try and hold too much cash and whatnot. And you've previously mentioned that you'd like to find stocks that have a clear path doubling over the next three years. That would equate to essentially a 26% return compounded, certainly a high bar. How about you share an example or two of how this ends up working out in practice? Because I know you're fairly agnostic to buying, say, quote, value stocks or quote, gross stocks.

I even think back to my days of playing sports where my coach would tell me to just take what the defense gives you. You're not trying to be married to a certain way of playing or a certain way of investing. You're simply taking whatever the market is willing to give you. Yeah, so, I mean, that rule of thumb of a double in three years, sometimes it works out faster than you expect, and sometimes it doesn't work out at all. So I guess I want to give you both good and bad examples of that. And so I own Carlisle,

Carlyle, private equity manager, probably underperformed its peers since it's been a public company. They botched the CEO transition from the founders to the next generation five or six years ago. They did a second attempt to hire the former CFO of Goldman, Harvey Schwartz to come in. And so, like, at the end of 22, it had really underperformed KKR and Blackstone

and was trading for 10 times fee-related earnings. You know, just exiting out the carry, just what do they earn on their management fees? And, you know, I think Blackstone was like 22 or 23 times at the time, and KKR was at 17 times. At the end of the year, I just like to look at different sectors of like, what stocks have lagged the sector and is there a reason?

And I noticed at the end of 22, Carlisle had lagged its peers. and it was at 10 times earnings. And we had a CEO change as a catalyst. You know, if people look for catalyst, I think CEO changes for underperforming stocks are generally good catalyst or can be good catalyst. And so I thought there were some easy things

that Schwartz could come in to do, especially since I thought Carlisle's expense structure was too high. So, you know, I bought the stock and I think I paid $29. And here it's trading, you know, a little less than three years later, it's 65. So it's been a double in three years, I guess. And an example of something that hasn't worked or maybe it hasn't worked yet because we're not to three years is that, you know, I bought PayPal 18 months ago.

You know, cheap value stock, a lot of value managers own it. Valuations come way in. Again, CEO changes catalyst. Alex Chris came from into it. He ran the QuickBooks franchise. I thought he could refocus the spending internally to focus on three core products. And it started to work. They had a hiccup in Q4 reporting Q4 earnings this year.

So the stock's unchanged since I bought it. maybe it's up a tick, but it's certainly not a double. So sometimes it works, sometimes it doesn't. And then a name like Robin Hood, which we'll talk about a little bit, like that happened a lot quicker and in a greater size. So like that rule prevents me from trying to be too cute and buy names that I think I'm going to make 20% on. You know, it's just like you only have so much capital.

I really want to focus on the ideas where you can make substantial money. And you can tie up a lot of capital trying to earn 20%. And so I just try to avoid those ideas. And over the time period that you've managed your fund, many would say that value investors generally have not done too well. You know, buying cheap stocks just has not worked the way it has in the past. And I have this theory that value investing has always worked, but the key of value investing is buying companies that are actually undervalued instead of focusing on the value factor of low PE, low price to book and whatnot. So how about you talk a little bit about how

you think value investing has evolved in your view and how you've been able to successfully apply the fundamental principles of value investing in an era where it seems that just so few have been able to do it effectively. Yeah, that's a great question. I've been really shocked by the performance of growth versus value over the last few years. And you know the Mag 7 are such good cash flow businesses and have such big moats, like they've really driven the growth stocks and to the detriment of value stocks, right? And so the quality of the businesses have been just so phenomenal. I mean, I think some value investors forget or, you know, sometimes don't apply momentum as a factor that drives returns. So like, really the ideal thing is value plus momentum drives returns.

You have to have some kind of, the stock has to be moving. And so like, I think the classic value investor air is buy too early, sell too early, right? Like something looks cheap. We can all pull up a chart and see, oh, that chart looks ugly, but value investors like, oh, I don't care about technical analysis. It's cheap. I'm going to buy it. Whereas I'm more just aware of technicals. It was a thing in the market. Like, I don't buy charts. Like, I look at charts. We all look at charts. I think the most dangerous is a fundamental analyst who claims they don't look at charts. And then first thing somebody does when they mentioned tickers, they pull up a chart. Like, we all do it, right? And so, like, by default, you're doing technical analysis when you pull up the chart.

I learned this from one of the PMs. Early in my career, I worked for Clover Capital and Mike Jones, who ran Clover Capital. They had a great fundamental analysis. And then when growth and value went different directions in the late 90s, they re-evaluated their investment process. And they said, yeah, we're classic value investors. We buy too early and we sell too early. If we like a stock, We're going to wait until we see some kind of base in the chart before we start buying the position. And on the exits, we're not going to just sell when things hit our price target. We're going to wait. We might sell a little bit at the price target, but then if the chart looks good, we're going to let momentum run.

And maybe the market will walk out way beyond our expectations. And so we're just not going to cut off our returns. And so that goes back like it's the same thing of Peter Lynch of you don't want to cut your flowers and water your weeds. It's the, you know, all those sayings kind of get to the same thing. You have to let the winners run. And so I think that's something that I fly pretty well. And, you know, I do it from risk management standpoint. Like if I buy a stock and it goes against me, I don't automatically buy it.

I just think, okay, the market's telling me something. It's not that I will never buy a stock that's down, but I just am very disciplined about saying, no, I have some edge to buy a stock that's gone against me. And that's kept me out of, like, dumping a lot of good money after bad. Yeah, when I look at the chart for PayPal, it sort of went into the stratosphere back in, you know, 2021 when everything's taken off. It goes from 100 bucks a share to over 300 a share. And then, you know, once that tech bubble popped in November 2021, you see PayPal's stock just come straight down the way it in the opposite direction, the way it was going straight up.

So when it comes to PayPal, you're sort of waiting for it to form a base before you get comfortable entering and you look at some of those catalysts like the CEO change. Yeah, so I mean, I thought the base had been formed last year. Like I bought it maybe April May last year. We had the CEO change. It had based for a couple years, hadn't gone anywhere. It wasn't really making new lows. And then the stock started working late last year and then kind of had a step back this

year with the fourth quarter wasn't that good. They've had a couple of okay quarter since then. A little bit of deceleration in the business. Like they have one business that's growing that's relatively low margin. So it's driving the overall company's margins lower. People don't love when margins are declining. So I'm not adding to the position here. It's still around where I bought it.

It's not making new lows. So you could say, okay, this base is still forming, but I need more evidence. It probably will be a better buy to buy it at 90 after we get some confirmation of good news or good things happening. It might be less risky to buy it higher and let the market tell you that they fix things and it's on a good momentum path.

So earlier this year, April 25, markets were really dropping like a rock due to the tariff talks. And with the benefit of hindsight, it looks fairly similar to the drop we saw in March 2020 in terms of the severity and the duration, right? You know, at one point, the S&P was down around 20% before swiftly rebounding. And to take advantage of this, you would have had to have made changes to the portfolio rather quickly. And, you know, it's tough to make some changes if you don't have cash, right? you know, to fund one position you're going to have to sell something else. So talk to us about

your level of activity during this period and how that might have impacted the portfolio at large. I would say I was relatively active. Like when things are moving, I try to be judicious about how I act, but I, you know, I'm not afraid to, if I see opportunities to move stock. So, you know, in the two days after Liberation Day, the KRA, a regional bank index, or ETF was down like 13 or 14 percent two days. And I think that's the place. playbook that macro investors have of recession risk goes higher, sell regional banks. And I have a fundamentally different view. Like, this is not 2006, 2007, as far as what the credit books look like at regional banks, the capital and liquidity is so much better than it was then. I don't

think in the next recession banks are going to fail. I mean, there might be a few banks that fail, but like, I just don't think it's going to be the whole industry goes down. It was a little scary because I was like, okay, what is he doing with these tariffs? Like, is he really trying just to crash the economy or, and, you know, clearly in the following week, it was clear that he didn't want to crash the economy. And he was going to not be dogmatic about imposing those numbers. Like, I think the catalyst was he gave a delay, like a 90-day delay. And so that pushed out the tariffs from April to July. And so the market rallied there. But like when we got that indication, I covered a lot of my regional bank shorts. Like I'm long, a bunch of regional banks, I'm short some others. You know,

ones that I think don't have as strong a management, have higher valuations, may have done an acquisition that I don't love. So I'm just generally short a bunch of regional banks. But some of them got down to eight times earnings. And as much as I might not like the management or some deal they did at eight times earnings with them being down a lot. In recent days, I covered a bunch of regional bank shorts. And so that benefited me. They, you know, they ripped higher after, you know, the delay and or the pause and the tariffs. Those are super stressful times. Like, it's where you, you make the performance, you can make a lot of performance, those by being smart, but you can also mess things up and your emotions affect your decision making. So you just have to take a deep breath

and say, okay, if I was the only investor in the fund, what would I do? Like, try to ignore that I'm dealing with people's money. Like, I don't want to put too much more pressure on myself. I'm already down. Like, just let's do the smartest long-term thing we can and just trying to manage those emotions. And then also earlier this year, I attended the Berkshire Hathaway annual meeting in May. And at the end of the Q&A, Buffett announced unexpectedly that he would be stepping down as CEO of Berkshire at the end of the year. And I know that Buffett has had a big impact on you. If going off memory, I think you mentioned last time that after reading his letters, you decided that you wanted to become a fund manager. You can correct me if I'm wrong there.

perhaps you could talk more about how Buffett has influenced your investing over the years. Buffett has been super important to my investing career. So I read Roger Lowenstein's in the making of American Capitalist, which was really the first Buffett biography that came out in 1995. The internet really was just getting started then. So there wasn't as much information about Buffett as there is now. And so that was really eye-opening to understand his career and his investing. And so I really appreciated that. And then, When I went to business school at the University of Chicago, one of my classmates, Dan Kuzlowski, who used to run the Janus Contrarian Fund, he took us all to the Berkshire Hathaway meeting.

So I went to the May 2000 Berkshire meeting, and it was right at the peak of the internet bubble. So it was super interesting. Like, at the time, Buffett was 69. It was so surprised to me, he was so energetic, so jovial and, you know, thoughtful about his answers. And I just thought it was a huge gift that you have this billionaire super investor who's sitting on stage answering all questions for six hours. And so I guess that was also the meeting where he said

if I had a million dollars, I guarantee I can make 50% a year. That was, you know, it's a shocking statement, right? Like, and it's easy to dismiss it of like, arrogance. I took that comment and thought about it, like, what would cause him to say that? How would he do that? Looking back early in the Buffett Partnerships, I know that he had much higher turnover than he does now, right? I mean, he's due to size. He's buying high quality companies. and owning them for decades, right? But when he ran much smaller sums, he was turning over his portfolio. And you can either make a lot on a stock, or you can make a little bit on a lot of trades. And I think if he had a million dollars, he'd make a lot of smaller trades. And I don't

mean smaller like 10 or 20 percent. And like he'd buy things and they'd be up 40 or 50 percent. And he'd just cycle of the portfolio. And then he'd also use leverage. You know, he used leverage in the early days of the Buffett Partnership. He uses leverage at Berkshire, it's just float leverage. It's not, you know, debt leverage. And you was thinking about those things, like, how could you do that? And so, like, in the early days of my hedge fund, when I was trying to put points on the board, like, I turned over the portfolio some. I'm just not afraid of trading when there's opportunities and kind of just harkening back to that Buffett quote of, like,

turnover can generate returns. And so I think a lot of investors just think, oh, you have to be buy and hold and you get wedded to these positions. Sometimes you see a lot of opportunities. you're not stuck in your existing positions. You can turn over your portfolio. And that will actually generate higher returns. Now, there's certain environments where with trending markets or things that are not moving a whole wide, turnover is not helpful.

But in markets that are moving, opportunities present themselves and turnover is not bad. So I think the other thing that struck me, that Buffett said that I don't hear a lot of people talking about at one annual median median, I don't remember if it was definitely in the early 2000s. Like, I don't know if it was 2001 or 2002. said something along the lines of if he had to change anything in his career, he would have been more optimistic and taken more risk, which is pretty amazing for him to say because he's known as a permable. Like, he's super optimistic about America and the economy and he's long stocks in a leveraged

way, right? And so, like, for him to say, I should have taken even more risk. I don't hear people talk about that, but, like, that changed how I think about the economy. Like, I think there's a lot of people who are talented in this country and around the world that are acting in their own economic interests. And that creates value for them and for the economy and for the stock market. And so I think it's better to be a permable than a perma bearer, right? It's optimism makes you more money. And so I try to remember that. I mean, being bear sounds sophisticated and like you've figured something out. The timing of that is so hard. And so like, it's better to be optimistic. and I use a little bit of leverage in my portfolio.

I try to invest in some companies that are not the highest quality. I'm trying to be long-term optimistic and good things happen to the ones that are optimistic. Those two things. Like, how would you get 50% a year if you managed a million dollars and being long-term optimistic? Those are two things that I've taken away from Buffett that I don't hear a lot of other people talking about. Yeah, that's so well put.

And I just love how you looked at someone like Buffett and you launch a lot of you, launched your own hedge fund, being the sole investor at day one and just figure it out, you know, trading a lot when there's a lot of volatility and whatnot, being willing to bet big when you find the right opportunities and that's certainly worked out well for you. And Buffett is also an investor in the financial sector. You know, he's been very involved with insurance and the big banks, has major investments in that arena. That's exactly what your fund is focused on is the financial sector. And this can be pretty broad. You know, you have banks, brokers, asset managers, insurance, rates, et cetera. What pockets of the market are you finding the most opportunities today?

I think small midcap banks are still an opportunity. And, you know, they became an opportunity after the Silicon Valley First Republic implosions. And they've done okay. I think there's more to go. They're still cheap relative to their history. I think they still have the headwind of the yield curve. And with the yield curve, I think about really what benefits the banks is the spread between the overnight rate and the five-year treasury. So right now, that's inverted. You know, the five years like 368 and the one-month treasury is like 408. So it's a 40 basis point inversion. If that was steeper, I think that banks would make more money.

Their margins would be wider. But we go back to seven years ago, you know, 2018, that spread was 80 basis points. And so the overnight rate was 80 basis points. of the five-year rate, and now we're 40 basis points inverted. So that 120 basis points swing is a big inversion, big headwind for the regional banks. We get a little bit of steeper yield curve with a few more rate cuts, which it looks like we're going to have. And I think banks can make more money, and then the multiples can also go up. We also have deregulation coming. Bank mergers are getting approved faster. I think there's going to be more MNA activity. I think another area that's

super interesting is we've talked about with PayPal is FinTech. So FinTech names, or they used to be growth themes in 2021, they've fallen out of favor. Everybody hates Fintech. The valuations are super compelling. They're cheaper than the big banks. So there's a lot of single digit PEs in Fintech, whether it's WX or PayPal or global payments. And so they convert a large majority of their net income to free cash flow. I just don't think it's sustainable that the valuation stay down here. The third area I would say is I've started investing more in European banks. You know, European banks have been terrible for 15 years, 15, 16, 17 years. So finally, last year, year, I've owned Barclays for about six years. Last year, it worked. I looked around at other

European banks and started buying the French banks early this year. And, you know, the French banks. I had for two of this timing, but the B&P was trading for 60% of tangible book and society general was trading for 35% of tangible book. And, you know, the CEO was 50 years old and had been in place for two years. So again, as CEO's catalyst change, they've both worked this year, and I think there's more to go on European banks. So those are the three areas I've been most focused on recently. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are

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year, which is likely 50 basis points total. What signals do you look for to determine these sort of interest rate changes other than maybe just the yield curve? And how do you see these interest rate cuts impacting the economy? Interest rates are restrictive at this level. Like I think there's, you know, we have a bifurcated economy. We have the AI non-interest rate related sectors. There's humming along just fine. And then we have interest rate related sectors, like whether it's housing or autos that

are struggling, right? And so like existing home sales were bouncing here and just below four million units a year, whereas in 2021, I think five and a half million existing homes were sold. And also real estate development has really struggled. With higher rates, developers just haven't wanted to borrow any percent rates to build new apartments or build new warehouses or whatever we have. So the construction economy is lower. And so I think we really need rate cuts to help the interest rate-sensitive parts of the

economy. I'm frustrated with the conversation around inflation. I think there are three big parts of the economy that are driving persistent inflation, and None of them can get solved by higher rates. When I think about it, it's housing, college education, and health care. Like, higher rates is not going to make health care prices go down or the growth of health care prices go down. Neither is it going to affect college education.

And the housing, like with the land use regulations and the nimbism and the zoning practices and how long it takes to get things entitled, higher rates aren't going to fix those problems. In fact, it makes them worse. Like, if you had a slow down an apartment construction, So how does that get lower housing prices if we're not going to build apartments? And so I think there is a disconnect here between, you know, rates and inflation and what's really going to change inflation. If we want to get inflation down, the Fed can't fix those problems.

How do we fix those problems? Like hospital administration staff and health care has exploded compared to the number of doctors. Like, why is there so much more bureaucracy on health care? College education and same thing, administrators at colleges have exploded, like compared to teachers. We have so much technological improvements, but we teach the same number of college kids. Like the big elite colleges admit the same number of students in 2025 as they did in 1990. That's crazy with, you know, we can deliver education so cheaply now. Like, why do we have capacity constraints on that?

So prices would just come down if we could just use online teaching to educate more people. So like higher rates are not going to fix those inflation problems. I think there's also huge deflationary forces in the economy. Like the internet is still deflationary. globalization. You know, globalization is maybe having a little bit of pullback with the tariffs and the immigration changes, but internet's still a huge deflationary force. And I think AI is going to be a huge deflationary force in the economy. So like, I think rates should be lower. Like, I don't think it's going to create too much speculation. Maybe there'll be a little

speculation, but the IPO market's been dead for four years. Like, I really don't think there's a problem at the moment. Like, I know that people are worried about private credit or some sectors like that, but I really don't think that inflation is going to rocket just because they cut rates two times the rest of the year. I believe that Powell said that, you know, he was really looking at the job market when it came to, you know, lower interest rates wanting to help stimulate the economy in light of a tighter labor market. What's really puzzled me over the past few years is how real estate has reacted to, you know, mortgage rates going up so much, you know, In 2020, I believe people were getting interest rates below 3%.

And then just recently, you see some mortgage rates are around 7%. That is a significant increase in the cost of interest, yet home prices overall haven't significantly come down. And part of that's just, you know, there's not a lot of activity. Some of the more pricier markets like Austin, L.A., and some of those markets have come down a little bit. How do you think the interest rate cuts are going to impact mortgage rates and maybe the real estate market overall. Yeah, I think 30-year mortgages are around six and a quarter today.

And so I think if we get a little bit of steeper yield curve, like the short end keeps going down, I think people could potentially switch into 5-1 arms. And, you know, I think 5-1 arms will get down to, you know, below 5 and a half, maybe 5%. And I think that'll improve some activity. You know, I think we have a lot of regional differences, like you mentioned Austin and L.A. I think any of the COVID boom markets, you know, Central Florida, Nashville, Boise, Phoenix, all boom during COVID. And I think they're all pulling back here. So I think the inventories are increasing. I think prices at the margin or down a tick.

I think they'll continue to tick lower because there's a lot of supply. A lot of people have to move back to work in the office. They can't remote in to work anymore. So, you know, and then we see New England. The inventory in New England is almost non-existent as far as homes. And so it's, you know, that's super interesting to me. Like for a long time, New England, people are leaving New England and now it's, it's hard to find a home in New England. And so I don't know how that gets resolved.

I don't know if there's going to be a lot of building in New England or how that gets resolved. But I think some of those COVID boom markets will continue to trend a little bit lower. Hopefully they'll get saved by lower rates and there'll be more activity. But it's hard to tell how things will move. But I think that it's likelihood prices are lower. or maybe they don't go as low with lower rates. Jumping back to your recent performance, you're one of the few managers I've chatted with who has been pretty successful with shorting stocks.

At the end of 2024, you had some fairly significant short positions relative to the overall portfolio. And during that year, both your longs and your shorts outperformed one of your benchmarks, the financials index. What were some of the key reasons for your shorts doing so well in a market that's going up. Shorting's hard. I think shorting's been an iterative improvement over the years. And so, like, you're trying to, you know, respect momentum is, you know, when shorts are going against me. As a value investor, you want a short expensive stocks, but those can also be stocks that

have momentum. You know, it's trying to find a mix of stocks that are just non-good values and stocks that have headwinds against them. And so, you know, just trying to constantly improve, I think the short environment's been hard for most of the history of the fund that a lot of the bad financial companies got wiped out during the financial crisis. And so any company that survived the financial crisis had some stain power, right? And so there weren't a ton of shorts there. But during the SPAC craze of 2021, there was a lot of new financial companies that came public, a lot of mortgage companies, you know, some of Vintechs that came public that were bad values. And so that improved the opportunity set. And other than utilizing shorts, one of the more contrarian parts of your strategy is that you're

able to get comfortable with some holdings in the portfolio using some leverage on the balance sheet. You know, in the good times, this can look really good. But if we ever come across a major crisis, then that's when these highly leveraged businesses can find themselves into trouble. So how do you think about managing leverage at the company level so you don't get caught on the wrong side of things when the crisis inevitably hits? I've made money investing in highly leverage companies. It's not super easy. I guess I'm comfortable investing in a stock and not being guaranteed. I'm going to make money. I feel like I have a higher

tolerance to own losers than other managers maybe. So I don't know how things are going to turn out and leverage, losing control of leverage or having an adverse outcome due to leverage is certainly a way to lose money. And I just, I've been comfortable with that risk reward of the upside that the leverage presents versus, you know, the potential downside. But, you know, they don't all work out and they can quickly unravel. But it also keeps management focused. And so like when they have high leverage, they tend not to do dumb things because they know their margin of safety is low. So I don't recommend that for everyone, but like that can be a benefit of investing in companies with higher leverage. You know, an example right now is some of the fintech companies. Like they've

bought back stock and levered up to do it. And so they've stopped making action. acquisitions to pay down the day. So hopefully that works out for them. And as a financials fund, do you benchmark yourself against the S&P 500 financials as well as the S&P 500? So when I look at the top holdings in the financials index, this includes companies like Bircher-Hathaway Visa, MasterCard, and the big banks. And I was actually surprised to see that this index was up nearly 30% in 2024, given the backdrop of higher interest rates. I would expect to that. You sort of highlighted the difficult environment for the smaller banks of an inverted yield curve. So I would expect generally higher interest rates would lead to lower loan

growth for companies like JPMorgan, Bank of America, but the big banks seem to have done quite well the past 12 to 18 months. So talk about some of the dynamics that play here in the industry. Yeah. So the big banks got a huge gift from Silicon Valley and First Republic failing. Like there was a flight of quality and the biggest banks because of the regulatory position that they're too big to fail. And so like the people, depositors are moving deposits and accounts to the big bank. So they've had this tailwind of the low cost deposit growth, which is a big win. And then there was a little bit of watering down of the Basel three capital rules. So like there was a set of capital standards that were proposed for the big banks that were onerous.

And the stocks were priced because like that capital rule was going to. going to implemented. And then it got reduced. And so the banks rallied when that capital world got reduced. And then they also had the benefit of at end of last year. I think they responded well to incoming Republican administration, thinking that there'll be a deregulatory environment and more M&A. And so I think some of the stories I hear from banker is about how the regulators act during the previous administration. I think that a lot of those behind the scenes pressures get lifted with the current administration. So I think the banks reacted favorably that they can focus more on business. You're right about loan growth. Like loan growth with higher rates has been lackluster.

And hopefully that's one of the things that we'll see going forward is accelerated loan growth. But, you know, when rates went up, borrowers just like, I'm used to paying 5%. Now you're asking me to pay 8%. I just don't want the loan. And plus a lot of borrowers had liquidity from, you know, the COVID boom. And so they just use their own internal liquidity rather than borrowing at high rates from the banks. But you're right. loan growth has been not that exciting, but the capital rules and the potential of deregulation have helped the big banks. Yeah, it's interesting that you highlight the flight of quality and this capital and

some of these deposits going towards the big banks because you've highlighted that you're overweight the regional banks. And I sort of think of regional banks as these mid-sized banks. They're bigger than the smaller community banks, but smaller than the largest national banks like J.B. Morgan, Bank of America. So one of your top holdings is First Citizens Bank shares, which we discussed back on episode 669. They're one of the larger regional banks, family run, very good company and very good compounder.

So talk more about what makes the regional banks an attractive hunting ground for you in light of the comments you've just made of this flight of deposits to the bigger banks. Yeah, I think regional banks are interesting because the valuations are so much lower than the big banks. So normally the big banks are the cheapest and followed by midcaps and then small caps are the most expensive due to, you know, M&A potential better growth prospects. But right now we're inverted, right? So the big banks are the most expensive, midcaps are in the middle and the small banks are the cheapest. And so I think that gets fixed with the change in the slip of the yield curve. I think a steeper yield curve will make the smaller banks more profitable because they have a higher percentage of the revenue from spread income where the big banks have more fee income.

And so I think that increase in spread income, there's not a cost associated with it. So like if their margins expand, they don't pay their people more. They may pay the executives bigger bonuses. But like for most part, most of that revenue drops to the bottom line and it'll have a bigger effect on the small banks. And then I also expect the valuation differentials to go back to normal where the smaller banks have higher valuations than the big banks. But there's definitely economies of scale in banking.

So we really need more M&A. We still have 4,000 banks. the country. Like when I first got in the business, we had 13,000 banks, we're down to 4,000. You know, we're the only economy in the world that has many financial institutions. Like most, you know, Canada has a dozen or, you know, five large ones, but, you know, a dozen at most banks. And so we'll see more consolidation. And JP Morgan's a remarkable company. Like, they're the biggest bank and they're taking market share. So they entered Boston, Philadelphia, and D.C. without buying any banks in those cities. They just started opening branches.

And they're just taking share. I think they even opened a branch in North Dakota. So now they have a branch in all 50 states. You know, their tech platform, their tech, they can spend more money and they have the best apps. And they're just taking share. They're easy to do business with. And so B of A is taking share.

Some of that's from Wells Fargo. Wells Fargo has had this asset cap so they couldn't grow. But they're also taking the big banks, the big two are taking share from the small mid-cap banks. If we don't have more consolidation, you know, it's just we're going to get consolidation through organic growth of JP Morgan and B of A. And so we need to make cap banks to get together to have real competitors to those companies. It's interesting you highlighted that some of the big banks are still opening branches. I think back to my dad. He loves stopping by his small community bank.

I don't know how often probably at least once a week. He's stopping by just to say hi to his banker and whatnot. And all occasionally go to a bank just to pick up cash, the physical location, it's convenient, not too far for me. People that just are getting out of it. of college, I'd imagine a lot of them either haven't been to a physical branch by their own will or they just use the online banking and whatnot. How do you see sort of the online banking market developing? I know there's a lot of online banks being launched. It seems like every year I see a new one come out. So talk more about how that space is developing. Yeah, I mean, you're right. Branch traffic has declined every year since 2010. So like less people are growing to branches.

Even though the big banks are opening branches, they're in new geographies. Like I think if you look at D.C., I think J.P. Morgan has about 20, 25 branches across the whole city of D.C., it's in Virginia, Maryland, D.C. And I would guess 20 years ago, if they entered D.C., they'd probably have to have 80 branches. And so now you don't need to go to a branch within two miles because you only go to the branch a few times a year. Like, you could drive 10 miles to drive to the J.P. Morgan branch because you only do it twice a year. You can cover more geographies with fewer. And so that increases the competitive intensity of the industry.

Like we used to have interstate branching laws where J.P. Morgan couldn't just enter Virginia. When those interstate branching laws went down, banks could enter new geographies without buying banks or just letting them go into any geography at all. So the competitive intensity is increasing in banking. Online banks are, I guess, they're real threats to profitability of banking. Like they're paying higher rates. They're easy to do business with.

There's ways that they give you credit on your deposits faster than the legacy banks. The online banks are just going to take share. So it's another way to increase the competitive intensity of banking. And when I say increased competitive intensity, that means margins going down, returns going down. So I mean, I think the long-term trajectory for banking is lower returns. That's why banks aren't the greatest thing. Like, I run a financial fund, but I would never just say, hey, let's go invest in the KRE together for the next 20 years. Like, that's not a great strategy. Like, there's some banks that are well run. We can invest in

them. We can invest in banks when they're cheap. We can't just invest in the average bank for the next 20 years. Like, that's just, it's not a software. It's not semiconductors. It's an average to below average industry that where returns are going down. So, you know, I'm just aware of that. Like, I'm not a permable in banks. There's times to own them. I think right now is the time to own but it's not always the case. I almost wonder if you're not giving the banking sector enough credit. I know you find a lot of good banks that are out there. And you look at the large banks, the midsize and the small ones, and you say, hey,

there's quality banks within all these segments, but I'm going to buy the cheap ones, right? That's what I also appreciate about your strategy is looking for potential and opportunities for multiple expansion in generating returns for your investors. It seems that within your fund, you'll have, say, the really high quality businesses, like the first citizens of the world that are bound to grow for a really long time, might not be the cheapest company either. And then you also have, you know, we've mentioned plenty of stocks today that are just too cheap. Once they reach a certain valuation, you're happy to part ways with them.

What do you think that sort of mix looks like in your portfolio of, you know, some of these high quality names you can see yourself owning five, ten years from now and other names that you'd be happy to part ways with if the valuation reached a certain level. I mean, I think it's like 30 or 40 percent names that I kind of think of like enduring. I'm going to hold them for a long time. And then 60 or 70 percent, it's like their first sale at the right price. And, you know, keep that turnover the portfolio, moving on to the next cheap stock or cheap sector within financials going. Yeah, I think that's probably the mix. Before I started my fund, I worked at GSM. And the PM that I worked for is the guy named Herbellers. And he used to preach, like, if you ever own a stock in a great company,

never sell it. And so, you know, very much a Charlie Munger investment style of it. So I do keep some of my portfolio in stocks that I'm like, I just want to own the stock for a long time. So let's talk about Robin Hood. So I feel that only a true master of their craft can make money shorting a stock and then turn around not too long after and go long before it becomes a multi-bagger. So that's exactly what you did with Robin Hood. This is a stock you bought in November of 2023, and you actually still hold a smaller position today, not as big as it once was, but since November of 23, the stock is up over 14 times in less than two years. It's just not very common. You see a stock go up that much, let alone own a stock that goes up that much.

So let's walk through this story. It was in 2021, Robin Hood went public. And at some point after that, you ended up going short the stock. So talk about what you were seeing at that time. Yeah, I mean, I think the response to the environment. Like, there was a lot of speculation, the SPACs were coming public. Like, there was a lot of junkie companies coming public and a lot of inflated valuations and just a speculative frenzy in 2021. And so, you know, shorting Robin Hood, like, I thought the valuation compared to where they were in their business was high and, you know, they were losing a ton of money and the valuation was high. And I thought the speculative, bubble was going to recede. And so it was an easy way for me to participate in the downside there.

And I knew they had $8 a share in cash. And I shorted it from 25 down to 10. And then at 10, with $8 a share in cash, I was like, you know, the short's done. But I continue to follow the company. I like brokerage businesses. And I was impressed with the changes they were making to the business. They put up a couple profitable quarters by reducing costs, introducing some new products. I really liked their product roadmap for introducing new products. I was like they could accelerate customer growth with all these new products. And then I just got an opportunity. They reported the Q3, 23 earnings.

And there were two environmental reasons why they missed the quarter. And I just thought they were temporary. And it traded down to the $8 where I bought it. And they still had that $8 of sharing cash. So it was just being flexible and understanding the business. Also, like technically, it had built a big base. Like, you know, had covered in a number. March of 22, and from March of 22 to November of 23, the stock kind of was flattish,

and it had built that long base. So I got fortunate that it took off soon after I bought it, and that was just good timing, good luck. You know, they had built that base, didn't think there was much downside, and had it kind of treaded water, put in, it sparked its time to make a move higher. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Back to the show. You know, what really stands out to me here in your approach, and I think a lot of, you know, the alpha you're generating in the fund. is just being aware of sentiment, right? You can have a great company that isn't a great stock to buy and you can have an average or an average company that can be a great buy because the sentiment is just so bad. So in 2021, sentiment overall across any technology stock was just too much. And it was, you know, assuming you believe that markets are rational in the long run, then it can make for a good short in your case. And on the other side, when, you know, a good company

just gets way too far beaten down. It's trading near a tangible book value that can make for a lot of asymmetry because the sentiment is just so bad. So talk more about you buying it in November of 23 near tangible book value and then how the company developed since then and became a huge multi-bagger. A couple weeks after I bought the stock, the SEC approved the Bitcoin ETFs. So the crypto market started taking off, right? And so Robin Hood's one of the few ways to participate in the crypto market, without owning Bitcoin directly. And so they got some benefit there. And then their product innovations,

they had customer growth accelerate. Customer deposits went from like 18% of assets to 40% of assets during 2024. It was. And so that really got growth going. And they continued to introduce new products and activity ramped up. And then, you know, crypto trading exploded after the election. And they've continued to introduce new products.

And some of the products, like, are a little bit shocking that, Like until the fall of 24, you couldn't open up a joint account with your spouse. Each had to have individual accounts. So Southern products were not rocket science. They're just getting around to all the things you need to offer as a brokerage firm. But they introduce futures trading. I think they're just introducing short selling in the coming days. And then this goes back to, you know, I held onto the stock for a long time.

I started hedging it late last year and through this year. And I'm almost completely out of the position. I still have a tag end piece. if it becomes a meme stock and I'll benefit a little bit, but you could argue it already has become a meme stock to some extent. But it's just avoiding that value investor mistake of selling too early. You know, hit my price target amount. The market can take stocks a lot higher than you think. And then, you know, also like the stock got up to, I think it was like $30 late last year. You know, I think earnings estimates were about $1.50 and I looked at the models and I could get

the $3 in 2026. And so I was like, okay, the socks way up at $30. But I can see in two years, it can earn three bucks, 10 times earnings that even though it's made a big move, there's still a lot of upside here. So like, you know, my three bucks estimate for 2026 had some pretty bullish assumptions about customer growth and training activity. And so like, I'm not saying $3 is the base case, but I'm just saying like, okay, well, what are other people seeing?

Like, what's the potential upside and just being comfortable like, okay. ignore where the stock's been, where could it go, what are people looking at it? You know, people who are buying the stock at these highs, what are they thinking and just being comfortable with momentum and stocks that are moving higher probably continue to move higher. That's an uncomfortable position for a value investor, right? Just letting stocks go up. But that's what you have to do to keep your returns intact. Yeah, and the past couple of years, I think one of the lessons for me is just understanding

how powerful operating leverage can be. So a few examples that come to mind of some businesses that maybe don't care about profitability since they're early on in their life cycle. And then once they built up their customer base, then they can start to pull these profit levers. So a few that come to mind are Uber, Spotify, and Robin Hood. So looking at Robin Hood's financials, for example, if we just look at the net income line, 2021, they were losing over $3 billion.

They're losing a billion. but in the last 12 months, net income is $1.7 billion. So as revenues growing, the profit side can really ramp up significantly since they can have a low cost base, right, since it's very much a tech platform. So that's one of the lessons I think that I get from looking at a stock like Robin Hood when the market doesn't appreciate the level of operating leverage and just being patient with letting that profitability come through the bottom line. I think that's well put.

There's another stock that I have that has a lot of operating leverage. leverage and a lot of financial leverage is anywhere real estate. And this is the old realogy. They own Coal Banker and they run it as a fixed cost business. And then the commissions are variable based on volumes of real estate transactions. So like this stock is way down from where it was a few years ago when the housing market was booming. And I think people are just coming around to the fact of like, okay, you have financial leverage on top of operating leverage and the EBITDA numbers could explode here if we get back to five million units. of existing home sales. I agree with you. Operian leverage is a lot of times underlooked as a

potential upside. I also wanted to be sure to mention interactive brokers. I'm a very happy customer of interactive brokers. They're in the discount broker business, in the broker business just like Robin Hood is. And they are founder-led, and their founder owns a significant part of this business. And I believe that's one of the concerns with this business, I think, is what's going to happen with a lot of the shares he owns, but I've been a bit disappointed not to participate in this stock's spectacular run over the past couple of years. They've been, you know, organically growing their customer counts over the years and the market's finally taken notice. I'd be curious to get your thoughts on interactive brokers. I don't believe you've owned it, but you have looked

at it based on what you've said off air. Yeah, I do own a few shares in the mutual fund that I manage, but I don't own it in the hedge fund. Unfortunately, it just was a little bit too disciplined on the price I was willing to pay and it ran away from me. I was looking at it December of 23 after I bought Robin Hood and it's been a phenomenal stock and it's a great business. I've been a customer too. I use it as a prime broker. They've been super helpful in helping me with my business. I think they keep costs low. I think the fixed cost nature of their platform gives them a lot of operating leverage. I think it's a conservative balance sheet. I think their credit ratings higher than Morgan Stanley's. And so I think that's super interesting as far as a safe

place to custody assets. I think it's very efficient and it's a great business. I wanted to also be sure to touch on Wex, Inc. So in your most recent letter, you highlighted your thesis on this company. So talk a little bit about Wex, Inc. What's this company do and what's your thesis on adding it to the portfolio? Yeah. So Wex is a financial technology company. They issue fuel cards. So they have three businesses, 50% of the business is fuel cards. You own a fleet of trucks with your service business. You give all your drivers a Wex fuel car. They have to type in a password and the car mileage or the truck mileage when they get gas and just reduces waste or, you know, shrinkage on your part as owning a small company fleet.

They're not filling up their personal car with the gas card. And they give you a lot of data of how to evaluate your drivers. And so that's been a good business. They've used some of the cash from that business. They bought two other businesses. They have in the health savings account business, which is high multiple business. They provides low cost deposits. They actually have a bank where the low cost deposits from the health savings accounts

fund the receivables from the fuel card business. So there's nice integration there. And then they have a corporate payments business, which has had some struggles. Corporate payments is about 20% of the business, and half of that 20% is servicing online travel agents. And both Expedia and booking.com have brought some business in-house. And so that's been a little bit of struggle, but the stock has not done anything for eight years. And so the valuations come way in.

It's trading for eight times even. They did a tender offer at $154 a share earlier this year. They've publicly stated that they're not making any more acquisitions because they're going to focus their free cash flow and paying down this debt that they took out the buyback shares. The CEO bought some shares. There's been an activist involved for about three years. And so I feel like the activist is watching management. The management's aware of the activists. so they're not going to do anything that is non-shareholder friendly.

And I think valuations come back up. And so it was weird, like they closed the tender at the end of March. And then with Liberation Day, the stock traded through the tender price. And so it traded down to $120 a share, which was kind of crazy to me, given that the company you just bought back 10% of the shares at $154. So it's up from that. You know, the stock's trading around 170, 175 right now. It's still eight times even to, I think we just need some more time.

I think management's also doing a good thing of reinvesting a little bit in the business. They've started spending some more marketing dollars in the Heel Card business and have also hired some salespeople in the other two businesses. I think revenue growth is going to accelerate here. Not in a huge fashion, but I think at the margin it's going to be positive. I just think the valuation's too low. Like a year ago, the stock was at $240. Like, we could easily get back there with no problem.

Yeah, I think some of the things that stands out to me about this company, I just think being in the financial space, you sort of benefit from having the opportunity to just look at, you know, a lot of boring businesses that aren't doing a lot, right? I mean, WECs, it's not a high revenue grower. It's not, you know, you're not seeing exploding earnings like you are at Robin Hood. But you are seeing some things happening under the hood where an activist is getting involved. You know, you're seeing this catalyst of more share repurchases and whatnot. Like you mentioned, the stock treating down to 120, sometimes the market just does some silly things, just on short-term concerns, whether it's, you know, the economy, concerns around fuel prices dropping, fuel

volumes dropping and whatnot, and, you know, someone like you coming in and taking advantage of those unique opportunities. Yeah, I mean, it's a $4 billion market cap company. It's not the largest company. It's not, people don't talk about it, right? I mean, the stock hasn't done anything. It's flat for seven years. There's a lot of investor apathy about it.

And so I think the tender offer for me was really what sparked taking another look of like, okay, that's a special situation type event of buying back that much in stock and really kind of putting the handcuffs on themselves. You can't do anything with your cash except pay down debt at that point. And so that's a real stake in the ground. So I think that's the catalyst. And there's a lot of people don't respond to events like tender offers that are clear signals that there's value there. Tender offers are something, you know, to my knowledge, don't happen all too often. For those in the audience that might not be familiar, could you just explain sort of how this works and what a tender offer is? Yeah, so the stock was, you know, $170 and management wanted

to buy back a bunch of stock. And so instead of going to a brokerage firm and buying shares every day in the market, they said, okay, we're going to make a tender offer. They make a filing with the SEC and they say, okay, a month from now, we're going to buy 10% of the company this many shares, and we're going to buy it somewhere in the price between $150 and $170.70 and investors can go to their broker and say, I'd be willing to tender my shares at $160 or $150 or $170. And then you look at what price is the clearing price to buy all 10% of the company shares. And in this situation, it was 154. So relatively at the low end of the range.

So, you know, investors, you know, shareholders were willing to give up their shares at relatively low price. So it just shows that management and the shareholders had different views of the value of the company. Right. And so, but, you know, I think that to buy back that much of the stock in one swoop, like the management had to be super confident that they weren't overpaying. And I think that was a pretty strong signal that they thought in that range of 150 to 170, they were getting a good deal of buying in those shares. Buying back that much stock helps EPS growth because you have fewer shares of the same income. The valuation, was low enough that the cost of the debt, the fund, the tender offer makes the transaction

was low enough that it was accretive to earnings growth. But there aren't that many tender offers out there. Like there's a handful each year, but it's a good source of ideas because companies don't tend to buy back that much stock unless they think the stock's undervalued. That's not always the case. Like, not all tender offers work as far as building the stock, but a lot of times they do. In fact, I think I first learned about tender offers when General Dynamics in the early 90s did a tender offer and Buffett bought the stock because of the tender offer. He thought that was such a strong signal that General Dynamic stock was cheap when they announced the tender offer. He bought the stock. You know, it seems that part of the dynamic of a tender offer is the company wants to buy such a significant portion of the shares.

It's more efficient for them to do going the tender route rather than just going out and buying shares in the open market. saying they're buying 1% or 2% or whatnot. So that's sort of the dynamic of the tender is they're buying a significant portion of the shares back. Is that right? Yeah, that is exactly right. You can get a lot more shares in a faster amount of time. And what's also sort of interesting to me about this, your investment thesis here,

is part of the thesis is that one reason why the company is at such a discounted valuation is because of the leverage on the balance sheet. and if management's going to be paying off some of this debt over the coming years, then you would expect some multiple expansion naturally from that. So that's sort of one of the catalysts you're looking for a re-rating. A lot of times there's de-leveraging. One of the things that makes private equity so profitable or have high returns is the use of leverage.

And we've talked about leverage a few times. But this is another example of like there's a company with leverage and this is almost like a publicly traded LBL. The leverage isn't as high as what private equity uses. that's only three and a half times, you know, it's not five or six times, but three and a half times is plenty of leverage to get leveraged returns from the stock. As investors will discount the stock while it runs with high leverage, but then as the leverage gets paid down, you get a little bit of growth and the debt gets paid down, the de-leverages naturally. And

then investors will be more comfortable putting a higher, higher valuation on the company. Excellent. Well, Derek, I really enjoyed this conversation again. Very informative for our listeners always enjoy bringing you on. Before I let you go, how about we give the audience a final handoff here? If they'd like to learn more about you and your firm, where should they go? Yeah, if you would come to Gatorcafital.com and sign up for our newsletter or you can send me an email, Derek at Gatorcapital.com, be happy to send you our investor letters. I won't spam you. Send out four letters a year with one stock idea in each letter and just something that I'm doing in the portfolio or some insight that I think I have that hopefully will be added.

to your investment process. But I appreciate you having me on the show again. You're super generous with your time and your questions. I appreciate you, Clay. Well, thank you, Derek. I really appreciate it as well and hope we can do it again eventually in the future. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to The Investorspodcast.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.