Yet Another Value Podcast - Jeremy Raper on StoneX $SNEX

Episode Date: August 3, 2020

Our inaugural episode is an interview with Jeremy Raper of Raper Capital (https://rapercapital.com/). We start by discussing Jeremy's credit background and how he's looking at the markets today; then, we dive deep into one of his favorite investing ideas: StoneX (SNEX)

All right. All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker, and I'm excited to welcome you to the first podcast. And for my first guest, I'm excited to have my friend and the founder of rapercapital.com, Jeremy Raper. So, Jeremy, how are you doing? Hey, Andrew, I'm doing great. Thanks for having me. It's a pleasure to be here and to be your first guest. It's quite an honor. Hey, no, thank you for doing this. And before we started, I'm just going to go ahead and plug you for you. awesome premium service three or four months ago and i've got to say it's one of my favorite if not my favorite service i subscribe to uh you know it's a great blend it's edgy value ideas that you're not going to find anywhere else uh just off the top of my head i think i can think of two ideas from the u.s new zealand a couple of london ideas like they're really unique interesting ideas and i really enjoy reading them and sometimes investing in them so awesome that's great to hear

Not a satisfied customer. So why don't you tell me a little bit background, how you find this background of yourself, your investing background, and I'd love to hear a little bit of how you're sourcing all of these kind of unique small-cap international ideas. Sure, sure. Well, I won't take you all the way back to the beginning. But basically, I grew up in Sydney, Australia, but left when I was 18, went to school in the US.

So I haven't been in Australia as an adult. So I kind of, after graduating college in the States, I began my career, in finance in Tokyo in 2008, so just post-crisis. And it's something I talk a little bit about on my blog and also, you know, comes through in my investment style. But for the first four or five years of my career, I focused overwhelmingly on credit because there were a lot of distressed credit opportunities, as you can imagine, coming out of the financial crisis.

And in Japan as well, yeah, exactly. So my formal training actually was kind of as a credit analyst. Look, I was a sell-side hedge fund salesperson doing distressed credit, distressed debt, CDS, convertible bonds. But my first buy-side gig was as a credit analyst doing overwhelmingly Japanese and Asian corporates. And so my kind of perspective as an investor is mostly formed through that credit lens. So, you know, look, I don't want to repeat too much what others may already know, but essentially, you know, the difference between a creditor and an equity investor is the creditor

cares much more about the downside than the upside, right? Because his max upside is getting his money back, right? So the equity investor has a call option on the growth of the business. So that's why you always see PE and PEG and EPS on an equity research report. And on a credit research report, you look at things like debt coverage, debt service ratios, asset coverage, and things like that. Because, again, you're only getting your money back if things work out and a coupon, but maybe not even a coupon these days. And so if you translate that to how I look at stocks, or I guess, you know, we'll talk about one in a few moments. but the vast majority of my ideas are kind of generated from this credit lens where I'm not

necessarily looking for three, four, five baggers. I'm essentially trying to underwrite the downside much more so than the upside, which, you know, is obviously a quintessential value approach, but the difference is I often look for like a credit-based catalyst to catalyze the value. And it's easy to find on the short side, right? It might be some kind of covenant breach, some kind of maturity wall, a big bond coming due that the company doesn't have money for a bad asset sale. it's slightly trickier on the long side in a very credit, in a very easy credit environment,

which is what we have here. That is what we have in today's markets. So on the long side, it often looks a little bit more like a special situations type of approach, right? To have a good code, bad co-structure where the good co is, you know, a highly cash-generative business, a few claims against it. And you can underwrite the value even in a pretty bad scenario, but it's somehow shrouded by the bad business that's been a serial lossmaker. But now, something's going to happen with the bad business it's going to be shut down it's going to be sold off whatever and therefore the good co can shine through um so that's kind of a typical one which obviously aligns with your special situations type approach the way you kind of look at things

so that's kind of the genesis of my approach um and so just to kind of tie it back to to what i've been up to so i worked on the by side for a few years i spent a lot of time managing my own money went back to the by side and basically the last call it um better part of the last five years i've just been full-time investing and as you mentioned i also write run this research blog, which I only started a few months ago. It's kind of an outgrowth of my approach. I've been blogging for the last better part of the last five, five, six years. And turning it into a business has allowed me to spend a lot more time on it and specifically allowed me to spend more time looking for these kind of under the radar opportunities

that you discussed. Now, in terms of how I actually generate these ideas or where I find them. I always tell people I have three key ways for generating ideas, and they are cumulative, idiosyncratic, and systematic. And so the vast majority, though, honestly, it's cumulative. So what I mean by that is a new idea grows out of an old idea. A new idea grows out of work you've already done. So kind of an example is probably the best way to explain it, but taking it all the way back to Japan, right? So in 2008, nine, one of the very distressed sectors was consumer and integrated electronics. So basically all these electronic companies like, you know, Sharp, Tashiba, Hitachi, Panasonic, these companies, they almost all hit the wall. They didn't hit the wall,

but they got close to hitting the wall. So I did a huge amount of my work in the early days was looking at some of these distressed electronics, OEMs, essentially. And so having done a lot of work in that space, that naturally lent itself to looking at LCD, liquid crystal display manufacturers, because a lot of those businesses had LCD businesses. So not sure how familiar you are with the LCD cycle, but it's kind of a prototypical boom-bust commodity business, destroyed by China when they decided to enter the market in the late 2000s, early 2010s.

And basically you had the same pattern you see in other manufacturing commodity industries when China enters. That is, all the high-cost guys in places like Japan or Taiwan get obliterated when the Chinese coming with irrational capital. Kind of exactly what happened in solar modules, if you're familiar with that industry. Right. So because I'd had a background looking at the end products,

that is television's, computers, laptops, and also some of those businesses were integrated, so they had LCD businesses. I naturally started looking at LCD. So when you start looking at LCD, then all of a sudden you start looking at some of the component manufacturers for LCD, like the film manufacturers. And then you start looking at the glass substrate manufacturers.

So I started looking at names like Corning, other Japanese names like Nippon Electric Glass or Nippon Sheet Glass. So this is what I mean by this. cumulative process. Almost everything I do in some way will be related either directly or tangentially to something I've spent probably years looking at. And we'll talk about SNAX, Stonex shortly, but essentially this also grew out of something I'd already been looking at G-Cap, right? So we can talk about that as well. And so just tying it back into the idea generation process, the hurdle for me to look at something completely new in a sector I haven't spent any time on or even a tangential

sector I haven't spent any time on is incredibly high. Maybe one out of ten new ideas will be some kind of brand new off the beaten path industry or space that I haven't spent time on. But I'd say 70, 80 percent of ideas I generate have been built on work I've already done or sectors I've looked at adjacently or directly. And in terms of actually finding the names, I mean, look, you and I, we both have, I hope to think, pretty extended networks given our time on the street. But the internet is a great source of ideas.

I mean, you'd be surprised how many ideas I just find talking to smart people on Twitter, for example. People will throw ideas at me. I'll throw ideas at them. Next thing you know, I think it's really interesting and I go down the rabbit hole, right? So that's, it's not that sophisticated really, but it's essentially, you know, trying to talk to as many people as possible, trying to turn over as many rocks as possible. and every one out of 20 times, one out of 15 times, something's really interesting. Yep. No, I think that's great.

I guess there are two areas I want to dive in on. So first, let's just go with the most recent one. So one of the things I worry about is, I agree with you. Like, the network is such a good place. Like, look, I subscribe to your service or I talk to tons of people in Twitter DMs and stuff. And one of the things I worry about is when you get an idea from someone. Like, hey, it's probably already picked over idea, right? Like, if you're getting it from them, they probably gotten it from someone else.

else has gotten it from someone else. So I worry about like kind of that chain thing where you're the last person to get the idea and it's already been picked over a little bit. That's one. I mean, you know, to some extent, every idea has been looked at by someone, but I do worry about that. And then two, I worry about bias, right? Like you and I both like SNEX. Hopefully anyone who listens to this podcast and comes away from it, comes away thinking, oh, that's a pretty interesting idea I should you work on. But I do worry like any idea that you kind of get pitched and find this way, it's something that you're going to come pretty positively predisposed to because the person who's pitching it to you, it's probably pitching it to you because they're pretty

bullish on it. So what do you think about that? Yeah, I mean, look, they're both, they're both valid things to be, to kind of be aware of and to certainly worry about. I mean, the first point I'm honestly less concerned about that is I'm not so worried about, you know, I'm getting the most picked over idea already, just because you have a sense from your initial look at some of these names, right? Like, if someone's pitching you the name and it's up for 5X in Okay, forget price for a second, but if you just do the initial work and you come to some valuation and it doesn't look screaming cheap, then that in itself is its own defense, right? Like, you know at that start that someone's already, you're not buying it at a bargain basement price, right?

So I guess the way to answer that first concern, or at least to assuage it slightly, is to kind of understand why it's cheap in the first place. This is a very key for what we'll talk about with Stone X, right? And so if someone, if you're talking to someone on Twitter and they say, hey, take a look at this Spanish, you know, Spanish small cap, a Spanish midcap. I think, you know, it's super interesting. It's really cheap. And you take a look at it and it's actually trading it 30 times earnings and it's, you know, kind of like a secular growth name and everyone's all over it. Then, you know, it's pretty obvious what's going on.

On the other hand, you do have the other case where, you know, someone that recommends something actually is really cheap. And maybe it is a small cap or a foreign stock with limited disclosures. And there are pretty explainable and rational reasons for the cheapness. And sure, it may be up a bit or whatever, but it's certainly not up anywhere near as much as it would be or could be or should be if ABC happens. So, I mean, look, a good example of this is probably GAN, a stock. I don't, not to go too far off the time. No, no, no.

Look, Dan, you wrote it up. I did a lot of work on it. I was really, you know, I was like, there was one specific red, flag, I couldn't get over, and I think it's a five-backer since then or four-baggers. So you know this is a painful for me. I'm not trying to poke the bear. But look, I mean, to be honest, the only reason I brought it up is because I didn't buy this at the lows. I certainly didn't buy it close to the lows. I think the stock could, look, I think the first time I wrote it up, the stock was already going back to the old AIM price, so not the US listing, but the UK listing for people who may be

following the story. You know, the stock on the AIMs were traded from 60 pence to 1,8, 20, 200 pence, came back to 120, 1.30. Maybe I wrote it up at 150 or 160. It definitely wasn't anywhere near the lows. It had already doubled well off the lows. And so, you know, I had that kind of that decision to make, like you said, you know, am I getting, because again, you know, I didn't just dig around and find the stock. I've been talking to a lot of people. People thought it was, you know, very cheap. I'd started doing the work and I got excited about it, but the stock had already doubled. So again, there was one of those situations where I kind of had a good sense for why, despite the fact the stock had moved a bid, there was still this fundamental

cheapness. And that had to do with the terrible stock exchange it was on. That had to do with the, you know, lack of most natural U.S. investors to trade the stock, had to do with the mismatch between the investor base and the actual business, the underlying business, overwhelmingly in the US going forward, versus the listing in a UK retail backwater of the financial markets, let's say. And so it was quite evident why it would still be cheap, right? So I could get my head around that. Now, as regards to your second point, or I guess the second concern regarding bias, I mean, there's really no, there's no way around that. I mean, this goes for any investment you'll ever make, whether you talk to someone about it or not. I mean, it's just, it's tying into

the, to the, I guess, the, the most important of all investment questions to ask, which is, how do you know when you're wrong, right? And, you know, when we listen to podcasts and we hear people talk about stocks, we do the work, we get excited about them. Of course, we can tell ourselves, we have to be aware of the biases that go into the decisions because, you know, we've invested time in that. We've heard smart people who respect talk about them who own them. But at the end of the day, it's a lot about experience and judgment. And, you know, we can, it's quite self-reflexive, but we can be aware of the biases we have or think we're aware of them and yet still not be aware enough of them when things go wrong

to forestall us from making an investment mistake. And I wish there was a clean or easier way to kind of deal with that problem with investing. But in 15 years, it's still something I grapple with. It's just this constant nag, right? It has to be this constant nag in your back of your mind that you could always be missing something that could be tied into with the bias you bring into what looks,

like a compelling investment. I'm not sure if you have any solutions or suggestions to how to kind of deal with that. You know, no, I don't actually, I wish I had solutions. I mean, look, your biases are investing is a game at its core of rationality, right? Rationality, logic, figuring out. And your biases are the things that for the most part prevent investors from, you know, good investors from being great, great investors from being outstanding. So, you know, I think it's just every day trying to work on it and learn something new. But let me take that back. So speaking of biases, you mentioned at the very start of the conversation, you mentioned you bring a credit background to an equity analysis, right? And what you're looking for is you're looking for more

asset coverage and all this type of stuff in equities. And I know you do long short. And one thing I've struggled with, and I've struggled with, I'm sure you struggled with, is when you bring an asset coverage and you know, you're more protecting the downside than looking for upside. When you bring that to a short, sometimes it can be really difficult for, you know, if you miss one piece of optionality or one thing on the upside, the stock can be a screaming home run, and that can be very difficult on a short. And like, the thing that comes to mind for me is the old Netflix argument where they say, hey, you know, ignore the fact that our bonds are, you know, trading at 50 times EBIT or something or the interest coverage ratios don't look at.

The thing you should be focusing on is we issue these bonds. You know, we have 10 billion of debt in a 200 million, 200 billion market cap. So it's less than 5% of our cap structure. So you've got this huge equity cushion beneath you. And I think in a lot of ways, that's very difficult, right? For debt investors, it's tough to wrap around, hey, I'm really only protected by this big equity investment, not really like tax flows. And a lot of short sellers have been burnt by, hey, this company trades at this huge multiple of EVE. There's no cash flow here, but it turns out there's this huge optionality as they kind of capture an increasing share of the global viewership, the huge benefits to see all that.

So I just wanted to get your thoughts on that for a second. Sure. So look, let me caveat what I'm about to say with a few comments. We are in the middle of a raging bull market, shorting anything at any time. It's extremely difficult and quite frankly, very risky. So that goes with the territory of where we are for anyone, you know, considering what I'm about to say as a playbook to act. That's not necessarily the case. But let's use Netflix.

This is a great example. So basically I have a lens where I look for three things for a short, okay? And if it doesn't come to all three, if it doesn't hit all three of them, then it's just not for me, right? So the three things are one. It has to be a secularly challenged business, right?

It has to be a structurally challenged business, some kind of unsustainably cash-burning business. Okay, so let's keep Netflix in mind as we go through these three things. You could argue that Netflix actually is a structurally cash-burning business. We'll talk about that. The second thing is there needs to be

some kind of credit-based catalyst to get the equity to where I want it to go. And the third thing has to be, there has to be just too much debt. So that's partly a qualitative judgment on your part as a credit or an equity analyst. Partly, it's also quantitative, right? You know, 10 times leverages, clearly too much leverage, probably five times leverage is too much leverage. Whatever. We can talk about it.

It's industry specific. But essentially, you need those three things. Busted balance sheet, too much debt, an unsustainably cash burning business that has some kind of structural, not impediment, but some kind of structural obsolescence about it. and that's burning cash and then three are credit-based catalyst. So if we refract Netflix through the lens of those three points, certainly some of them apply, but I'm not sure all three apply,

and they probably all three wouldn't apply in spades. The most critical one is the credit-based catalyst, right? Because you could look at the credit markets. We could say, okay, they're too levered, which it's probably true. Forget the market cap cushion argument for a second, just on the purely basis of what their, you know, EBITDA, or even versus their cash flow, Well, you know, they're probably carrying too much leverage in a in a non, in a non, mass bull market environment, but forget that.

And you could even argue that they're structurally a cash burning business. If you believe the argument that they're on this content fly wheel, well, they need to keep spending more and more money on content to maintain their, not grow their subscriber base, but actually maintain the U-Bot users eyeballs. They have to keep spending more and more per user because the cost of content is escalating from competition, et cetera, which, you know, you can actually. actually quantitatively proved. They spend more to maintain their business now than progressively they spend over the last three, four years. So those two may be true, but the third point certainly isn't true. And part of that is a function of the credit markets, and therefore it's reflected, for sure. But without that credit-based catalyst, there's nothing to stop the train going on. And so you just can't shoot against a stock like that. So, I mean, if you think about

it, like one of my biggest losses last year, probably my biggest discreet loss was shorting Tesla. You and me both, yeah. And look, I mean, I took the pain at the end and I saved myself a bunch given what's happened to the stock since then because I got out at $3.50 or something, having made a lot of money on the way down and given it all back and then a lot more. And I realized the mistake I made was not even about the fundamentals, which frankly, they've gotten worse. It wasn't even about the business analysis, again, it's gotten worse.

It was purely about ignoring that rule about the credit-based catalyst because the whole reason I got into the trade at the time last year was I thought that they would not be able to access the capital markets post Musk's tweet on funding secured. I thought that the SEC was going to shut them out, that that would dictate some kind of massively dilutive or, you know, deeply discounted equity offering. That would have to be an unregistered deal or whatever that Musk's margin position would get blown out given the low stock prices. And when that didn't happen, even if the stock was, you know, had rallied back a bit, whatever, forget the price, then that credit catalyst is gone.

If the credit catalyst is gone, then ultimately it's just a bad business and valuation. And obviously, should really funky accounting, but whatever, that wasn't why I was in it, really. And therefore, that third piece for me is really key. What's the credit catalyst? You know, how bulletproof is that credit catalyst? And so, you know, a few other shorts that have gone awry this year. as well have been kind of in that similar range where I thought there was a very strong credit

catalyst. It turned out not to be the case. Next thing, you know, I'm chasing after myself trying to cover this short. The ones that really work, you know, obviously they're burning a ton of cash. They're bad fundamental businesses. They're two-leveled, but also they have no access to capital. It's as simple as that. So I really think that's key, sticking to your methodology, I mean, going back to our discussion about biases, I mean, that's one way to keep yourself honest, right? You can go into an investment, acknowledge that you have these biases in making the investment, whether that be an invested time, you know, a confirmation type bias or having heard about it from someone you really respect and think it's really smart. But you also go into every investment

where I do, I try to with red lines, what's, you know, what was going to get me out of this investment. Every time I've kind of not obeyed those red line, you know, limits in the Tesla example, for example, it's cost me. It's cost me. So, you know, know, biases or no biases, if the thesis creeps beyond a certain point, it's time to cut and run. That's kind of what I learned over the last year. No, look, on Tesla, it's interesting because, you know, I just think back to a year ago, and I remember having the same discussion as kind of sound like you had where people were saying, hey, where does, where does Musk margin loans kick in where he's going to get, he's going to have to blow out with his Tesla position.

And, you know, people are starting to talk like, when are these guys going to file? Like, you know, The business, it's funny, you look at it today, the accounting and the cash flow, like, the business is really outside of the regulatory credits they sell. It's not very good. And that's kind of generous. But it's just crazy to think about over the past year. And I agree with you. Like, if your thesis was, hey, these guys are going to have to file, they're not going to have access to the credit markets.

Once they access the credit markets, it became, hey, I'm turning to some valuation, which I actually don't think it's a bad thing. Like, if you look at the base rate of car companies is not that great, but the base rates of companies with Musk's history of selling and stuff, they tend to, they can go a lot higher before they go lower. So that's pretty interesting. Exactly. One more thing before we dive into SNEX, you just wanted to get your sense. I think we've got a little bit of it where you said, hey, we're in a raging bolt market, but just your sense of the market right now, kind of where are you seeing the most opportunities? And is there anything, either you think the market is really, any general

trend you think the market is missing or any general trend that the market's going through that you're in difficulty reconciling. Sure. Okay, so my broad market view is, I mean, again, just by way of background, I try not to take explicit market views. So, look, I'm slightly net long at the moment, maybe on a beta adjusted basis, maybe 20, 25% that long and slightly larger than that on a net basis, just given that my longs tend to be lower beta and my shorts tend to be higher beta.

Do you tend to get down to, I mean, that's beta approaching zero net long, reaching zero. Do you tend to do with a lot of kind of market hedging where you're shorting out indices or is this? No, not 300 shorts. All single. Yeah, well, maybe not. More like 30 to 40. But, but yeah, I try to do everything single stock, just because I think, I think that's where that, you know, I do think you can still make alpha on both sides of the market. And, you know, I'm not just, I'm managing my own book, right? So it's not, it's not as if I am limited where I can go, what I can do. And overwhelmingly, I try to concentrate on the short book outside. the United States at the moment, overwhelmingly.

Like, of those 30, 40 names, maybe I have five U.S. names and the rest of foreign stocks. And the reason for that is simply the retail craziness is, look, who knows how long it goes on, but obviously the U.S. is the epicenter. You can just see that in the indices. That's where all the hottest companies are. That's where the specs are going crazy. Because they're buying for bankruptcy and their stocks going up four or five times. Exactly.

Exactly. Exactly. So that's the epicenter of the madness. And I want to try and fish in easy upon on the short. side. So look, my first point is I am not trying to take an explicit market view. That said, the path at least resistance seems to be higher, at least in the US. And again, that's purely a function of monetary policy. I mean, there's no rocket science there. But again, I'm not really expressing this in any way in my book. I'm not trying to be massively met long or whatever.

To your second question, I think the most interesting opportunity is within style shifts within the market. So I'll give you an example, right? So everyone, knows about the massive growth versus momentum or growth versus, sorry, growth versus value divergence and how momentum slash growth is not the pants of value, not just the last 10 years, but at accelerating fashion in the recent months, right? I think the most interesting part of the market is kind of looking at the value bucket. Value bucket basically encompasses all the stuff that's been destroyed by COVID, right? Because the vast majority of those cyclicals.

And within that bucket, there are a huge number of halves and have not. So a lot of my book is trades where I'm actually net, let's call it value agnostic. So I have a long value position versus the short value position within say the travel hospitality space. So I have a very, a couple of chunky long travel positions, related positions against a very large number of I think absolutely busted travel assets. Let's put it that way. So I think there's a huge amount of long, short opportunity to try and pick the winners

and losers within the equity space, that is, among some of those value names where I think a lot of babies have been thrown out with the bathwater. Yep. I also think that's without trying to take too much style of factor exposure, right? So what I'm basically saying is if you don't want to, if anyone who buys Amazon or Facebook or SaaS companies or whatever, they're not making an idiosyncratic bet on that company right now. The valuations are so high, they're making a factor bet. They're betting on the factor of growth, right?

That's the biggest, and they're actually betting on interest rates as well. I don't even know if they're betting on growth at this point. I think they're betting on, you know, these companies. is getting valued as dominating 10 years out. They're betting on, I can get that 10 year at a low discount rate. But I absolutely hear you there. Yeah, I mean, it doesn't matter if, you know, it doesn't really matter if Google is as dominant or more dominant in 10 years than today. If the 10 year goes from 1% to 4% in the next 10 years, they're going to lose money. It's as simple as that. People don't understand that. So you can make an explicit fact of it,

or you can look within these various factors and just get a long growth name versus a short growth name, which is that probably the way I would try to do it. But I'm not even really playing there. But I think the most interesting, other than these kind of intersector long short pairs or, you know, bets that I quite like, the other thing I've been trying to do is look at some of these pockets of the market that are pricing in, say, a successful COVID outcome, right? And maybe then comparing those with other parts of the market than are not. So I'll give you an example. So you know how many vaccines are currently being tested for coronavirus? I think it's a lot. It's over 100. It's over 100. I think it's over 100. It's over 100. And I think there's someone was showing me a chart of the amount of market cap related to COVID vaccines. I mean, obviously, Moderna is a 30 billion market cap, right? There's a huge number of these companies that, I mean, I don't want to say they're pump and dumps. But the market is basically telling you that maybe one or all of these companies will have a massive success with a COVID vaccine. Now, if we think about the consequences of that, right? If Moderna is actually worth $30 billion, it implies that they're going to solve coronavirus, the vaccine is going to be a massive hit financially and basically that the whole world will be vaccinated within a couple of years. Now, if that's also the case, there's a whole basket

of busted travel stocks I can show you that it will be triples or quadruples. So both of those things cannot be true at the same time, right? It has to be one or the other. So either the modernas of this world are insanely overvalued or a lot of those busted travel names are actually, look, I'm using the word travel. I should really say COVID loses, right? It's not not purely travel, but just for simplification, yeah, a lot of those busted COVID losers are just, I mean, these things are being given away. And so that's kind of where I'm spending my energy trying to find the modernas of the world to shorten, full disclosure, I'm not short, Moderna, it's just an example of these kind of things where there's so much irrational exuberance

priced into an outcome that other parts of the market just refuse to accept a possible. I think the two interesting is, like you're saying, Moderna and Moderna is just kind of They're the number one case study just because they've got one of the most popular ones. And they're a smaller cap company, Pfizer probably is the leading bet to solve this. But there's tons of other ones. And the other interesting thing is if you look at like Moderna and seven of the other biotechs that are involved in a COVID vaccine, right? Like all eight of them can't be successful. And I think all eight of them are pricing in something where they've got very good odds of being successful.

Or if all eight of them do come with the vaccine, the vaccine is not going to have a lot of economic value. So I do think there is something to, hey, if you can figure out a, way where you're not going to get stopped out if all of these go up another two or three X, there is something to, hey, I create a basket of this. And it's also got this really nice hedge component where I can go along a bunch of hotel stocks or airline stocks or something. Because when the vaccine comes, they're actually going to more benefit than the vaccine player. That's exactly the way I'm trying to frame it by buying this kind of best-to-breed hotel names or, I mean, like, Riemann Hospitality is a name I like, for example. Right. So names where they're

massively beaten down, they have no balance sheet sustainability issues, right? So they have managed to cut fixed costs to an extent where they're, you know, there's probably obviously still burning cash, but they have a cash runway for say two years, okay? At the same time, they have a huge amount of operational leverage, right? So in the event, you do have this vaccine snapback, which frankly I do believe will happen at some point in the next 12 months. You'll see this massive uplift, either maybe not in actual, you know, financial change near term, but nevertheless, there'll be this massive market inflection. It seems almost the natural thing to do. The market will gravitate towards the areas that are most likely two benefits in a new normal post-vaccine

scenario. And obviously that money is going to come out of what? It's going to come out of all these crazy drug stocks slash maybe some of the frothier, crappier growth names. So I mean, that's very, I know that's very conceptual or not to name specific. So it's still a theme. I'm kind of kind of trying to work through, but that's something that's quite interesting to me at the moment. No, I'm with you. I'm with you. You know, I'd love to talk more about this, but I think we want to talk about one specific idea here. So for sure, why don't we move on to the thing we were kind of texting about. And let's talk about this stock. I know both that you and I are very involved in Stone X group. The ticker is S-N-E-X. They, you know, you might refer to it as I-N-T-L because until

a month ago they were INTL, but let's quickly talk about how do you find Stone X and maybe hit me with the elevator pitch for it. Okay, sure. I hope it's an elevator up to say the 50th floor because I can be a bit verbose with these things. Okay, so I'll try to be as quick as possible, but basically, again, going back to my approach, the cumulative approach, I was following the G-CAP, the gain capital kind of merger of story very peripherally, very peripherally through a couple of message boards online. I think maybe Value Investors Club, there was a message board. And, you know, I was following it kind of through COVID on a very casual level because the stock was trading at a pretty big discount to the deal price. So kind of quick background,

gain capital is a retail effect, largely FX related CFD broker that lost money for, you know, at least, well, 2019 was a very low volume. They lost a bunch of money. 2018, they made money, But essentially, it's a play on volatility. And because of the low volatility environment, the managers gave up and sold the company at a very small premium to tangible book value. And the deal was agreed in very early 2019 pre-COVID. That happened to be $6 a share. It was agreed at then.

Excuse me, excuse me, 2020. My apologies, they shopped the company for a whole year. They got maybe around tangible book, slight premium to tangible book, and they ended up hitting the bid in early 2020. I think it's February. Thanks for the correction. And so obviously, COVID happened, everything fell out of bed. The spread massively widened.

And there was some few comments online saying, why is the spread widening? This is essentially a long fall plate. They should be minting money. Because the way these businesses work is essentially when volatility spikes, spreads widened out. And obviously, you see a big increase in trading. So you get the double whammy of wider spreads and high commissions. That's essentially the business model. And, okay, so the stock dropped aggressively below the deal price.

I started getting involved. It was very small. I wasn't really that aggressive or following it closely. But it really heated up when they reported their first set of post-COVID numbers. Not sure it was the first quarter numbers. They may have put out a proxy document before the actual first quarterly filing. But essentially this company had agreed to sell themselves all in for a few hundred million dollars before considering the cash that would go to the acquire.

We'll get into that. But it essentially agreed to sell themselves for a few hundred million dollars. And yet all of a sudden during a period of weeks, maybe six weeks, they generated close to $100 million in EBITDA. And so, you know, it was very quickly apparent that this company was raking in the cash and yet there was a deal on the table at that point, an increasing discount to tangible book. So it got very interesting the stock traded through $6 and started to price in a bump to the deal, which is what you would expect with a massive windfall in earnings to an agreed deal that had yet to close.

So I originally came by this, we'll come to INTL slash Stone X now, but originally my view was regarding GCap. I thought, and we discussed this, you know, I thought it was very likely that the G-CAP deal would get recut, given the amount of excess earnings that COVID had delivered. And, you know, given the synergies would all remain with the buyer, et cetera, it seemed a small price to pay to give a couple of extra bucks a share to the selling party. And I think your accurate, it turned out to be very accurate pushback was, well, you know, almost 40% plus of the, 40% plus of the stock had already, signed an agreement to vote their shares no matter what, and it's very hard to get out of these pre-agreements, even in the case of these kind of excess earnings. And therefore, you were actually pushing back on me, and obviously correct in hindsight, that you didn't, well, maybe you thought the deal had some chance of getting renegotiated, but it was nowhere near the slam dunk that I

thought it would be. And actually what turned, so obviously, you know, this played out over a number of months, and that turned out to be correct. And one of the salient features of this case is the intransigence of the entrenched G-CAP board to do anything to extract value for their shareholders. It's very strange. Now, normally in these situations, the story probably ends there, right? So one group of shareholders got hosed, the acquire got an amazing deal. And I say that because... He's going crazy over here if you're hearing some noise in the background. And that's like, go on. You know, he said, Penny's saying, Penny's saying my elevator pitch is more like a, encyclopedia. So he's, I need to hurry it along. But basically, normally this story ends because

oftentimes the acquiring company is much larger than the inquiry, right? And the business is too tangent. It's not going to move the needle. But in this case, obviously having been a slightly aggrieved G-CAP shareholder, I did the work on INTL and I worked out that, look, the needle actually is most significantly moved by this deal, right? So if you look at INTL standalone, call it around at the time was 8, 900 million market cap and it was trading at high single-digit P, seven times P, standalone, right? So they were making 80, I think they made 85 million of net income last year. As I said, this G-CAP deal printed close to 100 million EBITDA, essentially in two months, and depreciation and mortization is not a large number. So essentially the drop-through

net income number they printed is, what, I think it's 65 million or something in a couple of months from the top of my head. So it's most material, most material. And, that's before we even look at the balance sheet they're getting with the transaction, just purely on the earnings accretion. Buying this business is hugely impactful to the acquirer. So that was the spur to get me looking at I&TL. So let me give you the elevator pitch on I&TL. Stonex now. So Stonex is a diversified financial services company, essentially a roll-up of different kind of financial intermediaries. Quite a hodgepodge of different financial assets, to be honest with you. maybe 30 to 40% of the business is commodities hedging, either physical or on behalf of commercial

clients. Everything from hedging gold transactions to agriculture is a big segment for them, to precious metals, to other commodities. I want to say that's 40, 45% of the pre-GAC business. They have a payment processor in there as well. That's another 15, 20% of the business. They are also a big execution and clearinghouse. They're a market maker in a lot of foreign sales.

stocks that trade OTC in the U.S. And there's a few other bits and bobs in there as well. I think they bought Stern A.G, the old tech research company as well. Yep. But essentially, it's a roll-up of these boutique financial assets run by owner-operators. I guess that's key, right? So the guys who found in the company in the early 2000 still own just under 20% of the company.

Yep. They have, look, they have a 10B-5 plan, so they're taking a little bit of capital out here and there, but essentially they take very little or no capital out of the business. and they've compounded capital at historically very attractive rates, mid-20s returns, and the stock looks cheap. So basically the elevator pitch would be three points. One, on a standalone basis, you're paying seven times earnings for a business that is positively levered to rising volatility, and that's basically it.

You're paying an attractive multiple of standalone earnings. Point two, you've never seen a robbery like the robbery they took from G-CAP shareholders, and we'll talk about the significance of that. That's a huge amount of excess capital. maybe, I want to say, upwards of 200 million on a basically a billion dollar balance sheet of under a billion dollar balance sheet. So a huge amount of excess capital got transferred, or excess value got transferred to S&X shareholders. And the third point, of course, is synergy.

So a topic you're more clued in on than me, but look, when you plug in one retail brokerage to a retail financial firm that they have eight different overlapping offices around the world, there's no public company costs, there's a huge technology suite. that essentially can be merged. There's all these kind of other business integrations they can do, for example, routing G-CAP's client flow through the execution and clearing at Stonex and also using the Stone-X market-making on G-Cap client orders.

I mean, the synergies, just to give you some idea, the synergies alone in year one, I think we're in the mid-20s, million. Year-two synergies were, again, from memory, I want to say what 35 million something like that mid 30s mid 30s mid 30s and again this is a business that as we shall see stone X got paid to take right so at the end of the day that the headline deal price was north of 300 million when you include taking out the existing G cap converts but with the excess cash that came with the deal both in terms of the excess profits generated from COVID and also the

trapped regulatory capital that Stonex can take out because you don't need two piles of regulatory capital when you merge two financial firms most most of the time. Essentially, they got paid somewhere between $50 and $100 million to take this business that did close to $100 million at EBITDA in barely a couple of months. That's probably the simplest way to say it. And so, yeah, sorry, that's the elevator pitch. The headline that struck me the most is if you read through their proxy. GAC, you know, when they went to the sellers, they said, hey, we think we're going to do $37 million in EBITDA for fall of 2020, right? They signed the deal at the end of February, and then in the month of March, GAC does $90 million in EBDA. So in one month, they do

approaching three times what they thought they were going to do for the full year in EBDA. And then INTL said, hey, we're going to get 35 million in synergies. So INTL was basically saying, hey, we'll match your annual EBITDA with our synergies, right? So we can double your earnings by acquiring you, and by the way, your earnings went off the chart. So I just agree with you. It's a hugely centered deal. Absolutely. Absolutely. Yeah. Yeah. And I guess just to just to add on a few other points that I thought were kind of, look, I guess there's the investment case, right, which was kind of as we described, cheap on its own merits, good business on its own merits, massive synergy opportunity with Gcap, massive excess capital through COVID that people aren't

realized. That's kind of the investment case. Then there's the, okay, so why am I so lucky point of it, right? So to your point about, well, why hasn't this already been picked over? And that point is also very key. And there's there's a number of points here, which I think signposts this really is an undiscovered opportunity. And I guess there's a few ways to go about it. The first point is let's, I guess this is an uncovered stock. There's literally no analyst coverage. not only is there no equity research coverage there's there was no there were no bonds outstanding before this deal so it is quite important because when they did a they announced they were going to do a bond deal to finance the acquisition at the time of the deal and the deal came as as you

suggested in in very early 2020 and they were a debut issuer and the guys running the deal with Jeffries yeah and the former Jeffries CFO I think or some former executive of Jeffries is also on the board of G-CAP, so there's some kind of strange relationship there, but anyway, that aside, they did a debut bond offering and they paid up. They paid up for the bond that they didn't even need to do. They paid over 8%, full disclosure, I'm longed those bonds as well. I think you need to be a QIB though, so that's FYI. But yeah, so they paid up for those bonds and they did them anyway, even though they didn't need to do them. And the reason they were charge such a high rate on those bonds over 8%.

The bonds are now trading closer to 5% yield, so they've richened, but they're still very attractive, was purely because they were a debut issue. Now, all the stuff we've discussed is not, honestly, it's not exactly a rocket science. You could do the deal math. You could work out the deal accretion. And sure, there was some risk that the deal would not close when they did that bond offering, but the very fact that credit markets charged them north of 8% for a deal that paid for itself the day it closed is evidence that this is an undiscovered.

opportunity. If that bond got priced at 2% or 2.5%, you could, the stock would not be trading at 52, 53. The stock would be trading already at 7580 in my view. And one of the most interesting thing, and I'm going to talk about the merger call on a second, but one of the most interesting things was Gcap is this, you know, 200 million, 250 million market cap company. And they actually have research coverage. And on the INTL Gcap call, their analysts coming on and saying, hey, INTL, like, congrats on what looks like a good deal. We don't really cover you. we don't know anything about your business, so we're going to ask the GFAC CEO some question. So it was a really interesting dynamic on that call. And I agree with you,

it's completely undercover, right? Like this business is compounded at around 20% returns on equity for approaching 20 years at this point since they're founding. And like you would think this is the type of business, you know, roll up, great returns on equity, management team owns a bunch that kind of the quote unquote compounder bros would fall in love with. But for one reason or other, I mean, I think you and I, you're the only other shareholder I know. Like, I don't know anyone who's really looking at this opportunity or, or anything. So I do think it is completely undercover. No aimless research. Totally. A lot of shareholder race doesn't really know this exists. Totally. I mean, look, it also is a financial, though, right? And they're levered to interest rates.

So maybe we should talk about the key risks to the investment at some point. But clearly, the compounded bros like things that are not financial, let's say. I mean, unless they're fintech. So it's not really, look, I mean, they have a payment processing business that does 60% segment income margins, operating income margins. So compounded pros could get excited about that. And it's not a small part of the business. It's about 20% of the pre gap, pre G cap operating income. So they do have something for the compound of pros. But I think, look, it still falls in the value bucket. It still falls in the financials, which has been massively out of favor. We spoke about the lack of coverage, a huge issue. It's obviously a small market stock. The float is, this. The other point is to float, right? So because the insider's own close to 20% of it, and until recently it was an under 1 billion market cap company, not even a mid-sized hedge fund or fund is going to be able to accumulate the stock, right? It trades three, four bucks a day.

So it's definitely under the radar. Now, I guess we should talk a little bit about interest rates. So obviously they are as a more diversified entity than something like a G-CAP or some of these other pure trading operations, they are exposed to fluctuation in interest rates. through their client balances, right? So they have disclosed, and I should make clear, once they consolidate G-CAP, the sensitivity goes down

because they get those G-cap earnings, which are transaction and spread-based, not interest-rate-based, overwhelmingly. But nevertheless, there is a negative impact from the recent move-in rates. So at the beginning of the year, short-term interest rates, call it one-month, six-month rates, whatever, we're above 1%.

We're closer to 1.5%. Now they're 10-15 basis points. Yep. So that move alone, standalone would cost the company over 20 million, I believe, in net income. So for the company doing 80, 85 million net income pre-G-cap, you know, obviously it happened halfway through the year. It hasn't been a full year, but whatever.

On an annualized basis, that number's closer to 60 million without G-cap. So for those of you who are wondering, this is so attractive, why is the stock being killed of the last, not killed, the stock's being under pressure the last, call it month, six weeks. It's because interest rates of collapse. There is that sensitivity there. Now, that's part and parcel of an investment like this. I'm less worried about it for the reasons I mentioned,

just given the synergy argument alone is so powerful. And you get the diversification from the G-CAP earning stream once that comes online, that the interest rate sensitivity will actually decline, I think, to less than 10% of run rate annual net income. Having said that, go on. Go on. Go on, Andrew. Oh, I was just a second. Stonex is more leverage to G-Cap than to interest rates, but Stonex also does benefit from increases in volatility.

Right? Like, there's one numbers. Sure. We kept many money. INTL itself printed a pretty nice Q1, and I think they're going to print a very nice few too as well. So it's not like you're not getting other things on the other side that pick up on this. No, totally, totally. I should have made that clear.

The benefits of higher volatility far outweigh the negatives of lower interest rates. The one disaster would be a scenario kind of like the end of 2019, where there's no volatility and low interest rates. That was kind of the death knell for death now. That's the worst case scenario for a business like this where nothing's happening in financial markets, no one wants to trade, and interest rates also do a full-on Japan. So, look, I'm pretty optimistic on both fronts. Honestly, I think interest rates will eventually turn the corner as we'll see inflation because the US dollar is basically being turned into toilet paper. At the same time, if that doesn't happen, look, we have a very contentious election.

We have, obviously, the post-COVID period is not going to be sunshine or roses. there's going to be a lot of volatility. Excuse me. Something just happened with my phone. No problem. And so I'm pretty bullish that, look, volatility won't be like we saw in March and April, but it's definitely not going to be 2019, right? And so you're right, 2019 for either G-Cap or Stonex is not the right comparator.

You should probably look at something more like first half 2018 with some second half, second half 2020, I think could be a good kind of barometer of the kind of volatility environment we'll see going forward for a while. So not the craziness of March, April, but certainly well above a five-year average, let's say. So let me hop into doubles advocate corner, right? We've talked about probably attractively priced on its own. The G-Cat deal is, I think you and I both agree, it's a killer. They're getting a lot of cash and diversifies them, all this sort of stuff. So let's go into doubles advocate corner with a few things. I think the first thing is, look, G-CAP, its CEO was its founder. He was a pretty significant shareholder still. It's not lost on anyone over on the

G-CAP side that, hey, we are minting money. They have an activist file at 13D and say, hey, you are selling the company for way too cheap. Three of the eight board members, if I remember correctly, eventually voted against the deal, despite that the deal still went through. So, you know, let's play devil's advocate with why does G-CAP sell itself so cheaply and what, you know, if it's so clear to everyone that SNEX is getting this great bargain, you know, why does that happened. Why doesn't a topping bid come in at some point? People have done due diligence on this thing. Okay, so there's two parts of that. Why didn't someone else come in? Let's probably, let's deal with that first. Okay, so if you look at the deal proxy, they ran a very extensive

process. Okay, they ran this process through all of 2019. So if you think about the volatility environment in 2019, essentially it went down all year, right? So as the process was going on, as you moved from stage one to stage two, stage three, and people went through their due diligence. The business was getting worse and worse and worse. And that's reflected in the deal process, right? And so there was a huge amount of fatigue by the time, look, having shopped the business for in excess of a year by early 2020, there was a huge amount of deal fatigue, both probably on the part of buyers and obviously on the part of the seller and the board. And so at that point, I think they just made a decision, look, at least we can get tangible book or a

slight premium to tangible book. We have no idea it's a volatility environment is going to turn around. This is a firm bid. And I believe you've probably discussed in some of your work, Andrew, but there's an upside for Glenn Stevens, right? He's going to run the business within Stone X. And so he's going to get paid. Obviously, he's going to roll his equity to some extent and therefore have the ability to earn a return on the pro forma business going out the next few years. But essentially, deal fatigue is a huge part of the equation here. And so that kind of explains why they hit the bid. I guess going back to why no other bid, well, by the time the deal was announced in, I believe, Feb, then COVID happened.

COVID was this conflagration, this absolute malstrung where credit market seized up momentarily. No one's in a position to bid on anything, right? No matter how cheap it is. I mean, it's a reflects it. That's why everything got so cheap is because there's no one able to bid on things like this, even though they're printing money. And then by the time, kind of you got closer to the, not the longstop date, but the shareholders meeting, which happened very recently, then the different question is, well, how sustainable is this volatility environment? Interest rates are going down again. Okay, we're still in an elevated vault period, but you still have this structural issue with the business where unless vol remains at a certain level, you have these high fixed costs that

can't be defrayed if VIX goes back to, you know, 15, 14, 15, right? So, look, all that played into each other. People are looking over their shoulder at 2019. You had a momentary conflagration of the credit markets. You had this huge deal fatigue behind you. Simply put, I think a lot of people just didn't bother. Or you could just say all these other likely acquires are guys like Plus 500 or CMC markets, IG group, who their own businesses were absolutely going on fire, right?

they didn't need or they didn't have the time and or the need to look at a competing business for a synergy story when their user acquisition costs fell by 50% and their engagement metrics with their users were just doubling and tripling in a matter of months, right? So I think that kind of explains why there was no competing bid. Now, I guess your first question is slightly harder to definitively answer in why are we so lucky if this is so obvious. But I guess it also ties back to the fatigue point, right? that all the other potentially logical acquirers, for whatever reason, just weren't interested in looking closely and or pulling the trigger now for that reset of circumstances. And thus, INTL now Stone X is the lucky dance partner left on the floor.

No, look, I agree with all that. I don't want to dive too deeply into it, but I think, especially when you think why did they do that, if you go reread the INTL G-CAP merger call, The G-CAP CEO, I've never seen a CEO selling his company for all cash who's coming on. He's like, these energy targets are conservative. We're going to hit them so quickly. We're going to blow through them.

We're going to be so much more business. This is going to be fantastic. And then the I-N-TL, the buyer will come on and be like, this is a full and fair price. It was a tough process. They really talked us up into it. It was just very strange. And I do suspect-roll reversal, big-time roll reversal. I do suspect the G-CAP CEO is going to be in the position to make a lot of money

from running the business with all the synergies going forward. Let's keep going down devil's advocate corner. So look, this is a business. I-N-TL, I think Stone X, after they close the G-Cat deal, you throw in credit for another quarter of earnings. I think book value is probably going to be around 40, 42 per share. They're going to be able to earn really nice ROEs, you know, driven by the G-CAP, driven by the G-CAP synergies and everything.

But when I look at this financial firm, you know, I can go opportunity costs. Goldman is trading for 90% of tangible book value, believe, you know, nine or ten times earnings. That's a business that historically earns in excess of their cost of capital. So why am I looking at buying Stone X instead of, you know, I just threw Goldman out because it's a financial firm, big trading. Why do I buy them instead of a Goldman or something else? Okay. So firstly, I'm not sure Goldman is the correct comp to be, to be honest with you. I was describing it as a financial firm. Yeah. So, so, all right, so there's the pure comp arbitrage, right? So the real comps to this business are

probably maybe something like an interactive brokers slash some of the, I know it's not perfect, some of these other clearing first. Kind of one of those quirky businesses. Probably some division within Goldman is the right comp for it, right? Or one of the judges. Exactly within JP Morgan or whatever. Look, okay, look, I'll tell you why I think it's a great opportunity. So unlike the Goldman's of the world, all the eyeballs to come is upside for you from this point.

Right. So if we're confident that no one is looking at it now, what's going to happen? Okay, so Jeffries, they did the bond deal. Next logical step, they're going to do initiate equity coverage. All the guys that covered G-Cap, I know, not a lot, but there were a few, they're probably going to pick up coverage. It's larger, it's a bigger market cap, right? So you're going to get more eyeballs. That's all to come. So that's all upside. The Goldman's of the world, the interactive brokers of the world, these are already well-covered names. Oh, and by the way, they're invariably more expensive. You can say that Goldman trades at a relatively low price versus historical earnings power. That's true. You know, you also have a lot of regulatory and legal risk related to some of their past adventures. Let's put it that way. And that's only on a price to book basis. Actually, on an earnings basis, pro forma earnings numbers for Stonex, I think will be far superior to Goldman, right? You're buying it. Look, I think it's going to do north of 650 a share standalone, right? It starts at 52.

With Gcap, even in a lower volume year and some of the synergies, it's not hard to see this do $7.58 a share in net, right? So actually, even at a lower than Goldman multiple, you still have plenty of upside, right, to get to the high 70s, low 80s, just on an earnings, on a multiple of earnings, let alone a multiple of book value. The third point is you're going to get, I personally believe you're going to get a lot more capital back. Now, that doesn't necessarily mean you're going to buy back shares because, frankly, they've been good acquirers. So probably just reduced debt and buy something else. But because the debt was so expensive in this case, just retiring that debt, another reason why I like the debt. I think they're going to do something. They're going to tender for it 12 months out or something.

They're going to retire that 8% coupon, go and refinance that at 4%, 3, 4%. And guess what? That was a $350 million deal, although $100 million is going to get tended. So, let's say, $250 million at 8%. You know, that's at $20 million. $20 million does a huge amount of impact at the bottom line, right? If you capitalize that, even at 7, 8 times. So that's another 15, 20% of ups, let's say 15% of upside on the stock today.

So you get all those that you probably wouldn't get at some of these better covered names that already have quite a very low cost of debt capital, the Goldman's of the world. Yep. No, look, I agree with everything there. I guess the only two things I would just add on top is you mentioned, but they've got a great track record of inorganic growth. And Goldman's probably not going to go buy anything super requisitive. These guys, there's a lot more out there for them to go buy acquisitive. And the earnings numbers, you know, I get obsessed with the earnings number too. Hey, these guys are going to earn $6. during the Gcap synergies, but that doesn't even account for. They're going to pull all this cash out of the Gcap from the regulatory things, all the cash that G7 turned in February and March. Like that doesn't show up in the earnings power, but it will eventually, right? They'll invest it in the business. As you said, they'll go buy something else or maybe they buy back from shares.

But there's a lot of other stuff going on there. Absolutely. Absolutely. For you. Sure. Look, this is a trading business. Aren't there, how do you get comfortable with the tail risk to a trading business? You know, how do you feel comfortable with?

hey, we're not going to get London wailed, or, you know, there's a history of things like MF Global exploding all of a sudden where you think this is a trading business, but they've got some balance sheets. These guys have balance sheets. How do you get comfortable with that? Sure. I mean, look, it's a $64,000 question with any of these businesses, right?

If you're willing to own a Goldman or an H.SBC or a SOGYN, there's a certain element of black boxness that you just are going to have to deal with. Having said that, you can look at what's happened in the past, right? So if you look back over the last, say, five years of standard, alone, I-N-TL, they only had one really bad blow-up. They had an issue with coal inventory, where they, essentially, they got stuck with a huge amount of coal inventory when the market collapsed because one of their counterparties defaulted.

Is that my reading of the situation? Yeah, that's it. Yep. And they, look, again, they've said they've improved their risk management processes, and they have lowered the risk limits they would take on specific customers to the extent that they could not be dinged in such a bad way. Again, having said that, you're right. I mean, this is probably one of the risks you take when you buy this,

that there isn't some kind of idiosyncratic trading-related blow-up. Even the best, as you said, the London whale, even the best-managed businesses take losses from those kinds of idiosyncratic, poor risk management decisions, right? So that's definitely something that's always, again, nagging the back of my mind. The only risk mitigant, I would say to that is the price you're paying, is low enough that they could look they could have that coal inventory issue happen again on the pro forma business it's not going to destroy the investment thesis frankly it would be a it would be a bump

in the road but it would not it would not destroy the thesis only thing i did there is the coal inventory it was an issue i think they took a 25 or 30 million dollar write off on it i can't remember off some head but yeah it was over 20 mil yeah they ended up reversing a lot of that over the next couple years as they kind of went through the bankruptcy process and all that and they actually recovered a lot of that to that. So it was the big mark at the time, but they recovered a lot of it. So last devil's advocate, you know, one of the things I have trouble with this is, what's the end game here? I don't think this is a company that private equity can acquire. You know, I think most of the big banks already have this capability internally. So I don't think a big bank is acquiring

them. In fact, one of the questions is, how do these guys kind of earn these excess profits with something that most big banks can't offer? So what do you think the end game here is? What's the end game? What's the end game? I mean, look, these are, we're getting in the realm of the philosophical now. Look, at some point, I hate to say this frame of valuation is its own catalyst, but look, at some point you graduate from being a $500 million company to a $1.1.5 billion company to a $2.2 billion company,

you get on the radar of enough investors where it earns a reasonable multiple of sustainable earnings and or what the market views as it sustainable returns on its capital base, right? And there's a time arbitrage there in a sense that as you get bigger, as you repeat the process of acquiring these assets, plugging them in, generating solid excess returns, the market can't ignore it forever. I do think that this G-CAP transaction kind of vaults them to a new level, just given the size of it relative to the existing Stonex entity. So I think that happens sooner rather than later. Also, I think the coverage, the increasing coverage from the street is kind of another way to kind of get us where we need to go. That said, you're right. I mean, I don't necessarily see them being bought out.

It's an owner-operator model, right? So they're definitely not in a rush to sell it. These guys have done great. So the end game is they do great integrating G-CAP. The market realizes it over time. And if it doesn't, you get a huge amount of excess capital back because these guys own 20% it and they're incentivized to get the stock where it deserves to be, and I'm going to do that either through smart, further smart acquisitions or probably through debt and or equity paydown,

equity buybacks. So the end game is it just decreeds value over time. Personally, I don't think it takes that long. And actually, I think you might, you have a real chance to have a massive home run here. And that's if the interest rate environment changes. You get all the synergies, you get the normal multiple on the pro forma business. And then interest rates normalize and this stock could, it's not hard for me to see this being a 12, 1.21.30 stock in an environment where interest rates are closer to the long-term averages, right? So, so I think this could be a real home run in a couple of years. And if not, you're looking at, as I say, going back to my credit mentality, I mean, look, you're buying this business with a huge amount of excess

capital at today, I think it's, well, it's definitely under seven times pro forma earnings. So, I mean, where is it going to go? Is it going to go to five times pro forma earnings? I mean, I guess it's theoretically possible, but even that is not a a huge haircut for not really the worst outcome in the world. And in that scenario, the owner operator would probably retire a huge amount of stock. So actual pro forma earnings would go higher even. So yeah, so I think it's a highly asymmetric position with some of the points you mentioned in devil's habit corner being really the only risks. That is some kind of big idiosyncratic trading issue. And you mentioned earlier, you'd like to run a book that's kind of net or low beta,

Right. And one of the things that really interest me about Stonex is their earnings be somewhat counter-sickful, right? Volatility generally increases because things are getting bad in the world. Markets are going down. They're going to make more money when volatility increases. If interest rates go up, I mean, I'm with you. I think equity markets are somewhat tied to interest rates. Interest rates go up. I think in general, you see the stock market come down, multiples come down. Guess what? These guys are going to make more money as the stock market's coming down. So I really like this is undervalued. And I think in scenarios where a lot of scenarios where the world gets worse and a lot of other things in my portfolio might get hurt,

this is actually getting a lot better. And they've got a lot of excess capital so they can also go buying when things get bad. That's totally right. I think that's the right way to look at it. The only thing I would say is in March it didn't act that way initially. Yeah. So when things get worse, they will make more money. But in the very near term, if things get really bad, the stock will obviously go down. The stock will go down. But they'll have lots of cash coming in on the balance. Exactly. They can buy back stock, go buy competitors. Exactly. Exactly. Before we wrap it up. I crowdsource questions on Twitter. I just want to go through. There were really only

two questions that I think we haven't covered so far. So I think the first is, you know, management's 2019 annual report, even before the G-CAP deal, they discussed, hey, we don't think we're getting a fair valuation. We want to improve our investor outreach and increase our valuation, get more investors interested. I don't think they've really done that yet. What do you think changes? Does it even matter? What could they do better? look i mean get covered by a couple of street analysts is the easiest thing to do i the website's not too bad i mean their their disclosures are fine and they put out enough materials i think it's just it's an issue of combination of low market cap low liquidity and no street coverage yeah so i assume

that post g cap part of the quid quid pro quo for that deal with jeffreys that i alluded to i assume that part of it is getting street coverage from at least jeffreys and maybe a couple of other names i think that goes a decent way to establishing the pathway to fixing that problem. I really do. And honestly, I'm not too worried about that. No, I agree. And I also think, I think they might have accelerated the investor outreach efforts, but they had this G-CAP deal going on, right? And I don't think you want to go out. Hey, we're this greatest strategic acquire when you're stealing this business. I would not be surprised. G-CAP just closed literally last week. They report earnings on Thursday, I believe. I would not be surprised if throughout the rest of the

year, you know, maybe with an analyst initiation or two, you see the company host an investor day, get a little bit more at the forefront. Totally. And they, and, sorry to cut off. Sorry to cut you off. They also changed the name of the company because they had the world's least sexy company name before Stone X. I think it was called like International FC Stone.

Yeah, it was like some law firm from, I don't know, 1935 without the partner and partner at the end. Just a terrible name for a company. it just does not roll off the tongue. Now you have Stone X, you have a great ticker. Look, I think you're right. I'm being a little facetious, but it's part of it, right? It's marketing.

And I do think an investor days probably makes sense. Let's not be too ambitious. Within the next 12 months, for sure, once they've better down G-Cap, you probably see that. I think that makes sense. To go back to what's the real long game here, I think eventually, whether it's three months from now from marketing or 12 months from now or 24 months to now from great earnings,

you're going to get what you deserve, right? So the market will wait. Last question, the more I hop it up. This is the most popular question I got. I got it from about eight different people. Why isn't the stock going on? Interest rates. Interest rates and no one really knows about G-Cap or not many people have done the numbers on G-CAP. So actually, I should nuance that slightly. So obviously interest rates, it's trading with interest rates in the short term for reasons I explained. Pre-G-CAP, there is a large sensitivity there. That's unavoidable. Although I would posit it's still being one of the better performing financial stocks of the last three,

four months. It's still done very well. And then the second point is there was some uncertainty when the G-Cap deal would close, right? I think the last earnings call, I-N-Til actually said they thought it was going to close in the fourth quarter. And then G-CAP said it was going to close in the third quarter. And then finally it closed two days ago. So there was some uncertainty when it would close. As you alluded to, the deal was very contentious. There may be lawsuit. There's still some legal, there may be minority shareholders looking to extract a bit more value from some of their holdings. So there was some slight uncertainty.

Would that deal close or not? The deal is now closed. That uncertainty has been removed. That overhang has been removed. So I think those two factors are the key ones that explain why it hasn't done great in the last six weeks. Look, that was a great answer. I was being somewhat facetious.

I just thought it was funny. I was like, hey, we've both done work on this company. We're here to answer questions on it. And just everyone's question was, why isn't going up? stock price grow chart uh no hey jeremy this was great i don't want to take up too much more of your time uh anything else you want to my pleasure my last words part of wisdom i mean i mean i think yeah we've broken it down for an hour so i think that's a great start again it's been great to be on andrew thanks thanks a lot for having me on your uh your podcast which i'm sure will be a huge success

hopefully i can come back in less than six months and stone x will be at you know 85 90 bucks and we can crack a virtual cold beverage. Well, hey, I appreciate you being our first guest. Everyone should, you know, rape your capital. It is a fantastic subscription service. If you like this podcast, you like individual ideas, I think it will pay for itself many times over. And if you're just in Selectry, I think it's worth it.

So thanks for being the first guest. And I'm going to stop the recording now.