Yet Another Value Podcast - Asif Suria on the Six Special Situation Strategies to Outperform the Market

Episode Date: May 20, 2024

Asif Suria, Author of "The Event-Driven Edge in Investing: Six Special Situation Strategies to Outperform the Market", joins the podcast to discuss the six special situation strategies he outlines in his book to outperform the market. You can buy your copy of Asif's new book, "The Event-Driven Edge in Investing: Six Special Situation Strategies to Outperform the Market" here: https://www.amazon.com/Event-Driven-Edge-Investing-Strategies-Outperform-ebook/dp/B0CN3PF1SW?_encoding=UTF8&dib_tag=se&dib=eyJ2IjoiMSJ9.1zuikMLb5MN1aQVWodj1ww.Nui4P_rilsWES5p1FNmoTnd5v0myqxSeQautyazGgno&qid=1715709920&sr=8-1&linkCode=sl1&tag=andrew613880e-20&linkId=376c305fd243b22988ebba35edf5ecee&language=en_US&ref_=as_li_ss_tl Chapters: [0:00] Introduction + Episode sponsor: YCharts [1:42] Overview of Asif's book, "The Event-Driven Edge in Investing: Six Special Situation Strategies to Outperform the Market" [3:33] Merger Arbitrages + examples [16:44] Insider Buying + examples [29:23] Buybacks + examples [36:45] Spinoffs + examples [46:18] Management changes + examples [55:32] SPACs + final thoughts This episode is sponsored by our friends at YCharts This episode is sponsored by our friends at YCharts. Every four years, the uncertainty surrounding the next president and their policies sparks concern among investors. And with 2024 shaping up to be a rematch of the last two presidents, this uncertainty is at an all-time high. So what’s your plan to ensure your clients stay informed—and equally important, invested? Enter YCharts’ latest Election Guide—an essential resource designed to arm you with the insights needed to successfully guide clients through election season and tackle commonly asked questions head-on, speaking to themes about: Market performance across various presidencies, The viability of investments based on political affiliations, Market reactions to Trump’s election vs. Biden’s election. Grab your copy with the link in the show notes to unlock exclusive access to downloadable charts and visuals that will elevate your client communication and boost your clients’ confidence in you as their advisor. Promotional Link: https://go.ycharts.com/how-do-presidential-elections-impact-the-market-guide?utm_source=partner&utm_medium=link&utm_campaign=election_guide&utm_id=yet+another+value

This episode is sponsored by our friends at YCharts. Every four years, the uncertainty surrounding the next president and their policies sparks concern amongst investors. And with 2024 shaping up to be a rematch of the last two presidents, this uncertainty is at an all-time high. So what's your plan

to ensure your clients stay informed? And equally important, invested. And our YChart's latest election guide, an essential resource designed to arm you with the insights needed to successfully guide clients through election season and tackle commonly asked questions head on, speaking to themes about market performance amongst various presidencies, the viability of investments based on political

affiliations, market reactions to Trump's reelection versus Biden's election. Grab your copy with the link in the show notes to unlock exclusive access to downloadable charts and visuals that will elevate your client communication and boost your client's confidence in you as their advisor. See the link in the show notes. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review,

wherever you're watching and listening to it with me today i'm happy to have on for the first time uh as if syria as if is a man of many hats but he's on today because i've got my copy here the blur is not letting it shine through completely but he is releasing a book that's going to come out pretty much concurrently with when this podcast comes out the event driven edge and investing awesome how's it going things are going great andrew thanks for having me on i've been listening to podcast for several years at this point well i appreciate that thank you for coming on before we get started, a quick reminders to remind everyone that nothing on this podcast is investing advice. That's always true, but particularly true today, because the way Asaph and I think

are going to do this is we're going to walk through the book and maybe some current examples of the book. But awesome, before we hop in there, you wrote the book. I generally don't do. I get reached out all the time by finance and investing people with books and they, you know, they want to make their book tour. And I generally say no, because if you wrote, you know, the history of Lehman brothers, like that's an interesting book, but it doesn't really fit squarely in the podcast, but when you wrote this book, you know, again, it's intros, well, it was going to be called intro to event-driven investing. It ended up event-driven edge in investing. I thought it was just so squarely for in the realm of this podcast, especially for a beginner to intermediate investor

who's kind of dipping their toe in event-driven investing for the first time, dipped it a few times with looking to learn a little more. Anyway, I'll pause there. If you just want to give a quick over the view of the book and what you were listening to and then we can dive into it. yeah andrew as you mentioned this is a very quick read it is for an investor who wants to expand their tool set and wants to understand how event-driven strategies work so it's no means by no means is it a comprehensive book on each strategy there are books where you can read every chapter could be a whole book by itself so this is more of a quick introduction with two case studies on each strategy one where you know things worked out well if you use the strategy and one where

things didn't go quite as well if you try to use it. So it's a quick, as you said, a quick introduction to the strategies. It's a quick read to, and I'm a little jealous because every now in them then in my head, I thought, hey, would you ever want to write a book? And, you know, my ideal would be to write a fantasy book, but that's kind of not in my will ask. If I ever wrote an investing book, I said, hey, you know, what I'm going to do is I'm just going to choose 15 historical examples and I'm going to just list them and go through them step by step. And that's really what you did here. You know, you did historical example. So it's how I would have written a book, I think, especially if you're an intro to, if you're getting into event-driven investing

for the first time, I think it's going to be really helpful. So look, you list, the book is centered around six different event-driven strategies. Merger Arb, insider transactions, buyback, spacks, spinoffs, management changes. I think SPACs for right now are kind of on pause. So we'll ignore that. So let's go into the five strategies that I think are actionable. We'll start with Merger Arb, maybe, I'm sure everyone knows what Merger Arb is, but maybe you can give a 30-second overview of Merger Arb, and then I'd love to dive into kind of a current actionable Merger Arb situation with you. Yeah, so Merger Arb, the strategy has been used for several decades at this point by hedge funds and now more broadly by retail investors as well. It's also called risk

arbitrage because you're taking on the risk that announced the yield might not close. So, for example, when Microsoft announced that acquisition of Activation Blizzard, they were willing to pay over $95 a share for that deal. And the stock doesn't usually go and start trading at 95 right off the bat. It usually trades at a discount, and that discount implies there's time value of money because your money might be stuck in that much-up situation for a few months. Sometimes a few years, as you remember with Genworth, that took four years to play out and finally fail. And so there's time value money, but there's also the risk that regulators might step in and try to block the deal. That is a risk I am very familiar with, sadly. Everybody knows about Lena Khan at this point. Absolutely.

And the risk can be from multiple regulators, right? It depends on the industry. So if it's a banking merger, the OCC is going to take a look. If it's a utility merger, you have all the different states that the utility operates and that they take a look. So really the spread is there or the profit potential is there because you're analyzing the probability of the deal closing and you want to pick up that few nickels in front of the bulldozer and hope that you don't get bulldozed over a few times as you do this. No, look, so yes and what you were saying, I agree with you. You know, I think merger arb is the hardest one for beginner investors to do because as you said, especially if you're doing what I call vanilla merge. R, where company A offers to buy company B, $10 per share, and the stock is trading at $9.75, so you're clipping that last quarter. You know, the downside in those scenarios can be

so large, particularly when, you know, the way you normally look at a merger RAB is if the deal breaks, if the stock was trading at six before, it'll fall back to six. So, you're upsides a quarter and your downside in that scenario I just laid out as $3.75. Like, it's very hard. You know, that tends to be the realms of highly sophisticated traders who have access to really cheap capital. They tend to lever it up a lot. They are following every filing because, you know, when the spreads are that tight, if the merger closes on a Tuesday versus a Thursday, that can really affect your IRR. So it's hard, and I know a lot of people love it because you do 10 in a row and most of them close, you're like, oh, I'm making all this easy money and then one breaks and you're just so sad. I don't know if you want to add anything there or if you want to hop into the example.

No, you make a good point. So you really have to be picky. You have to pick and choose which ones you participate in. Warren Buffett is really good at doing that. He was in the Monsanto merger where Bayer acquired them. He was in Red Hat IBM when IBM was acquiring Red Hat. He was also briefly in Activition Blizzard when Microsoft was acquiring them. And so that's a great example of where Buffett got in at around $80 a share.

If I can add, so Monsanto Bear is a really nice example. Warren Buffett was in it, regulatory, everything closed, it closed, made a nice profit. But it's a really nice example because if I remember correctly, Monsanto had a lawsuit in California that I think the science was very questionable, but was basically, hey, round up in the pesticides that Monsanto cells cause cancer. I think the science was very questionable there. I'm not a scientific expert, so don't hold me to it. that lawsuit went against Monsanto and they ended up going billions and if you look you can go look at bear stock price

they close on Monsanto and that lawsuit comes out two to two weeks later and bear stock price you know it's down 20 percent it's really interesting because if that lawsuit if the deal had closed three weeks later and the lawsuit had hit bear might have argued material adverse event so I always look at that and you know even the best sometimes they need to like kind of skip across some puddles and I always look at that and say wow you know Warren Buffett was really a dancing through the risk there. I don't know if you want to add anything to that. No, they, you know, in retrospect, made a huge mistake.

They probably have buyers remorse right now and they're trying to figure out how to isolate that risk, potentially as a spin-off and so on and so forth. So you're spot on that, you know, Buffett took on that risk. Red Hat IBM was a pretty straightforward merger in that respect. So he got into Activition Blizzard at

$80 a share. The pre-deal activation was trading at about $65 a share, and it was $95 deal price. So when it got to about $75 a share, I got interested because now I was viewing it as a deal break downside to $65, so $10 downside if it did happen, and $28 upside if the deal went through. And so you apply a probability of, you know, 40% probability of the deal going through.

It can still be an attractive risk reward option for you. I don't think there's anyone who's a longtime listener of this podcast who's not familiar with Activision, Microsoft. Let's talk a current example. What's a current example of merger our world that you think is kind of interesting? And again, it doesn't have to be, if you think it's the most actionable example in history, that's great. If you just think it's something interesting, that's great too. Yeah, I like to at this point, you know, because of the regulatory risks, spreads have widened quite a bit. So there's more profit to be had because of the increased risk.

And so the acquisition of Capri, which is the company that owns Michael. That's where this would go. Yep. Jimmy Chu and Versace is being acquired. by tapestry, which owns Coach, Kate Spade, and Stuart Weissman. And so these two companies both were, you know, they were an acquisitive mode. They started building this multi-brand holding company. And both was suffering because they kept discounting the products, and you cannot have

luxury products that you keep discounting. And so at some point they decided to merge. The deal is priced at $57 per share in cash. It trades at a 58% spread. So the deal courses, you make 58%. percent, the IRR can be significantly higher if the deal closes, say, by your end. It might be a 92-person annualized game. The reason it trades at a 58-person spread is because the FTC has sued to block the deal.

And so, you know, you can get into the specifics of that deal. Andrew, I think you had Christymoot Jr. on your podcast. That's right. Yep. In the markets, you discuss Capri in more detail. And I think that covers it in more detail. And we can get into it today. but you know the FTC has a very narrow definition of what affordable luxury

handbags are and quite frankly if you do a simple Google search or if you look at how tapestry responded to the lawsuit that's going to be a difficult argument unless they have a very sympathetic judge on the FTC side of things so that deal looks very interesting to me for a couple of reasons one is it's going to be I think an uphill challenge for the FTC to prove the affordable handbag you know, market definition. The second thing is it's trading at about $36 a share

right now. Pre-deal, the price was about $3460 or something like that. So it's just trading a little bit about the pre-deal price. I was talking to somebody in Omaha a couple of weeks ago and I was talking to him about the Capri deal. And I then said, oh, I decided to run

a DCF model to see if I figure out the intrinsic value of Capri and he started laughing and I was laughing with him because you know how it is with DCF models, you know, change the assumptions a little bit, as somebody said it, and you're looking at a different galaxy altogether. So I asked him to stay with me, I walked him through the assumptions, and I said, you know, modeling a deep recession in years three to five, and in 10 years, essentially,

the earnings are modeling is where the earnings are right now. And despite that, I get an intrinsic value of about $47 a share. So what I'm thinking about your is, you know, the downside might not be as significant as some people are, you know, claiming. Some people are talking about a mid-20s downside risk, but I think it's more like, you know, probably $30 a share. So if you have a downside of $8 a share, and if you have upside all the way down to,

all the way up to 57, I'm seeing this very similar to the way I looked at Activision Blizzard and Microsoft. That's said. I think it's a very interesting one. It is one of those ones where it's so funny because it's one that could argue for like kind of the kiss method like I know Arbs who they're hanging on

every word they're reading every filing they're listening in and they you know the judge cough there was a hearing Monday if I remember correctly and they're like the judge cough during this argument what does that mean so you could you could really go that deep or you could just look at it and say hey like come on luxury

like mid tier luxury affordable luxury I think is the definition affordable luxury monopoly like you really think there are an entrance in competition here you're you're insane. Just on the downside, it is interesting. You mentioned that, you know, I do know some people who look at this and they say, hey, this is a pretty low multiple? Like, is there really that downside? And I think the consensus has settled on the downside is 20 to 25. You know, I don't really have views. But as you said, if you look at the cash flow that Capri generates and I pulled up their

proxy while you're talking, if you look at the cash flows and the projections, you'd be like, this stock, I'd buy it either way, whether the deal goes through or whether it's a standalone value, you know, the other side is because these are brands, you know, there's no hard assets here. Brands can change and fall off really quickly. You mentioned recession, deep recession, or just, you know, coach and Kate Spade having some issues. Things can change really fast here, but it's an interesting one. Was there one more you wanted to mention? Yeah, there was another one where it's a really a small microcap bank called First Financial Northwest. It's a Seattle-based bank that is being acquired in a kind of a liquidation, if you will, by an Anchorage-Alaska-based

credit union. So it's an unusual situation with a credit union buying a bank. Credit unions, they don't pay taxes. If you're into small-cap banks, I promise you, you have seen credit unions buying some, hopefully stocks in your portfolio, but if not some peers recently. It's been a very interesting trend. Absolutely. And so this was a company that went through a thrift conversion. I listened to your podcast with James Royal, who wrote the book on Thrift Conversions, reading the book right now, and it's fascinating. And so this went through a Thrift Conversion in 2017. The activist investor, Joe Stilville, is involved or was involved trying to get them to sell, and they finally decided to sell. So the reason there is spread on this is because they

didn't provide a specific acquisition price. They provided a range. So it's $23 18 cents to $23.75 subject to certain clauses. So if you go read the clauses, you understand that, you know, it has to do with there's an excluded loans portfolio that they wanted first financial to sell by June 1st. So that's coming up in the next few weeks. And they wanted to make sure that there weren't, you know, significant asset outflows. Banks have been struggling to keep. keep their customer assets with the bank in the high interest rate environment. Depositors are willing to transfer the assets out if they get a better interest rate elsewhere. So there's a clause related to that.

But when you dig into the details of that one, neither clause is actually worrisome. So if you use the lower end of the range, the spread is 8% or about 13% annualized if it closes by the end of the year. And the spread until just a few days ago, I think it was over 11%. So that was an attractive deal. nothing like Capri, either in terms of the return or the rest, but I found this one interesting. This episode is sponsored by our friends at YCharts. Every four years, the uncertainty surrounding the next president and their policies sparks concern amongst investors. And with 2024 shaping up

to be a rematch of the last two presidents, this uncertainty is at an all-time high. So what's your plan to ensure your clients stay informed and equally important, invested? And our Y-chart's latest Election Guide, an essential resource designed to arm you with the insights needed to successfully guide clients through election season and tackle commonly asked questions head on, speaking to themes about market performance amongst various presidencies, the viability of investments based on political affiliations, market reactions to Trump's reelection versus Biden's election. Grab your copy with the link in the show notes to unlock exclusive access to downloadable charts and visuals that will elevate your client communication and boost your client's confidence in you as their advisor. See the link in the show notes. Perfect, perfect. So let's move on to insider buying. This is a very popular one. I know, look, there's the non-cap who follows, you know, all the proxies and when people get switched from RSUs to options, there's all that. But the way you laid out, it's the way I've traditionally done it, it's, hey, did an insider, you know, open up their wallet and, right, open up their wallet and spend cash to go buy shares on the open market. If so, I want to follow that. And I particularly you had a story, if I remember correctly, you lead with the story of Vertex, how they have an insider who serves on the board for 12 years, never does anything,

and then after 12 years, he decides now's the time to buy stock. So I ramble a little bit. Why don't you talk a little bit about insider buying that maybe we can hop into an example? Yeah, so insider buying is fascinating. People feel, as you and I know, that if insider is, you know, opening is wanted to buy more stock with his own money, despite having been awarded a bunch of options or RSUs, it must mean something. And so the insiders over a period of time realized that us investors are actually looking at their activity. And so you have a bunch of insiders buying just to signal the market. And that

makes our jobs significantly harder, right? It's not just because insider things, stock is very cheap. Or maybe, you know, they see an inflection point in the future where there's a large contract that's coming in and, you know, they think revenue might grow or earnings might improve. They're sometimes just buying to signal the market. And so there's a lot of noise in the data and you have to really look at it and do your fundamental analysis after the idea generation process is done. So I love the strategy as a way to make me look at ideas that I wouldn't have otherwise come across. Small companies I've never heard of might show up and then I start looking at it and you have to really do the work and dive deep to understand what's going

on and why the insider's buying. Let me ask you a question on insider buying. There's insider buying where, look, everybody likes to say, if the CFO does the insider buy, that's the person you want to pay attention to. Or you and I might say, hey, if the board member who's been there for 12 years and ever bought stock, if he buys, and then there are some people who like cluster buys, right, like three directors and the CEO buy. Is there any insider buy in particular that you found kind of as you prep for this book

that was particularly high signal? yeah so I talk about that case study of vertex in the book so I wrote about vertex very briefly and inside a weekend's article I published on Sundays and so I mentioned that Bruce Sacks the director has been on vertex board for over 12 years maybe at this point 14 years because I've had the stock for a few years was buying stock and so I heard back from a subscriber he said oh this is two briefcase Bruce that's buying and I was just confused I was like what do you mean by two briefcase Bruce and he said oh I worked with Bruce in the early 1990s, and back then people didn't take the computers home. You didn't have

laptops, so not quite as prevalent. So, you know, Bruce Sacks would fill up two briefcases worth of work over the weekend and take it home, get it done, and come back on Monday. And so my subscriber had worked with them. He said, you know, this guy is really smart and he's very hardworking. And if he's on the board for so long and is buying, I'm interested as well. And that's basically what made me take a look at a vertex. So what I've found, Andrew, is independent board members with an investing background are the highest signal for me. I really pay attention when one of those is buying.

It's funny you say that because that was going to be my question, right? Because any time you have, you know, there are a lot of companies. Hedge fund owns 5 to 25% of them and gets a board seat. And then they're on the board and they buy some, right? And I always struggle with that because you say, hey, this is a hedge fund. They should be very sophisticated. They've got up to the date numbers. They don't have MNMPI because they'd be blackout, but they've got a view.

They talk to management. They're buying. I always struggle with that because is that bullish or I can't tell you how many times I have seen that fact pattern. And that, you know, it's just the guy, we all have it happened to us. It's something you always have to watch out. You kind of get married to your beliefs and you don't, you know, you buy the stock at 20. You think it's worth 50. The stock goes to 15.

And you convince yourself, hey, this bad news is, temporary. It's not really bad news. And I've seen so many times hedge funds by 20, 18, 16, you know, all the way down and then all of a sudden the stocks too and the hedge fund's out of business. So I was curious if that was a high signal or if it was a little bit higher risk, if that makes sense. To me, it's a high signal. It's not the traditional hedge fund who bought in and got on the board. I'm not looking at those folks. There was this wood pellet company, I think Enviva where there was this big hedge fund could have been startboard value that was buying and they kept buying all the way down.

But that was a case where, you know, you wanted to avoid the company. So I'm looking at somebody who's an independent director that's been on the board for a while and not because they, you know, acquired a five-person stake and got on the board that way. So that's the distinction I would make on that front. Cool. Any current examples you want to give for insider buying? Quite a few. So I'll try to be brief.

You run the, you've got, is it Wednesdays that the insider buys come out or Mondays? I can't remember which day. But you literally send out a news. newsletter every week that has all the insider buys list. Yeah, so insider weekends on Sunday has the top five buys and sells. And then our event-driven monitor every day has all the interesting insider purchases that we kind of weed out for, you know, IPO-related purchases, secondary offerings, we take all that out.

Some days it's a lot. This morning we've published 26 of them. Some days, it's very little. So it can vary quite a bit. On the ones that look interesting right now, there was a purchase by a fourth generation. CEO of a shipping company, and I know a lot of people are going to tune me out as soon as I say shipping company, but hear me out. So Dorian LPG is a very large gas carrier company. As I mentioned, it's a Greek shipping company with a fourth generation CEO that's at the helm. He purchased stock

a few weeks ago at a price that's almost twice the price he paid in April 2023. So he was willing to pay up to buy more. And the reason he's doing this is because shipping rates, day rates have gone up at least in this category of shipping because there are multiple categories of shipping with different day rates. And the reason the day rates have gone up is because of the drought in Panama that's impacting traffic through the Panama Canal. And then you have the issue in the Middle East with Israel and Palestine where the Suez Canal is impacted because of attacks on the Suez Canal. And so ships are being rerouted. And, you know, what used to take maybe 22 days is now taking 42 days. And he clearly saw that, even with the Panama Canal issues, and he started

buying. And so this is a really interesting company, you know, pays a $1 quarter irregular dividend. They call it. They don't want to call it a regular dividend because it's a cyclical industry. And, you know, you never know when they're going to stop the dividend. So the yield at this point is almost over 9%. It was about 10% when I bought the stock. They have a fleet of very large gas carriers. They used to have very large oil carriers that converted into very large gas carriers. And the thesis here is natural gas and LPG is less expensive in the US because we have a surplus of supply, but it's more expensive in China and Europe. And so these gas carriers are exploiting that arbitrage difference and they're transporting, you know, gas from

the U.S. to other countries. Trades at a forward P.E. of less than six, a market cap is about $1.8 billion and it has about less than $600 million of debt on the balance sheet. You know, this is a cyclical industry, which means that is supply in terms of new ships that's going to come on over the next couple of years. So you only have to watch this and, you know, it's not one of those buy it and forget it kind of stocks, if you will. It's up 950% over the last five years. So that's another risk that it might pull back from these high levels. No, that's great.

You know, the tough thing with shippers, and I know people who have done so well with shipping over the past several years, it's always, it's hard right now because, as you mentioned, with all the geopolitical instability, the need for energy, especially in Europe, prices are highs and you see shipping is a very cyclical industry and it's just it's been very hard for me to look at these guys say look i see near rates are high and probably going higher but you know the classic with cyclicals is you want to buy when things are dire not when things are dear and it's tough for me balancing because as you said the money's pouring in like they're trading at let's just round it to five times next 12 months cash flow so that's a 20% equity yield doesn't take too many

years of 20% equity yield to get all your cash flow back. But, you know, the earnings can go from compare day rates today to day rates three years ago. The earnings can go from 100 to 10 really fast. So it's just one thing I struggle with. And then as you mentioned, everyone knows with shipping companies, there tends to be a little bit of corporate governance here if we're being kind. But the nice thing with insider buying is it's the one thing where you can point to and say, hey, maybe they're trying to power off the stop. Maybe. But there's probably better ways to do that than to take cash out of your own pocket and buy back stock. So if you see somebody buying stock, you feel pretty good.

They're probably aligned with you in terms of I'm buying because I see value here. Anything else on the insider buying front you want to talk about? Yeah, so a couple of other interesting situations that are going on right now. There is a company called 908 devices. The symbol is M-A-S-S. It's a microcap stock. The CEO started buying last week. And the reason it really, you know, stuck out to me was because he actually was selling in February

and then he filed this form 4 and he has a footnote there where he claims that, you know, he's going to give back over $12,000 in profits back to the company because he's buying in less than six months after selling. So there is this rule called the six-month short swing rule where you cannot buy and sell within a six-month period. And insider cannot do that. Otherwise, they have to give the profits back to the company. So you went to ahead and give the profit back to the company, bought 10,000 shares last week. And then every day since then, he kept buying 10,000 shares every day. And so stock is up almost 25% in just the last five days. I've just started doing my work and research on it. But it's fascinating

to see him be this what we call flip-flopper where somebody was selling and then he turns around and starts buying again. That is a fascinating, that is a fascinating situation. There's one other situation I remember, it's tickling the back of my mind that there was another situation recently where someone did this swing trade rule where they were selling and then they flipped to buying. I can't remember the exact situation though. But yeah, have you, have you seen this situation before? How has that played out? Because it is a very weird thing for someone to say, hey, I sold two months ago at 20. The stock's at 10. I think the stock is so undervalued. I'm going to buy today and give the company that $10 differential in profits because of the

swing trade rule. Like that is, it is wild. They have to see a heck of a lot of upside to do that and they were just selling. Have you seen this before? How did previous examples of this play out? I've seen it many times. We have a screen called the flip-flopper screen where we look for this specifically. There's one example where the CF of Grief keeps buying one class of shares and sells the other class of shares because one class has a higher dividend than the other one. So it keeps showing up because of that. That isn't a true flip-flopper because he's just doing a dual-class arbitrage. That's just some beautiful, beautiful arbitrage. Good for him. Yeah. So he keeps doing that. But there are other examples I've looked at. I haven't done

like quantitative work across several years, which I do from time to time on certain strategies. I haven't done quantitative work to have an answer across, you know, if this is going to work with every flip-flopper or at least a majority of them. This one was interesting because this company acquired another company in April and maybe after that acquisition, you know, the CEO felt like maybe that's value. It was a market cap was under 200 million. And they had $130 million of cash on the balance sheet, and the revenue trends are in the right direction. So all of those things make it interesting, but I'm very early in my research at this point. That actually goes well to buybacks.

Let's switch to buybacks. And this was the chapter, like people who have known me, no, I am an absolute sucker for buybacks, right? You buy a company because you think they're undervalued. It feels really good when every day, you know, they're out in the stock market, and your ownership of this stock is increasing a little bit. I guess I had there was one interesting point you made and then I had one area of pushback

I wanted to give you and then we can hop to an example the interesting point you made which I think makes sense but I'd love for you to expand on it you cite some interesting studies that say hey companies that have internal issues so where you know the issue is hey our production line is down and we need to you know get a new catalytic converter

in there or something in that case the companies are better at projections and possibly share buybacks than the outside analyst. Whereas outside analysts tend to be better at forecasting when the issues are industry-wide or kind of macro-oriented. And that makes kind of intuitive sense to me, right? Like if you're the steel CEO, that's a famously cyclical macro-oriented. You're just so involved in your day-to-day. You might not be as good at macro as an analyst who is kind of removed. They're tracking all the data and everything. Like, that's their full-time job whereas if you're the steel CEO, you have to manage the unions, all that sort of stuff.

That made sense, but I'd love for you to expand on that a little bit. And please tell me if I kind of cited those studies or your point wrong there. That's exactly right. I'd seen that empirically as I looked at transactions, and then it was great to go find these studies that essentially confirmed the thesis, right? So, you know, you see this all the time, especially with cyclical industries. We were talking about how a shipping company might be flushed with cash because the cycle is up and earnings are great and cash flows coming in the door. And a steel or a shipping company

CEO might be very tempted to use those cash flows to do buybacks at exactly the wrong time. Maybe they do M&A, but you know, everything is expensive at that point. So they decide they're going to do buybacks. And that's exactly the wrong strategy. They have to be patient. They have to keep the money on the balance sheet until, you know, the cycle turns and they can get assets for cheap. But people don't operate that way. They want to know, you know, they want to be active, they want to do something with the money. And often if they buy back the shares, it reduces the shares outstanding and juices the EPS numbers. So that's another incentive for their bonuses, if you will. So you're spot on that sometimes they have a very narrow view

because they are so focused on the company. They miss the macro or the industry-wide signals that analysts become. That's great. So I really like that point. Here's the point I had push back on. And I agree with this. It's right. But it's really hard. part of the chapter appeared to be, like, look, you built this on a good example and a bad example for most of these things, right? A merger up that's gone good and a merger of that's gone bad. Buybacks that have gone bad. And you were kind of talking about, hey, you know, areas where there's alpha and not alpha. And bybacks, it almost felt like you were saying, hey, the buybacks that work when the stock goes up, that's when it works.

And when the stock goes down, it's when it doesn't work. And I agree with you. right? Like stock go up, good, stock go down bad. But it's really hard for me to say that, like, I, it was hard for me to take that away. And I'll just give personal experience, right? Like, something like Charter. Greg Maffa was at the Moffin-Aithson conference yesterday. And he's asked about the buyback. And Charter's dialing back their buyback while the shares are at multi-year lows. And Greg Maffa, Liberty Media CEO, he's on the charter board. And he's asked about it. And he says, look, do I wish we hadn't bought back shares when the stock was 700 and the stock's too high 200? now? Yeah, absolutely. But we did and we saw value then and we see more value now and we have to back for XYZ reason. So that's an example of like a systematic buyback that didn't work. Whereas if I went to choose restoration hardware, RH, right? Like they aggressively bought back shares when the stock was low and then the cycle turned for them. They squeeze the shorts and the stock goes parabolic. So I don't know. I guess I was kind of having trouble like really pointing to when does buyback work as a investing strategy,

into these share cannibals versus when does it not? Yeah, so, you know, a good recent example that's going on right now is the aircraft leasing company, Air Cap. It's a Fintwit favorite, if you will. Andrew, you probably heard about it. What company was that? Sorry, I didn't get. Air Cap, the aircraft leasing company, AER. Air Cap, I'm very familiar with Air Cap, yep. Exactly. And so they announced a $500 million buyback. And so in that case, you know, they were trading at or below tangible book value for a while. They're selling assets. They know that some of their upcoming leases in the next two years are going to be at a higher rate. So you can

see that the trends are in the right direction. You can see that the stock is undervalued and they're making that purchase. So I think you have to make the judgment call and try to look at the industry type to look at the company and see if they make it. Even air cap is interesting because from 2016 to 2020, right? Let's ignore COVID because COVID goes. But from that time, they are doing exactly the strategy that they're doing today, right? Their stock is trading below book. Airplanes are tight. They are selling aircraft at a premium to book and buying back stock at a discount.

And the stock is just not working, right? It's not working. And they're taking out stock pretty aggressively. It does okay, but it kind of matches the maybe trails, the index versus today. I mean, things might be a little tighter and the fleet's a little bigger. They did a very accretive GE deal. But, you know, what is the difference today versus five years ago? Or I think of something like this is insurance and the,

Accounting and financials are crazy complex, but Bread House Financial, the ticker there is B.HF. They have bought back an enormous amount of shares. Einhorn's been on them and, you know, the book value is 200 and the stocks at last I checked 50. They buy back tons of shares and the stock never freaking goes up and the book value always stays flat. And look, in that case, AirCaps growing book value and growing earnings versus BHF probably isn't. But I look at the two, I look at AirCrap five years ago versus day or BHF today and I say, why is AirCap working now versus five years or BHF today? So you're exactly right.

And that's what industry trends and other factors come in, right? It's not just about buying stuff cheap on book value. You know that doesn't work anymore. We have a lot of asset-like companies there where you're just looking at something that's priced below tangible book value that doesn't necessarily work. And so you have to combine that with industry-specific tailwinds. So you have multiple tailwinds for ad cap. As you mentioned, the GE acquisition was very accrual for them.

The issues that are going on with Boeing right now means that, you know, deliveries of planes are going to take significantly longer. The actions they took during the COVID-19 pandemic where, you know, they didn't really step back. They continued to place orders. All of those tailwinds are coming together for them right now, right? So it's a, it's a mosaic of different factors.

Andrew, and it's not just about the trades below tangible book value. I don't know where to put my capital to let me do more buybacks. Is there any example of companies currently with buyback? that you want listeners to kind of be aware of? Air Cap was the one I was going to talk about a little bit. Yeah. If you have more time, I can go back to insider transactions. Okay, cool.

Let's go to spin-offs. One of my, it's funny, like, everyone reads Joel Greenblatt, you can be a stock market genius, and they say spin-offs. And one of my favorite places to play, I would say, though, from 2019 to 2021, maybe 2018 to 2021, spin-offs are not a fantastic place. play. I don't know why. Maybe that was market. Maybe it was a particularly bad batch of spinoffs. I kind of think companies started to get the hint that if you spin something off,

there's a bunch of event investors who are going to buy the crap out of it. And maybe you can spin off your garbage barge of assets and get a multiple there and issue some that can issue some stock. But I think spinoffs from that kind of five-year range were a bad run. But if you look at 2022 and 2023, I mean, the spinoffs have been unbelievable. They have done so, so well, and I think it's a really interesting area. But I'm rambling. Toss over to you on spinoffs. You are exactly spot on, right?

So from 2019, for several years, spinoffs did not work. And for multiple reasons, companies were using them as a dumping ground. They were loading them up with significant debt, leaving the parent company in much better shape. So when I think about spin off and I look at spinoffs, I don't think about it the way Greenblatt wrote about them and you can be a stock market genius. book, which is a wonderful book. But I look at it holistically to see, should I maybe be betting on the parent insular spin-off? And so GE worked out really well for me because Larry Kulp joined GE from Danaher. And he's been doing spin-offs, but the value is not necessarily in the

spin-offs. It's actually in the parent company. So he went from a company that was heavily indebted to a company that essentially has no debt on the balance sheet at this point. Because he used the spin-offs very strategically. He sold off assets. So when I think about spin-off, every situation it's about, do I buy the parent or do I buy the spin-off? And there are very strange situations that come along. For example, yesterday, Lionsgate Entertainment spun out its studio and library and merged it with a SPAC.

So the SPACs come into play at this point because of this interesting situation. And the guy leading the SPAC, Screaming Eagle, used to be the CEO of MGM. And MGM sold their library to Amazon for $8.5 billion. So you have this situation where, you know, the MGM ex-MGM CEO is involved, LionsK takes its best assets, which is their movie library and the studio,

which, you know, comes out with John Wick 1, John Wick 2, John Wick 20, and so on and so forth. So they have a bunch of these sequels that keep producing and making money on. And so they took those prime assets and put it into the spinoff, which is not something you see very often. So that one, I'm excited for the, the spinoff. In the case of GE, I was more excited about the parent. So I think you've got to look

at each of these on an individual basis to understand what's the motivation of the spin-off and which one should I be considering. A good example also was Jeffries, which wanted to become a pure play investment bank. It was getting rid of its operating businesses. And it spun off the oil production company with this. This one hurts me because I wrote it up. I followed it. I wrote it up and I you know you have an investment bank spinning off a royalty leasing company and my issue was if you compared it to some of the other like BSM or some of the other royalty I just did not see the value there and I mean the stock has been a effing screamer since then sorry I interrupted but I just had to wallow in my own misery no I came to the same conclusion so I received the spin-off shares

and actually got rid of them I kept Jeffries I got rid of the spin-off but then I spoke to the management last November in Dallas. I was at an Ideas conference and spoke to them. I looked at what they were doing, got interested in the stock again. I ended up buying it a few months after that conversation. So I went back in because now I could see why it was working. So every situation is very unique. It's the motivation of the seller or the person who is trying to spin off the assets. It's the management team and how motivated they are to make it work. It's where in the industry cycle we are at the moment, all of that comes into play. Let me ask you a question.

Joel, Adrian Blatt, and the spin-off, and you can be a stock market genius. One of the things he mentioned is you want spin-offs or parent companies, because he mentioned, if I remember the host Marriott spin, he mentioned how the parent company had this. You want spin-offs where insiders are just loading the boat, right? Wright's offerings was one he mentioned, but you want to dig through the proxy of the spin and see, oh, my gosh, like the CEO is going, let's do a, very easy. He's going with the spin, and he's rolling all of his stock from the parent company into stock and the spinoff, and he's getting gifted 500,000 million options that are struck

20% above the current share price because he thinks the stock's going to be a screamer, right? You want that. Recently, you know, I think I look at just about every spin. You know, maybe some I don't look as closely as I should, but I at least glance. I just don't remember in the past call it two years, maybe one or two, but I don't remember spins where insiders are kind of greedily loading the boat. Have you seen any of those greedy loading the boat spins? Because, look, I want to be on the same side as the greedy loading the boats. I just haven't seen that. And I think that's one of the reasons I haven't been like gung-ho into spinoffs recently. It's actually happening right now. There was an insider transaction in the spin-off yesterday. And, you know, we could talk about.

Which one? You got to tell me which one. This is the actionable idea. Yeah. Bio Haven? You've heard of Bio Haven. Oh, well, I bought Bio Haven. So Bio Haven was, from memory, Pfizer bought Core Bio Haven. And then they spun off some kind of smaller drug assets and a bunch of cash into this company. And it traded the day the deal closed, Bio Haven, new company spins. You know, it had, from memory, $10 to $12 per share in stock. And it traded down to six. And I bought it six and I sold at eight. And I was like, I'm a genius. Yes, who. Now, this was a year or two ago. The stock, as we're talking, is 37. So I have seen the insider filings at Biohaven. But, you know, at this point, it is a spinoff, but I wouldn't consider it like a spinoff anymore because it's been two years since the spin, if I remember correctly. It has been almost two years. So the reason that one is interesting is it was a merger up situation, right? So you've almost picked up. There was an $8 spread on it. So I participated in the merger up. And the reason I brought up the insider transaction was, I think, if I recollect

correctly, it was $148.50 that Pfizer was buying the core Biohaven company for, and it was going to load up the spin-off, which was going to have all the other non-migraine-related assets with some cash. I think the cash was about four or five bucks or something like that from what I remember per share. And so what happened was right before the deal closed, when the stock was trading at about $148, and Insider bought shares, about a million dollars worth. And that was so unusual. I've never seen a merger situation that an insider comes in right before the deal closes and buy stock.

It's not like they want to do the whole merger up play, right? So he wasn't buying it for that 50 cents he was going to get on the merger hub. He was buying it for the spinoff. And then the spinoff happened, and, you know, they have an OCD drug in phase three trials. They have a muscular dystrophy drug, I think also approaching phase three trials. So they have this pipeline of drugs. They've done a great job of, you know, raising a bunch of money through secondary offerings and the insiders participate in the secondary offering as they often do.

But what I notice is even after they participate in the secondary offering, they still go in the open market and buy stock. And the insider that bought stock yesterday was the same one who was buying before the merger closed. So that was interesting to me that he was willing to buy right before the merger close and now he's willing to pay $37, $38 a share and buy even more. no it's just funny you mention it because obviously i knew it i saw the filing yesterday you know i kicked myself because the six dollars that that was a juicy juicy trade and uh now

you do have the insider signaling but not that i'm impossible at biotech but you do have to have a view on the drugs and stuff there or you can just trust hey this is the great thing about insider buying right you can just trust hey the guys on the board he's got about as good a data as you can get i'm probably not going to have much of a differentiated view versus him let's just let's just ride right the guy bought it six he bought the orb let's just ride with him yeah let's go ahead and you know you got to look at who's buying so this person has been on the board for a while he is a medical doctor he was an emergency room physician for 10 years and then he moved on to the finance side of things right he's been on the board of 15 or 16 public companies so i just look at

that whole trajectory of his career and the fact that he's he's buying now so you also have to look at which insider it is, what kind of background to have, to have a strong opinion on, you know, whether this person is somebody worth following into the stock or not. Let's go to the last one you mentioned. And this is another really interesting one, though. I actually think this is probably, Merger Arb's probably the most fraught one, because we talked about, you know, you're buying in plain normal merger arb, you're buying nickels and you're risking dollars. But this is right behind that probably the most fraught one management changes. And I'll let you explain. I can talk about why I think it's a misrepresent, but I'd love to hear your thoughts

on management changes, where there are opportunities, where there's risk. Yeah, so with management changes, when we started tracking this data a few years ago, I was just completely shocked by the number of sudden departures that happened. I used to think, like, executives probably provide several weeks or months of transition time, and you often find that they announce the transition and they're gone by the end of the week. Sometimes you hear about the transition after the insiders already left. So quite a bit of activity on the C-suite transition side. And so this one, as you mentioned, generates a lot of ideas, but you really have to

understand the motivation behind the transition and what's happening there. Larry Kulp was a good example. He came into GE. It's taken him several years to turn the ship around. So it depends on, you know, the size of the company. If it's a very large company, it might take the new management, a very long time to turn things around and investors might lose patience. So while Larry Kulp was successful with GE, Pat Gelsinger at Intel has been added for I think almost three years at this point and we are not

yet seeing the turnaround there. So you've got to look at the size of the company to say are they going to have an impact in about two quarters? Are they going to have an impact in two or three years? So that makes it a little bit more difficult because this is a long game by the signal comes in and then you've got to look at it quarter over quarter for several quarters to see if you're seeing the inflection or the business side of things. Yeah, it's just, it's just tough because, you know, like, you generally don't get a management change when things are going well, right? And you've got, in the back of my mind, you have the old Buffy quote, you know,

when a genius, when a management with a reputation for genius meets a business with a reputation for, I don't know, destroying capital, I can't remember the exact quote. It's generally the business that keeps its reputation, right? So management changes, you generally have people going into really bad situations, But, you know, management, when you get a management change and it works out well, it's often a distress or semi-distressed situation. Like, you can be talking real screaming home runs here. And as you said, like, if it's outlined and it's done over a year, like, that's a management change, but that's different than when you've got, you know, I think of something like exponential fitness, which we've done a podcast on here. On Friday, they just come out and say, hey, we're under investigation by the U.S.

attorney's office and by the way our CEO is gone and that's a different management change than he's going to leave at the end of 2004 and Andrew's going to take over and instead those are two different situations. Are there any current management change situations that you think are interesting? I think the transition is snowflake where Frank Slutman left and they brought on a new CEO is quite fascinating. Clearly the stock fell a lot. Berkshire Hathaway still has a position in the company that they bought at IPO. So that's one I'm watching to see how it plays out under the new CEO who has a tech background, compared to the student who is great at growing companies.

The reverse of that happened this month with a company called FreshWorks. They are a small cloud SaaS company and they had a tech CEO that left and they have somebody else who came on who used to be on the board of service now and is trying to transition. the company from the small and mid-sized business focused to enterprise customers for the CRM and the SaaS products. So that's an interesting transition that I want to follow. So for me, I add these things to my watch list to see how things play out and the action might actually happen a few quarters down the road. But with the sudden departures, that might be a source for idea generation of the short side if you're so inclined to short stocks, which is not something I'm

recommending if you read Einhorn's book, you know, fooling all of the people some of the time or the other way around. It's really difficult to be short stocks, but, you know, the sudden departures can be an area for idea generation on the short side. This episode is sponsored by our friends at YCharts. Every four years, the uncertainty surrounding the next president and their policies sparks concern amongst investors. And with 2024 shaping up to be a rematch of the last two presidents, this uncertainty is at an all-time high. So what? What's your plan to ensure your clients stay informed and, equally important, invested? And our YChart's latest election guide, an essential resource designed to arm you with the insights needed to successfully guide clients through election season and tackle commonly asked questions head on,

speaking to themes about market performance amongst various presidencies, the viability of investments based on political affiliations, market reactions to Trump's reelection versus Biden's election. Grab your copy with the link in the show notes to unlock exclusive access to downloadable charts and visuals that will elevate your client, and boost your client's confidence in you as their advisor. See the link in the show notes. I'll refer everyone to the disclaimer at the front of the podcast that nothing on this podcast is investing advice. And it's funny you mentioned shorts because we're speaking May 15th and May 13th through

today has had the return of the meme squeeze and the shared squeeze. So it's just a reminder that how fraught short selling can be. Let me ask one more question on management changes. Just as you and I are talking, one management change that comes to mind is, recently over the past few years we've had these big companies where the old CEO kind of can't go away and I'm thinking about Bob Iger

at Disney you know his succession challenges have been you know from 2012 to 2020 he couldn't get a successor in place he finally has one and then he comes back and fires the successor basically and takes back over I'm thinking of Starbucks where Howard Choltz has had a lot of trouble letting

and go I think he's left twice only to come back and he might come back again the way Starbucks is performing and just some of the tweets I'm not an expert on any of those situations, but I'm kind of struck by those situations where I follow a few smaller casts where the old CEO leaves, the business runs into the trouble, and then the old CEO files a 13D that says, this new guy sucks. You know, whoever appointed him, don't look at me. It wasn't me, you know, but this new guy sucks.

Let's fire him and put me back in charge. In your experience, is there signal one way or the other? Because you could argue both ways. Like if the old CEO leaves, the new guy's terrible and the old CEO comes back, You know, I think Iger, like in that case, Iger, Cheypec was really playing the hand that Iger had dealt him, right? So I'm sure there were personnel issues and stuff, but I could argue the old CEO a lot of times the hands playing out and he kind of set his successor up for failure. Or you could argue bad pick. So anything on that side?

Sorry about that. I actually like the founder CEO coming back. It's their baby. You know, they feel like they have a really good feel for it. They have the drive to make things happen. So I like to see the boomerang CEOs, as I like to call them, that keep coming back. There's one of those situations playing out right now. I haven't looked at you very much, but Under Armour, which lost its way a few years ago

as a potential competitor to Nike, Kevin Plank, I believe, is coming back to the company. So I like those situations because, you know, they can re-energize the company. It's hard for them to give up and move on. Sometimes they become the executive chairman, but sometimes they just can't let them. go. And we've seen when, you know, Howard Schultz came back to Starbucks that had a positive impact. We've seen at least so far, I'll go come back and that's re-energized the stock a little bit. So I'm actually partial to these boomerang CEOs coming back. I haven't done the

quantitative work to say across all boomerang CEOs, what kind of returns you could end up with. The most famous example, most people think about is Steve Jobs coming back to Apple, but that might be exception if you will. I mean, obviously that's the most famous example and you would have loved it. And I think that's one of the, it's such a unique example, but it also does speak to as you said, it is their baby. He stepped into distress. Apple was very distressed at the time. He stepped in. He got paid because of his connection to Apple. He got paid a whole heck of a lot less than he was worth. And, you know, the founder, Under Armour, you mentioned it. That's a really interesting one. I haven't studied it deeply, but

it's an interesting one just because I think it's Kevin Plank, the founder who came back if I'm like, you know, you think about Apple. Iger in some ways was a founder of Disney by the time, like he had put so much of a stamp on it. I understand he doesn't have the Disney name, but you know, he had really turned that around.

Like the founder coming back, the founder has a level of reputation, gravitas within the organization that he can get turnarounds and things done that really no one else can. And I even think about Intel, you know, Pat, I can't remember his last name, but he was a lifer at Intel, right? And Intel runs through his veins that gives him a little more credibility than neither you or I are

equipped to run Intel. But if we stepped in and we're like, hey, we're, you know, brilliant mechanical engineers, we're taking over. We wouldn't have the same reputation. So Under Armour is a very interesting one to me. Great. Well, look, I think we've run through, we skip Spacks because, again, there's not a ton of interesting going on in Spacks. I say that the same Altman SPAC, DIPO, D SPAC yesterday. The Lionsgate SPACD, DSPAC yesterday. So maybe there are, but I don't think we have time for that. Look, I'm going to try and get the book through the blur again, but here's the book.

We're going to post this podcast to come out right when you're doing. If you're a beginner or intermediate and event-driven investing, I think it's got a lot of case studies. It's a quick read. I think it'll be very helpful to you. We'll include a link in the show notes. And anything else you want to talk about or anything? No, thanks for having me, Andrew. I really enjoy the conversation.

It was a lot of fun and you gave me Bio Haven to look back at. There's a few others. You actually tickled my mind on another spinoff that I'm not going to disclose because I don't want competent, but that's coming up that I need to put a little bit more time and effort into. But this was great. Anytime you want to come on, talk spinoff, inside or Biden, anything, open invitation. Thanks so much. A venture of an edge in investing coming out, May 21st is the exact day it comes out.

There'll be a link in the show notes if you're interested. And thanks for coming on. We'll talk to soon. All right. Take care, Angel. Bye. A quick disclaimer. Nothing on this podcast should be considered an investment advice.

Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.