Yet Another Value Podcast - Jay Van Sciver shares his thoughts on Industrials and Materials for 2023

Episode Date: April 24, 2023

Jay Van Sciver, Head of Industrials and Materials at Hedgeye, shares his thoughts on industrials and materials in 2023. Automobiles, Elon Musk, rails, Norfolk Southern, geopolitical commodities landscape - this podcast runs the gamut; tune in to hear Jay's takes on it all. For more information about Hedgeye, please visit: https://app.hedgeye.com/insights Chapters: [0:00] Introduction + Episode sponsor: Hedgeye [1:07] Industrial Sector overview: quick takes on VW, Porsche and other auto makers [5:31] Additional thoughts on Volkswagen and Lucid [7:53] Corporate governance issues: specifically referring to Jay's take on Elon Musk [13:27] Brand awareness of Tesla vs other EV brands [19:40] Is now the right time to short Tesla? [25:32] Why does the Porsche short trade exist? [30:55] Jay's bearish case for Uber [38:25] Additional thoughts on industrials, specifically, Jay's thoughts on rails [44:20] Understanding Rails' valuations [48:05] Opportunity in Norfolk Southern? [48:59] Materials Jay is looking at [52:52] Closing remarks Today's episode is sponsored by: Hedgeye This podcast is sponsored by Hedgeye. Hedgeye does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out hedgeye at hedgeye.com

This podcast is sponsored by Hedge-I. Hedge-I does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out Hedge-I at Hedge-I.com. That's Hedge-I.com. Hello and welcome to see yet another value podcast. I'm your host, Andrew Walker, and if you like this podcast, it would mean a lot if you could follow, rate, subscribe, review, wherever you're watching or listening to it.

With me today, I'm happy to have Jay Van Skiber. Jay is the head of industrials and materials. If I remember correctly, you can't forget materials at Hedge Eye. Jay, how's it going? Great. Thank you so much for having me on, Andrew. I really appreciate it. Hey, I really appreciate you coming on.

Let me start this podcast the way to do it with every podcast. A quick disclaimer to remind everyone that nothing on this podcast is investing in advice. That's always true. But Jay, I listened to a prior interview of yours, and I loved how you framed industrials. Industrials is the catch-all for things that don't fit in any other sector. But because you're the head of industrials and it's the catch-all for things that don't that elsewhere. We could go into a lot of different places in today's podcast. So people should

just remember, we're just talking. Nothing here is investing advice. Please do your own work and consult a financial advisor. Jay, I think you thought we were recording before we started. We weren't recording, but we're having a really interesting conversation about Tesla, which we're recording this on Wednesday afternoon, April 19th. They report earnings after the close. So who knows, maybe the stock's up 50%. Maybe it's a zero tomorrow. No one knows that we don't know what the earnings are. But we're having a really interesting conversation about Tesla. And And then Volkswagen, Porsche, kind of a little bit of the, how they Volkswagen compares to Tesla and a little bit of the stub trade Volkswagen versus Porsche. So I've rambled a lot.

I just want to let listeners kind of tune into what we were talking about before we press record. Yes. And I think from a value perspective, the industrial sector is one of the best places to look because the earnings tend to be so volatile. Something like truckload carriers, you know, over the next quarter or two are going to see earnings drop so much. You'll see people panic, the stocks will go down, the multiple will expand, they'll look expensive, but if you actually do valuation, if you actually are in the weeds, you can get wonderful value opportunities in the sector. And on the short side, you get some of the dumbest stuff that goes on, like truckload carriers with collapsing earnings currently being pretty new, all-time highs, you know, that you're supposed to the world. So we were talking about VW and Tesla, and I think it's an interesting, I would hesitate to call it a pair, although we certainly on our best idea of this list, have it structured that way, where we have a long VW, which trades, as you were alluding to,

for less than its public, large-cap, liquid subsidiary trades for its stake in that subsidiary. So VW floated 25% of Porsche, it's not even a, yeah, like a voting controlling stake to trades, and that values Porsche at more than all of VW trades for, which owns 75%. So its stake is worth more than what VW itself trades for. And other than this is trivial brands is Audi and Bentley and Lamborghini and VW itself, Scoda. It also has a finance subsidiary with a, I think it's a 30 or 40 billion euro, a book value. And Porsche is only like 11% of revenue. So it's a tiny part of total BW that's worth more than the rest of it combined.

And I think that's interesting. I like things like that. I do too. there are a few out in the stock out there in the stock market. I mean, I have had a couple people come to me with the VW Porsche trade. I have not put it on, but it's better than all those because a lot of like

you have real hair at the hold co. You know, like bought the former valiant now trades under I think it's Bosch Health and they spun out BLCO and their BLCO and their BLCO stake is worth like two times as much as their market cap is, but like the hold co has so many issues and there might be

negative value there. Whereas with VW it's like there's clearly so much value. I've had people pitch it to me before, though, and my first thought is always like, haven't people blown up on a Volkswagen, Porsche, Stubco Trade, pretty famous? Hasn't that happened before? I think that might be one of the reasons the kind of setup exists like that. No, there are, I mean, there's hair on everything that's going to end up reasonably valued at least a year ago in this market.

And you have one thing I think that's interesting about it as an event or an anomaly in the market, is that the management team is actually distributing real cash to investors, right? Yeah. 19 euro a share dividend and they actually could sell another 25% of Porsche and maintain control of it and distribute another. And then there's just within the, within the VW universe itself, the discount that VW preferred non-voting has to the common is ridiculous. Your vote doesn't matter. It doesn't, you can vote all you want as a common shareholder. Porsche SE controls VW, which is totally unrelated.

Well, it's not unrelated, but it's a different entity from Porsche AG. So I think there's like a complexity to the preferred common, Porsche AG, Porsche SE, VW. But just even that preferred common as a former person who's had on a prop desk, like, I love that kind of a trade. When that spread blows out, you put it on when it narrows back in. You take it off. You used to be able to do that with lots of A-B shares. HICO being one of my famous, my favorite.

So Volkswagen, and I've seen the deck, I know this way. So you've got the Volkswagen prefers with trade-up discounts the common, and then both traded a discount to just the value of their Porsche. Do you like those as the stub trade or like kind of the hedge trade, or do you think the discount is just so wide if somebody's going out? And obviously, look, again, we gave the disclaimer up front, shorting, doing stub codes. They have risk. We were laughing because people blew up on this in 2008. But do you think the value is there where you could just kind of go long Volkswagen and just

generate Alpha that way as well? I think so. I could be wrong. We're not allowed to trade personally the stocks that we cover for research. But I mean, that's totally the type of thing I would buy. But I probably have a value bias as an investor to my detriment in, say, 2020, 2021. But whatever. think that kind of thing makes economic sense. And if you're driving market efficiency, you should be really doing that kind of thing. And there are other pairs you can put against it. So we've had Lucid, which is an electric vehicle maker that's trying to compete in a market

that basically doesn't exist. The ultra luxury, it's a tiny, tan, highly competitive market. You compare that against it. You compare Tesla, which is the other name we're talking about that's going to report. today, which is basically a single product company, right? It is a company that is a 3Y that makes up 90% of revenue. They have an inventory build problem. They're cutting price repeatedly and inventories as of the first quarter are still building. The CEO, if you want to talk about corporate governance problems, the CEO, I mean, this is Googleable, which is amazing to me,

is that everybody in Tesla should realize that Elon Musk got paid $23.4 billion in 2021. That doesn't show up on the income statement because his options got marked to 2018. And for the most part, options marking grant date valuation doesn't matter very much. But it's the difference between a, I think, $900 million expense of Tesla and a $23.4 billion expense of Tesla. So when you think about how much of the theoretical profit that Musk has extracted from Tesla, it's much more than anything they've earned or will earn for several years. And then he left to run Twitter anyway. So what are you going to say on the corporate governance and, you know, stock options obviously matter and you need to adjust for that. But like it doesn't bother me that Elon gets the largest pay package in human history and it's all options base and like the stock goes up 10x and, you know, maybe you and I, you and I both probably think the valuation's crazy and all this sort of stuff. But like that doesn't bother me. But what bothers me is they paid as they said like the options are worth $23 billion. The dude owned so much. And you know, you're paying that because you think. allegedly you think he is the most talented entrepreneur in the world and you need to pay him this

so that he only focuses on Tesla. And then as you said, he goes on this quixotic quest to buy Twitter. I think that's really hurt the Tesla brand, as we can talk about in a second. But then even more than that, like just in the past week, he's launching this new open AI competitor and he's doing it, you know, he's doing the startup and funding it himself outside of Tesla. Like Tesla's paying him to be the highest paid best entrepreneur in the world. Tesla is allegedly an AI company, right? What do they always pitch? Hey, we're going to crack full self-driving because we've got all this great data. We build our own chips. We've got this AI. And he goes and builds an AI competitor, which, you know, AI could be worth trillions of dollars. He builds it outside of Tesla. Like, ignoring all the other, you know, the family members on the board, the solar state, all that. Like, it's just, it's bonkers to me. It's absolutely bonkers. I mean, people who own this must have never really watched any other companies with corporate governance issues. Corporate governance is an important topic that everyone should look at the composition of the board of companies that they are invested in

because it turns out it's super important over time and things get very out of control and you really don't know that much about what happens day to day inside an office, inside the culture, inside the CFO's office with reporting and accounting. And to be honest, you should also care about the $23.4 billion because in theory, you are sharing these profits and we're all pretending that there are profits there and there are no profits if you adjust correctly for what he got paid. And it's not even close. So, you know, you have a CEO with a corporate governance issue that's extracting all the economic value from an entity and pretending as though it's cool and we're so happy to have him. That's completely wrong. Nobody else does that. It's insane. And the other thing I would say about the brand, yeah, Musk has clearly pivoted to the right politically. He's politicized himself. My opinion, and we've written this, so I will say something controversial here, it's an opinion, is that Musk is politicizing himself because he's at risk of being prosecuted for securities fraud for faking, for example, the painted black video, where he presented a product, faked the video, presented it as a real product, and then sold a lot of stock. billions of dollars in stock. Usually, I don't know about what stock market you've covered in recent years, but my understanding the stock market is if you fake a product or lie and then sell stock, it's kind of a big deal. You know, I followed the SPACs really closely in 2020 and 2021.

So that was kind of par for the course for a while. But it became normal, but it became normal in part because this like Silicon Valley, it's not normal. It's wrong. And you shouldn't do it. And it's bad for capitalism and wealth creation in the United States. and it somehow has become normal in a way that is not normal. And Musk is in many ways at the center of that. Like, oh, you know, I'm rich. I can open my facilities against public health orders and what are you going to do about it? I can fly out dealer laws and just open stores.

What are you going to do? Sue me? And if he's super rich and I'll tie open court. You know, but there were reports that the DOJ was investigating him. And suddenly he becomes a right-wing guy who's tweeting the Taiwan. should go back to China when you're just like, where did that come from? I thought we were all fighting global warming and saving the planet. And now I hit a whole investor day where climate change didn't even come up. But I think that's one thing that's hit the brand, but we do

pretty detailed surveys regularly since 2018 on the EV market and landscape. And the Tesla brand has taken a hit. I think that the bigger issue is that people can see competing vehicles for the first time that are attracted. Like, if you go back to 2019, there were basically no EVs that you or I would be like, oh, I'm so excited to buy that car. I mean, the best one was the Jaguar. I paste. Shouldn't have a lot of range was the Jaguar, so you know it's going to be broken a lot or whatever, right? So, you know, you can buy the bolt, which was ridiculous. You could buy the leaf, which was, you know, I mean, these are like second cars for going to the grocery store. These aren't like primary vehicles. But now you can buy a Tycon, an Etron, a Rivian, a Lucid. You can

by really attractive all and forgetting to get into the kias and the Hyundai and uh you finally have Toyota introducing a battery electric vehicle uh so the amount of options that you have in the electric vehicles with the f-150 you have all of these new electric vehicles mock e i mean it's it's we make a list of it and we gave up on the list because there's now so many alternative like best one i've driven i actually thought the volvo um little electric SUV is It's a really nice car to drive. There's just so many of them that it's just less differentiated than it was. And now, a quick word from our sponsor.

This podcast is sponsored by Hedge-I. Hedge-I does fantastic work, and I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more, please check out Hedge-I at Hedge-I.com. That's Hedge-I.com. Let me pause you there. I want to ask three questions.

So first, you know, unfortunately, most people listen to this, audio, not video, so I try not to share slides, but I have senior slides. People can go, go find them somewhere. They want your slide on the, it is percent of people surveyed that would buy Tesla over another EV brand. And if I'm just looking at it, you guys start in 2018 and up until May 2022, Tesla kind of always pulls in the 70 to 80 percent range. So that's huge, right? Basically everyone is saying, I'd rather Tesla over everyone else. February to May drops from 70 percent to 56 percent. By far the largest drop. You've got the first time. that they kind of don't round out to 70%.

And then December, they're still in that 56% range, December to February. So that's the most recent one that I've seen you guys publish. They dropped from 56% to 40%. So I was just wondering, is there, obviously the competition's coming online, but is there anything else? Like the May 2020, it does strike me.

That's right when we starts buying Twitter. But is there anything else that you can think of that's driving these two? I mean, these are massive drops inside of a month, right? And obviously the February one is one data point, but from the February to May 1, they consistently go from 70 to 56 percent and they're there for the rest of the year. Like, is there anything else in particular you're thinking is driving this? I think there's three things. First, people on the political left by electric vehicles,

people on the political right may buy them, but just statistically they don't buy them. So if you liked the Twitter files or whatever, odds are you were on the right and believe in like, you know, the free speech and government shouldn't eat. email, a social media platform to take down Hunter Biden non-consensual nudity videos, right? Like, that's probably, you know, your bias. And if you're on the left, like, you see, you know, Musk being, I mean, he's tweeted that it's nothing new about him. He's tweeted a variety of things that would get me, you know, sent to the HR department,

and he's a CEO of a company. Like, but, you know, you find some of his things about, like, Fouder's. pronouns. You know, my pronouns are prosecuting Fauci, which isn't actually how pronouns work, and you can make some very funny sentences out of it. But, yeah, so I think he turned off a lot of the traditional buyer base for his electric vehicles and basically moved his personal brand to a cohort of people that don't buy electric vehicles in the way and haven't traditionally worried about climate change in the same way or their environmental impact in the same way.

And then they're like, oh, he's just preparing them for the truck. And I'm like, I don't think they're going to buy that truck. Like, that isn't the truck that, you know, a guy who's, you know, wants to put the MAGA flags on his truck is going to run around it. I mean, I think they'd make fun of him. But that's my, you know, take on it. But I think the bigger issue is that supply chain difficulties were a massive headwind to the launch of the EVs in 2021.

So 2021 was initially going to be a very big year. for new EV introductions. If you think about Tesla and their success, the Model 3 pre-sold very successfully in 2016. So the major OEMs were like, oh, batteries are here. Let's start developing these battery vehicles. It takes five, six years to develop a new vehicle. So you had a whole slew of the first barrage of new launches, really scheduled for late 2020, early 2021, and they all got demolished by the pandemic.

And when supply chain difficulties eased, a lot of those. Super Bowl ads and new introductions came out in, really, you can look at supplier delivery times or any of the indices for, you know, supply chain stress or just even the shipping rates for parts from China and stuff like that. They all came down in the second half of 2022. So you start to see the, you know, supply constraints on competing vehicles come off at that time. coincident with the issues around Musk's personal brand within that community and you know the other thing is I think that the most

another really important thing is just that these are aging platforms like the Model 3 and Y is now you know I mean they got like taxi cabs the blue weird taxi cabs driving around with the you know you want to drive the same car as the taxi guy like you know and when you have something like

2019 a whole bunch of cars get sold they all look new and great now they're going to get dirty and scratched up people are going to be driving around with dents in them mirrors hanging off you know just because that happens like you know the camry comes out and it's like oh it's a new camera it's so interesting uh and then you know they look beat up and you guys i see it the most like corvette it's like a new corvette comes out and i was like wow that's really like the current corvette looks really good but i know in three years it's going to look less good to me um so i think that's the other thing is you set up a single

product company it's like peloton they make one thing and that's like i mean i have a peloton So they don't make one thing. And the treadmill was excellent. And if they recall, if you still have a recall one, you should try and sell it in the second market because people really want them. I remember when the recall came out and you could go on to like a Peloton message board. And there'd literally be, you know, mother of two, 45-year-old women, but you'd be like, they can come take my Peloton treadmill for over my cold dead body.

Wow, that is some intensity around the treadmill. It's a really good treadmill. And the terms on which they sold it to you were, I have one, and it's amazing. It's a really good treadmill, but if something does get stuck under it, it is remarkable how quickly we had a like a thing get stuck under it and the whole trip that was up on its corner and like you could, it weighs like 400 pounds. So it could be really bad. But, you know, I think you have the same vulnerability where you have a single product or a single product category, sort of the three Y, that is entirely dependent on the success of the company. and that is, you know, under assault. Like you can buy this new, like, Kia EV6, and it's a good looking car.

You can buy the Volvo. You can buy Maquis. You can buy a whole ton of cars. And you don't have to feel like you're driving around in a Maga mobile that all your friends are going to judge you for if you live in the, you know, Northeast Corridor of California. Let me ask another question, just Tesla. I mean, you know, especially shorts, underweights, that type of stuff. Like, the question is always why now? because the conversation we're having, I do think the brand is worse today.

I do think there is more competition. But you and I, a lot of this conversation, we probably could have had back in March 2018. Like I specifically remember being short Tesla at the time. And, you know, the stock, I think it was March 2018, went on a crazy run. And then, you know, a year later, Elon's giving interviews that said, we were a week or two away from bankruptcy at Tesla. And I was like, oh, my God, I knew it. And somehow we pulled a rabbit out there out. And I think like no stock has burnt short seller.

like Tesla has, excluding maybe some of the really Mimi stocks, but over the past 10 years, no stock has burnt Tesla. And every time you think it's done, like, I remember coming into this year, I was like, I feel like the Tesla brand's getting hurt, competition is coming. The stocks up with like 40% this year, not to results base or say a very short time frame, but just every time you think this company is done, Elon pulls a rabbit out of their hats. Or I remember one person said once, I think was Dan McMurtry, hey, the bare case for Tesla is competition is coming and they're an overvalued car company and the bull case is Elon's going

to take us to Mars. Like, how do you fight that bull case? I don't know. Just like, why is now the right time? Well, right now they have an inventory problem and they're cutting price desperately. And if you saw that at any other consumer product company, you would get, I can't get a locate fast enough. Two price cuts in four months in an inflationary environment and just the whole market doesn't care. And the inventories are still building. Like in the first quarter, you had a another increase in inventory when that is not the auto market the auto market is still in deficit right there's there's still some supply chain issues the whole dealer channel is hollowed out and I know their conspiracy theories that say that that isn't true it's all off lot I'm like just look at

manhine right manhine is still up there's not enough cars uh and that's you know or go try to buy a car like I love to go buy cars took my son to the uh bentley Lamborghini dealer you know got this cute picture seven you know driving a lambo right not really really driving it just in the car, but, um, I think of him breaking the lawn, uh, running in and stuff. If my kid could drive a Lambo, like, I'll, I'll pay the fines and do the time. I'd be so proud of them. Uh, all my kids can drive, well, two of my two oldest kids who can reach the pedal can drive a manual, but, um, the, we do it in a driveway, just to be clear. Uh, the, the, the point is, though, that, um, I don't remember the point of that. I think I was asking why now

on Tesla, that's kind of what we were talking about. What was that? We were talking about why now on Tesla? Oh, why now? And you were saying, look, we talked about the price cuts, inventory building, and I think that's kind of, yeah. So, like, if this were any other car company, any shoe company, retail, or any other durable consumer product company that had, I mean, they're literally adding two factories and they're having a problem. They're adding, you know, Texas and Germany, and they're already having a problem selling their current production. and cutting price with inventories, even in the first quarter,

inventories went up at the time no one else is having that problem. We're entering a recessionary, we think, from a macro environment, clearly borrowing rates for something like a car or higher, and he just trained everyone to sit around and wait for price cuts. I think it's like a total mess. And there were not competing vehicles. They were supposed to be that didn't show up because of supply chain difficulties. It was in a way of very weird bailout.

And the most important thing is, you know, as somebody on Twitter responded to me, when we post this chart of like Tesla relative to the market versus Fed funds, when the Fed, you know, is accommodated and liquidity is abundant and a bunch of people who aren't sophisticated investors come in with their ape-in to AMC or SPACs or any of these bubbles that came, you know, came up. And I, you know, I think that, I mean, hopefully, since this is a value-investing podcast, every single person on the other end of this understands exactly what I mean the tide is going out the Fed is tightening specs have already blown up lucid is you know blowing up uh all of the

autonomous stuff blew up right some of this some of the stuff is blown up is actually going to be I think interesting in the long run and Tesla is actually down 50% in addition over the last year in addition to up 50% year to date which tells you everything you need to know about it's the last We call it the last garbage standing. And, you know, we can look at Musk's AI thing, and I call them a jack of all bubbles, right? Like, if streaming companies are coming public, he's going to have Tesla streaming. If autonomy is what's high, he's going to do full self-driving. If it's electric vehicles, new energy, whatever it is, like he tends to be on it, you know, that's just how he is.

We're going to mine lithium with table salt, right? how did he get out of the 2019 situation you know i think it's very obvious that he held the autonomy day where he told of everyone he was going to do a variety of things that four years later didn't happen and he probably knew it's a time mark going to happen and he sold stock because Tesla's primary product the thing they are the best of selling is stock and you can be like oh they haven't sold stock to the public it's like no they disrupted that by giving it to the CEO who then in total turn sold it, right? The main product there is shares of stock in addition to the Model 3, which is a very nice car. I don't think the Model Y is nearly as good.

You know, they did a good job with the Model 3, so I don't mean to take away from that, but the Peloton is also a really nice treadmill. I'm a huge advocate for that treadmill, even though I'm sure it will kill me one day. So being a nice product doesn't get you that far in stock market valuation and durability of products. Let me go back. We were talking Porsche VW, And, you know, I think a basic question to ask. So, you know, you've got this trade where VW is trading for less than the, than less than just the value of their poor share, of their poor shares. That's a pretty obvious R, you know, I haven't looked at the bar or anything.

And again, short selling is risky everybody. I'm assuming Porsche would be a little bit difficult to borrow since VW owned 75%. But even they're like buying the rest of VW, you mentioned the financing arm, all their other brands. Like, that's obviously a good trade if you can get it for more than free. I guess just the first question I should have asked is, why does that trade it exist? Like, what are you and I seeing here that the market's missing? Is it just Porsche's low float so nobody can short it and hedge this out? And Porsche is actually just massively overvalued because a few retail guys who love Porsche or buying stock?

Or is there something else going on there that's kind of presenting this opportunity? Yes to all that. Porsche is not without hair. I mean, it is if they have, first, it's a European industrial. And usually my thought on European industrial, specifically French industrials, is nobody ever made money there. No, just don't. whatever it is, leave it. It looks good. But Germany and Sweden, you can occasionally do okay, right? So we'll take that more seriously. But you do have, for example, labor on the board. You have more of a stakeholder culture in Europe. You have the Porsche family is in a controlling state. You get into a lot of the politics. Oh, the government of Lower Saxony as a board seat and some influence. So you have, this weird governance.

It's not necessarily evil or fraudulent, but it's not great because you just had all this Dieselgate stuff that went on that was definitely operated at the, you know, so you have some history of bad governance of that sort of toxic brew at the board level not being great for value creation and shareholders. Although I think Dieselgate was an effort

to maximize shareholder value by a fraud, but whatever. You don't hear that too much, right? Maximize shareholder value via fraud. That's kind of where we're going, right? They want to sell more cars. They want to win it. And, you know, a little bit to get away with that because it's the sort of national champion, you know, who's really regulating you? Oh, your friends is a German government, right? And you're probably one of their largest taxpayers, everyone, employers and all that stuff, right? There's all kinds of conflicts. I mean, we talk about the investment industry,

conflicts of interest, but I mean, every industry has deep conflicts of interest. So I think there are like issues with governance and the board. I think that that board currently recognizes is the low VW valuation is bad for VW's brand and the marks that are under its umbrella, and they want to correct that. I think they also initially overcorrected, not overcorrected, but they were also forced into being early into electric vehicles. So they're investing in electrify America. They were selling EVs earlier than most other companies.

And like I pointed out with Tesla, like the way they were early is they were willing to accept a $7 billion loss in their first whatever number of years of operating. Everyone knew electric cars were coming. They just really need the loss early and build a franchise in it. And, you know, to some extent VW has done that as well. And I think there's a huge complexity issue. You know, you start explaining that there's Porsche SE, which is owned by the Porsche family. And they are actually the controlling shareholder in VW via the voting VW shares.

But there's also the VW preferred, which is non-voting, and trades at a discount to the common, which is controlled by the Porsche SE family. And then one of the ways that VW created value was by IPOing Porsche AG, which at that moment, everyone's like, wait, there's two Porsches. And that also has a common and a preferred and trades for more than all of VW. And you just, when you start explaining all that to even a sophisticated institutional investor, the term is brain damage. Like they don't want to do the work.

And you can make money. I mean, like Liberty and there's been a variety of things where you're understanding something complex money in liberty recently oh i know i'm just like historically like you can make money and things are complex or whatever but you know sometimes if you have a hundred companies under coverage you're a p.m who's trying to go across all the sectors yeah a lot easier to hear like oh they're going to mars long right like that that is definitely a dynamic that i think we've probably all seen play out of institutional investors but uh you know inefficiency a management team is actually i mean they're talking about ipoing Lamborghini right

sell 49% of Lamborghini, pay out the whatever, $8 billion or whatever that raises, and give it to shareholders. That is just like a very natural way to get rid of the stock won't go up, but your total return sure will. That's a very natural way to correct the valuation disparity. So, you know, I think that is a trade I like a lot. It's worked out in the last year. and I think it is, you know, if you're, if you are, you know, worth yourself as a value investor, you know, and VW has some like really be even beyond diesel gates. There's a lot of like, I mean, they behave badly during World War II. We were going to tie the title. Oh, yeah. You just can't, you just can't. There's baggage in history in any old industrial company, right? Like, it's just how it is. Let me switch gears completely and ask you about. I think, unless you've changed your recommendation in the past couple of days, bearish Uber is one of the positions you guys have. And it's just one that's interesting to me because I've got a lot of friends who are longed.

I've got a lot of friends who wouldn't touch it with a 10-foot pole. You know, I think the long thesis is you've got the leader in mobility. It seems that Lyft is imploding as we speak. I'm not sure how long that's going to be like a two-player market. It seems like it's going to one-player market. You're getting glowing profiles in the Wall Street Journal of Uber's CEO, spending two full days being an Uber driver and being able to fix all driver problems because of that, I guess.

But I just want to ask you, bearish Uber, obviously a little bit of controversial stock. What's making you bearish there? So we did the IPO as a short. And we still have that on from that period. If Lyft goes away, that would be interesting as a structural change to the industry. But the reason we are bearish Uber, and this is a great, actually, I love speaking to, I speak to too many non-value investors, but I assume everyone on this call is familiar with

like Michael Porter and industry structure and they're good businesses and bad businesses and what I mean Uber is obviously like structurally in a difficult position right they're just when you do it out the cost of taking having a chauffeur is just really high like if you the cheapest way to get around New York you and are both New York is to run or take a bike you will take the least time and it will cost you the least that's why a city bike is very successful. Having a, you know, owning your own car outside of New York, a place where parking is a pain, right? Anywhere outside of high parking costs, it makes more sense to drive yourself. Just it takes less time. The bus is a disaster because of the amount of time it takes. We put like

$100 an hour on people's time. People overvalue their time. You can tell that by who takes the Acella versus the regional on Amtrak and things like that. It's like your time isn't worth that much probably. But people put a high premium on it. And the problem with Uber is just that it's really expensive to hire a chauffeur. The real problem with Uber, the thing that we came away with very confident on saying, like, this is an IPO you can short, is that the theoretical industry structure advantage is supposed to be a network effect. That when more people show up, more drivers show up, and more drivers show up, and you get

this wonderful people all in the network. Well, the problem with that is that, one, people can just, just get on two networks at the same time. They can get on Lyft and Uber at the same time. And second, there are tests for network effects, which is that, you know, daily average users over monthly average users over time. Like, are people using the product more?

Like, you know, oh, I log into Facebook once a week, but then I find I love it. I'm on the more time goes by, the more users are there, the more interaction you have with it. Well, Uber failed all of the network effect tests. it doesn't have one, which is why it's so big and still loses money, no matter how they try to define EBITDA and all of these numbers. We're going to be adjusted, remote, recalculated, excluding everything EBITDA positive, right?

You hear, anyway. So I think the problem with the business is that they have historically lacked a network effect because there are some significant structural problems. We do it out. it's actually in the in we use it still as an industry structure example of a failed industry structure but you know one of the problems is just that uh the switching costs for drivers and riders is very low there are lots of alternative um transportation mechanisms uh so it's very hard uh to to get um that network effect to work no i think that's the big thing with because i i do wonder like As you said, the switching costs for drivers and riders are pretty low, but everyone else is imploded.

So it does seem you're going to a place where Uber is kind of the only place for riders and drivers to go at that point. But it's just everything else, right? Like every time I go out to dinner on a Friday night, it's 9 o'clock. I'm 50 blocks from my apartment. I pull up Uber and I see, oh, you know, if it's $10, I'll probably bite the bowl and pay a little extra take Uber. But it's 15 or 20? Great. I'll spend an extra 10 minutes and take 250 on take 250 to take the.

subway and the bus or I'll do the I mean I am a huge city bike man I'll probably city bike by your by your apartment later today but uh yeah just in obviously subway and bus and city bikes versus uber is a New York city thing I don't want to be like but you know if you're in the suburbs you've almost certainly got a car so you weigh hey do I want to go out have a couple drinks I'll take an Uber then or I can just drive like it's just there's so many alternatives it's just really hard when it's not just that people can go to your competitor or that you're always weighing every other alternative against it. That is just a tough slog.

It really makes the most economic sense outside of areas where it's impossible to park when you're going to the airport because the airport parking is expensive. Outside of basically every other use case besides dense urban areas where you can't park and airports, it doesn't make a lot of economic sense. And there was already a competitor in the form of taxis and black cars and limous that met the needs of people there. They elbowed them out to get into that incredibly desirable lucrative market of running a taxi service.

You know, you're just like, okay, great. Before Uber, it was pretty lucrative. I mean, you remember all the stories about taxi medallions. In college, I remember I went to a conference and a private equity guy was in Dallas, and he talked about owning the monopoly in the Dallas market and how much money it made. And I thought he was kind of arrogant.

So when Uber came around, I was like, I bet that guy's regretting how much he talked about that in the past. But they had a regulatory barrier of entry. And that was amazing. And now basically Uber blew up that. So, yeah, I just, I look at it. And if you did, if it were a monopoly, then yeah, I guess you would, you would get the, you probably see the network effect of that and they'd be able to take price.

But yeah, I'm a huge user of Uber. I don't look at how much it costs. And as long as it's not stupid, like, you know, You got to get to the kids somewhere, so you're just going to get in the car, right? Although I greatly prefer taking a New York City cabin, I can get it because the drivers are better. They actually know what's going on. You get some guy who just drove in for the day or whatever driving around in York. And it's like, oh, my God, why are you going there?

We're going to die. We're like in the tunnel or something. You know, you're going to die and never get there. The other day, my Uber driver missed my exit, which it was a very obvious exit. He missed it. And then right in front of us, there was a car accident. So that mixed exit, which should have cost us five minutes, ended up costing us an hour and a half because we were stuck on the,

and, you know, like, it was a big accident, like seven police cars, two ambulances, a fire truck respond. I was like, oh, my God, I cannot believe one exit is cost us. Anyway, no, the other thing with- business, it would have made money by now. The other thing with Uber, like, if you think about the alternatives, you know, business trips, you go somewhere and I instantly just price out, hey, I need to make four trips.

Is the cost and convenience of an Uber going to be worth. it versus running a car, being able to instantly leave, go wherever I want, maybe take a couple of extra, like there's just so many alternatives to it. It's very tough. We've been going for about 45 minutes. I think we've got another 10 or 15 minutes. I've got lists of everything that you're long, but anything else you want to talk about with kind of more of a value investor focused podcast? I do, I do think, well, I mean, so one of the things we've been working on the most recently is the truckload carriers. I had, I had your short, I think your short truckload carriers and your long rails.

I thought that was a pretty interesting. Yeah. So, I mean, rails are, you know, speaking of regulated quasi-monoplies, regulated quasi-monoplies, the cycle. So one thing we do, I should probably explain our process, but our process is usually to define the cycle in an industry. Like, what actually drives the cycle? And for a lot of industries I cover that are, you know, physical fleets like trucks or construction equipment, what drives the cycle is actually a replacement demand that you'll have a cohort of it's like demographics we call it fleet demographics right where you have a cohort of of equipment that gets old and has to be replaced so the best example of that is rail cars because there's a regulatory restrictions on interchanging rail cars that are older than 50 years old so if there's a huge number of rail cars that are going to turn 50 you know that they're going to sell replacement for those and if they're not and then people like well they never last that long it's like no actually

there are like 80 year old rail cars still running around that don't interchange so they're just like ship lumber you know inland or whatever uh so that's you know and we did wabtech as a short because uh the fleet demographics were turning very bearish and you weren't going to have any replacement demand for a while because in 1974 they changed the life of a rail car from 40 to 50 years so you ended up with a 10 year gap and replacement demand, which is a really good trade that will reverse. We usually use shipbuilding, which is after World War II, you had a whole cohort of ships coming to the commercial fleet. Ships last for 30 years. You had a peak in 2011 was the last peak. And, you know, people don't talk about Baltic dry all the time, dry bulk shipping the way they did back then.

So, you know, but they aren't all fleet demographics, right? A lot of the demographic, A lot of the drivers are regulatory. So for class eights, it was always emissions regulations. It's now no longer emissions regulations, so they've given up on that. But now it's just fuel economy, which is like what they were doing anyway. But one that's really interesting is rails,

where railroads were a lousy industry for a long time because you had the Interstate Commerce Commission regulating pricing. So a shipper would go and take a rate case, they complain, and the, you know, Structurally, the rails just couldn't fight, you know, that pricing, and they ended up taking, and they had all these other burdens that were forced on them. It had to take passengers, all this crap. So, you know, for a long time, you know, the 50s, 60s, 70s, rails were a lousy industry to be an investor in, deeply cyclical, subject to marginal freight demand.

And then you get deregulation, Jimmy Carter, the great deregulators, how he should be remembered in Myspace, trucking, airlines, rails. you get eventually to the surface transportation board and the composition we have now, and you have a very light touch on rail pricing. And when you think about the lobbying power of the rails, right, it's super consolidated. They're basically five class ones. And there are employees in basically every congressional jurisdiction for the rails. It's like the Defense Department, defense contractors. They wield an enormous lobby.

And that's the road they've taken. I don't know why they're being like so stupid on the PR front recently with respect to the accident, Ohio. I mean, nobody dies in rail accidents. It's a very safe industry. People die in rail accidents when their car gets hit at a rail crossing. Rails are a very, very safe way to move a huge amount of freight. Nobody even died in Palestine, Ohio, right? Nobody was even hospitalized, but we somehow have made a national emergency out of it.

But, you know, the reality is that they have this enormous pricing advantage. if you want to get your coal to the power plant you're going to pay your railroad they take price every year margins go up every year because they are a lightly regulated monopoly now eventually it will be too much and the shippers will get together and oppose it and bribe politicians to re-regulate the rails and that could be in like 2060 like i have no idea when that's going to happen it certainly isn't going to happen right now so in the meantime these are like basically lightly regulated utilities with uh in terms of their sort of fact characteristics in the market. And the other thing that really matters for rails is how fast freight

moves. So if you can move the same amount of freight and half the time, you get to book that revenue early. So the congestion we saw from COVID, right? You heard probably about the ships backed up at ports and trucks backed up at rail yards and ports, right? It just snarled the whole transportation network in the U.S. People were out sick. People, the freight lanes changed, like everything went wrong. And it's a very sensitive network. You know, you'll think of a not like a you know a sensitive soul but like if you get a disruption to a trade network suddenly you have a train in the way and you have a train in the way just like your traffic accident right you get stuck uh you get backed up you know it all kind of compounds so the decongestion the

speeding back up of transportation networks in the u.s freeze up capacity freeing up capacity is bad for truckload carriers freeing up capacity is fantastic for rails because the thing i think people also don't know what the railroads railroads having grown revenue ton miles capacity, how much they move in two decades. They are not growing capacity. It is exactly like a flat line from 2004. It's not a volume story, but margins go up because it's a pricing and cost story. I guess just looking at the real.

So I've just pulled up Norfolk Southern on Bloomberg. I haven't done a deep dive into these in a while. But I guess the pushback on it would be I'm looking at 2023, 2024 abstinence, and it trades for about 15 times price earnings, right? It's about roughly right. You know, I think you laid out a coherent story for volumes going up, but like if I'm buying a rail, you know, this leapy growth company that's just kind of relying on margins and pricing going up a little bit at 15 times, like, are you really

going to generate alpha at that multiple? Yeah. I mean, I think you are. Like the rails for the class, the margins for Class 1 rails were like 12% in 2007. And they're like 30% now. So these aren't that sleepy. They take a lot of price. And their costs are coming down quite a bit over time as they kind of optimized a fixed network and increased.

Yeah, they use more technology. You know, there are some big cost reductions they could make that will probably be harder to do in the wake of more regulatory scrutiny. But, I mean, these aren't like, this is a straight line up from deregulation. So you get the STB in 2006 and just, you know, you're talking about more than doubling margins in a decade and a half for a decade, really just a decade, a doubleing margins in a decade. That's pretty good. So I think there's no reason to expect that it won't continue. And then you get people like, they're like, well, they only earned X in 2019, which you can be like, oh, well, that's an industrial recession. And four years ago, four years of price increases.

Yep. Inflation hit them kind of, you know, there's not like an inflation aspect. Like inflation was bad for them because, you know, they typically price out. It's a mix of contracts, but the average like big shipper price out a year. So they know what their, and there's some longer term ones too, but they'll know what their prices are going to increase. And if suddenly their cost increased more than that, that's X fuel surcharges, right? That's kind of a negative. So to the extent that you get disinflation and ongoing pricing, you know, and the network speeds

which lowers unit costs. I think it could be a really good group to be long. Is it going to light your portfolio on fire? No. You got to be careful talking about railroad's lighting stuff on fire on the heels of an accident, Jay. Come on. Yes.

No, writing it on fire was the right thing to do. So I'm a chemist. I have a degree in chemistry. I worked in a lab. And I left chemistry to join the by side at Brown Brothers Charmin, which was quite a career change. But I know a lot about chemistry.

and I've covered the rails for two decades, and this accident happens. I'm like, this is my moment. I've been training for this my whole life. It was actually, I think, a huge regulatory victory, right? There was an accident. It was immediately disclosed. People objected to the process of remediating it, right? They objected to lighting the vinyl chloride on fire.

And I'm not saying that lighting vinyl chloride on fire is something you want around you, but they evacuated the area. They are, you know, removing contaminated store. Writing on fire is probably the best thing you can do to get rid of it, right? What do you think happens at a hazardous materials waste facility? They light the stuff on fire. Like, that's what happens. Like, you burn it.

Like, there's no other way to get rid of the stuff. It just looks ugly and it does create an acidic ash, which is not great. I don't mean to minimize the, it's not great. But, you know, nobody killed, nobody hurt. everyone's like, the press isn't covering it as I see it on every television screen at the gym. It was on crazy. Every late night show was covering it. Just quick question.

Norfolk Southern down about, let's call it 20% to make the math even this year, whereas I think a lot of the other rail piers are up. Do you think, I'm guessing this accident has a lot to do that. Is there opportunity in Norfolk Southern right now? I, we have it as a long, but I think they'll all work. They're all correlated. I would prefer Norfolk Southern because I think the rail accident is way. overblown. That was more what I was asking. Yeah, just

Yeah. But I think you can own a basket of them. Like, I don't think you have to, you know, take the individual risk because, you know, the reality is it's a good business to be in and it will make money even if we have a better recession. And now, a quick word from our sponsor. This podcast is sponsored by HedgeE. HedgeE does fantastic work. And I think that shines through in the conversation we have today. If you like the conversation and are interested in learning more. Please check out Hedgeye at HedgeI.com. That's HedgeI.com. Last question, and this is me being a bad podcast host, I prepared more on the industrial side, and I think you've got a longer industrial coverage. The interviews I saw with you had been more industrials. But on the material

side, are you following tech at all? Tech Comenco? Or? The tech, Glencore, a crazy buyout offer, the spin that's happening. No, okay. I'll just be like, I've looked at it. I mean, so we have a couple of interventions of substance on um one thing that when we do we do we cover we cover and we don't cover what we don't cover like i i can talk about like almost anything but i've covered industrial as a long time you listen to the glencourt earnings call and we'll start talking about their fatalities but it is uh we have two things that we're really doing one is short base commodity so cf um and then urea fertilizer names where there's a huge slug of

capacity coming. Everyone wants to talk about high marginal gas prices in Europe. What they should be looking at is India going self-sufficient, Nigeria moving to the export market, and the fact that global consumption of Eurea in developed markets in the US goes down. It actually is in decline, not over like some short period of time, over like decades. And globally, it's probably going to go into decline with China being more responsible with use application. And then short steel is I think one of the coolest places, to be short, very straightforward. What you had was very high shipping costs through 2021, 2022, which narrow the competitive geography, right? So suddenly if you wanted to build a toaster out of steel, you literally could not import steel. It was, it just wasn't

economically reasonable. So you had to, you get this. I heard you describe it on a prior podcast, you know, steel is normally an international market, but because shipping costs went so high, it turned into like cement. It was a local market where, hey, if the steel was more than 50 miles away, you basically, 50 miles might be, but you basically couldn't get it. It's exactly like, yeah. So that dynamic is since reversed. And then on the long side, we have, I'm a believer that electric vehicles take share because everyone's already building the factories to make them and they've already designed

them. And when we survey consumers, they say they're interested in buying them. So I think when you do it out, there's absolutely no way that you're going to have 20% of auto sales that are electric in 2030 because you simply don't have the metal. Like you don't have enough lithium. it doesn't you can do it's like math it's not even i don't know why like they whoever wrote the ira didn't do out all the math for hydrogen subsidies and all that stuff because when you do it out you're going to end up with like no lithium and a negative hydrogen price there's like it's very

i mean i know the market will adapt but like you wouldn't have chosen those uh subsidy levels if you had really thought it through carefully through non lobbyists so uh i do think that Alomarle is like a normal company in many ways, relative to a lot of materials companies, you know, like a U.S. listed board, man, CEO, in decent regions in which to produce good assets and is an interesting way to play what is likely to be another super cycle. Like, we saw that with Iron War, where you had in 2001, I was in the materials analysis in 2001. So like, people would come in and be like, can you imagine if everyone in China bought appliances, how much steel and iron ore that would consume. And it turned out that was

right. That was like a really easy thesis. Like, and I think, you know, you do the same thing. You're like, can you imagine if a third of people bought electric cars what that would do to lithium consumption? And you look around, you say, wait, that's right. So I think that's one that we have is a long where you are going to be in a, you know, until you get to lithium recycling in a amount that matters or a cessation of ED demand growth in a long upcycle in lithium consumption. Perfect. Well, hey, Jay, this has been absolutely great.

We'll have to have you on again, but we're approaching over an hour if you include our pre-podcast chat. So I think we have to wrap it up here. But where can people find you if they kind of want to learn more? So if you're on the institutional side, you can email sales at hedge.com and we can get you set up. We have for non-institutional individuals who are interested, Industrials Pro, which is, if you Google Hegei Industrials Pro, believe it or not, it will take you to the page where you can sign up for that. And yeah, those are our two main categories.

Cool. And I'll include a link to your Twitter account as well so people can go follow you there. Very active Twitter profile over there. But Jay, really enjoyed having you on and looking forward to the next time. Great. Thank you so much for having. It was a pleasure. 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.