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    Value Hive Podcast

    Jeremy Raper Pt. 2: Activist Investing, Australian Small Caps, and Finding New Ideas

    Fri Jul 07 2023
    TeagasMIT Investment Management Companyinvestment strategyshorting stocksTeslamissed opportunitiessocial activismsmall cap stocksHunter Douglas acquisitionsqueeze-out lawsale of the companyactivism in smaller companiestraditional print mediamedia and business environment in JapanJapanese business characteristicsgovernment actions in Japaninvestment idea generationFAR investmentAustralian small cap opportunitiesdeals in Australian small cap spacecommodity investmentsethanol producer Alto Ingredientstransformation of Alto IngredientsPuppy eh1 research business

    Description

    This episode covers various topics including Teagas, MIT Investment Management Company, guest's investment strategy, shorting stocks, challenges of shorting Tesla, missed opportunities, social activism, investing in small cap stocks, discussion on Hunter Douglas acquisition, debate on squeeze-out law in Curacao, sale of the company, activism in smaller companies, importance of traditional print media, challenges of media and business environment in Japan, unique characteristics of Japanese business, potential government actions, personal fascination with Japan, investment strategy and idea generation, investment in FAR and Australian small cap opportunities, process of deals and opportunities in Australian small cap space, commodity investments, ethanol producer Alto Ingredients, transformation of Alto Ingredients, crush margin and potential opportunities at Alto Ingredients, Puppy eh1 and research business.

    Insights

    Teagas and MIT Investment Management Company

    Teagas offers expert interviews on public and private companies. MIT Investment Management Company supports emerging manager stock pickers.

    Guest's Investment Strategy and Shorting Stocks

    The guest has become more activist as an investor. The guest has focused less on shorting stocks since starting to write publicly.

    Challenges of Shorting Tesla and Missed Opportunities

    Timing the shorting of Tesla through derivatives is borderline impossible. Missed opportunity to make money on Silicon Valley Bank due to pattern recognition failure.

    Social Activism and Investing in Small Cap Stocks

    Attacking sub-billion dollar companies can have an outsized impact as a smaller investor. Smaller companies offer opportunities for better outcomes for shareholders.

    Discussion on Hunter Douglas Acquisition

    The founder of Hunter Douglas bought more shares at a premium price. The price offered for Hunter Douglas was far below fair value, causing dissatisfaction among other shareholders.

    Debate on Squeeze-Out Law in Curacao and Sale of the Company

    The CEO wanted to acquire the remaining 13.4% of ownership. After four months, they sold the whole company to a third party for $175 per share.

    Activism in Smaller Companies and Importance of Traditional Print Media

    The speaker's focus is now on smaller companies with lower market caps. Access to traditional print media is important because random tweets may not carry as much weight with executives.

    Challenges of Media and Business Environment in Japan

    In markets like Singapore, mobilizing press and shareholder associations can lead to favorable outcomes. The mainstream business press in Japan is not interested in investigative journalism or stories that criticize companies.

    Unique Characteristics of Japanese Business and Potential Government Actions

    Japanese companies prioritize the company unit and society over shareholders. The Galapagos syndrome has caused issues for Japanese companies focused solely on the domestic market.

    Speculation on Japanese Government Actions and Personal Fascination with Japan

    The speaker discusses the possibility of the Japanese government taking a portion of bank deposits to recapitalize the country's balance sheet. There is speculation about how Japanese citizens would react if a similar measure were taken in Japan.

    Investment Strategy and Idea Generation

    The speaker believes that idea generation in investing is not a structured process but rather a result of experience and pattern recognition. They read articles on various websites, newspapers, and Value Investors Club as part of their research process.

    Investment in FAR and Australian Small Cap Opportunities

    FAR is an Australian oil and gas explorer with no assets except cash from a soon-to-be-producing field in Africa. The Australian small cap space is inefficient, with many undervalued opportunities.

    Process of Deals and Opportunities in Australian Small Cap Space

    Stocks trading cheaply coming out of COVID due to shutdowns and fixed costs. In Australia, small-cap companies offer more attractive opportunities than large caps.

    Commodity Investments and Ethanol Producer Alto Ingredients

    Many commodities are undervalued and have long mine lives, making them attractive investments. The crush margin, which measures the difference between ethanol and corn prices, has improved significantly.

    Transformation of Ethanol Producer Alto Ingredients

    Alto Ingredients is an ethanol producer trying to transform from a commodity producer to a specialty producer. The current CEO has had a negative shareholder return of -60% since 2013.

    Puppy eh1 and Research Business

    Puppy eh1 can be found on Twitter and their website raperecapital.com. The research business is technically closed, but people can add their name to the waitlist.

    Chapters

    1. Teagas and MIT Investment Management Company
    2. Guest's Investment Strategy and Shorting Stocks
    3. Challenges of Shorting Tesla and Missed Opportunities
    4. Social Activism and Investing in Small Cap Stocks
    5. Discussion on Hunter Douglas Acquisition
    6. Debate on Squeeze-Out Law in Curacao and Sale of the Company
    7. Activism in Smaller Companies and Importance of Traditional Print Media
    8. Challenges of Media and Business Environment in Japan
    9. Unique Characteristics of Japanese Business and Potential Government Actions
    10. Speculation on Japanese Government Actions and Personal Fascination with Japan
    11. Investment Strategy and Idea Generation
    12. Investment in FAR and Australian Small Cap Opportunities
    13. Process of Deals and Opportunities in Australian Small Cap Space
    14. Commodity Investments and Ethanol Producer Alto Ingredients
    15. Transformation of Ethanol Producer Alto Ingredients
    16. Crush Margin and Potential Opportunities at Alto Ingredients
    17. Puppy eh1 and Research Business
    Summary
    Transcript

    Teagas and MIT Investment Management Company

    00:01 - 07:08

    • Teagas is a product that offers expert interviews on public and private companies.
    • MIT Investment Management Company supports emerging manager stock pickers.

    Guest's Investment Strategy and Shorting Stocks

    00:01 - 07:08

    • The guest has grown his hair out since his last appearance on the podcast.
    • The guest has become more activist as an investor.
    • The guest has focused less on shorting stocks since starting to write publicly.
    • Shorting stocks became more challenging during COVID, resulting in painful losses for the guest.
    • The guest still finds intellectual satisfaction in shorting stocks, but it is now a smaller part of his investment strategy.

    Challenges of Shorting Tesla and Missed Opportunities

    06:49 - 13:50

    • Timing the shorting of Tesla through derivatives is borderline impossible.
    • Missed opportunity to make money on Silicon Valley Bank due to pattern recognition failure.
    • Regret for not shorting other regional banks when Peter Thiel instructed clients to pull their money out.
    • PTSD from previous market events causing hesitation in taking advantage of obvious shorting opportunities.
    • Individual shorts are now smaller and less significant in the overall portfolio.
    • Responsibility to subscribers limits focus on shorts as majority are not interested in them.
    • Increased focus on non-US markets, particularly Asia and Australia.

    Social Activism and Investing in Small Cap Stocks

    13:23 - 20:22

    • Attacking sub-billion dollar companies can have an outsized impact as a smaller investor.
    • Social media activism allows for amplifying messages and influencing the market.
    • Smaller companies offer opportunities for better outcomes for shareholders.
    • Leveraging networks and social contagion aspect can generate interest in small cap stocks.
    • Connor Haley is an amazing investor with a different approach to investing than the speaker.
    • The speaker focuses on getting involved with companies at fair prices and being hands-on.
    • Price is an important factor in investing, even if it means dealing with less glamorous businesses.

    Discussion on Hunter Douglas Acquisition

    19:59 - 26:04

    • Connor and the speaker often disagree on investment opinions.
    • Hunter Douglas, a Dutch window coverings maker, was discussed.
    • During COVID, there was a property boom and people started renovating their homes.
    • The founder of Hunter Douglas bought more shares at a premium price.
    • The speaker found the offer insulting and thought the valuation was too low.
    • There were some oddities in the deal, such as the bank that gave the fairness opinion having previous contracts with the company.
    • The board members of Hunter Douglas did not own any shares and were essentially working for the main guy.
    • The price offered for Hunter Douglas was far below fair value, causing dissatisfaction among other shareholders.
    • Hunter Douglas was listed on Euronext Amsterdam but had a global business presence with its CEO living in the US.

    Debate on Squeeze-Out Law in Curacao and Sale of the Company

    25:48 - 32:02

    • There was a legal debate regarding the squeeze-out law in Curacao, which is a Dutch territory in the Caribbean.
    • The CEO wanted to acquire the remaining 13.4% of ownership and there was a debate whether the squeeze-out threshold should be set at 90% or 95%.
    • If the threshold was set at 95%, it would be difficult for Sonderburg to rip off the minority shareholders.
    • The valuation of the business increased significantly since the initial bid, but the offer price did not reflect this increase.
    • A tender offer was announced, increasing the bid from €65 to €81-85.
    • The acceptance ratio for the tender offer was only around 15%, which was considered low.
    • Although they had enough ownership to proceed with a squeeze-out, they did not attempt to do so.
    • After four months, they sold the whole company to a third party for $175 per share, tripled from their initial bid of €65.
    • There is speculation about collusion between Sonderburg and the CEO of another company based on their proximity and potential connections.

    Activism in Smaller Companies and Importance of Traditional Print Media

    31:37 - 38:51

    • The speaker discusses a situation where there was a disclosed mobile bid and conditions were ripe for rebellion from minority shareholders.
    • The speaker had a motivated majority owner who wanted to take the company out, and they were able to mobilize the troops to resist.
    • The speaker's focus is now on smaller companies with lower market caps, where they can own a meaningful percentage of the company.
    • They look for companies where management may be conflicted or not doing an optimal job, and where there are disgruntled shareholders.
    • Old school business people may not care about what people say on social media, but if it's written up in reputable newspapers like the Wall Street Journal, it can have an impact.
    • Access to traditional print media is important because random tweets may not carry as much weight with executives.
    • In markets like Australia and Amsterdam, having juice with local newspapers can be advantageous due to their influence on social circles.
    • Japan is a more difficult market for this approach because no one there would write an article about it that would carry favor with management.

    Challenges of Media and Business Environment in Japan

    38:25 - 45:20

    • The environment in Japan is not conducive to getting issues discussed and put into the right context by the media or other organizations.
    • In markets like Singapore, mobilizing press and shareholder associations can lead to favorable outcomes.
    • However, Japan lacks this kind of market-appointed organization that comments on these issues.
    • The mainstream business press in Japan is not interested in investigative journalism or stories that criticize companies.
    • This lack of interest affects the outcome of such stories.
    • While there are changes happening in Japan, it will never be like extreme shareholder capitalism seen in the US.
    • Japanese capitalism has its own unique characteristics and advantages.
    • Japanese businesses often prioritize cost-cutting over profitability, which can be seen across various industries.
    • Labor-intensive sectors like retail and construction consume a significant amount of labor in Japan compared to other countries.

    Unique Characteristics of Japanese Business and Potential Government Actions

    44:52 - 52:05

    • Japanese companies prioritize the company unit and society over shareholders.
    • Excess assets on balance sheets in Japan are likely to be distributed.
    • Cross-share holdings between Japanese corporations can be reduced.
    • Japanese construction companies prioritize employment and service over profit margins.
    • The closed-loop system of owning shares in Japanese companies contributes to societal value.
    • There are both positive and negative aspects to Japan's approach to business.
    • The Galapagos syndrome has caused issues for Japanese companies focused solely on the domestic market.
    • Japan's social cohesion and low crime rate come at the cost of slow growth and limited immigration.

    Speculation on Japanese Government Actions and Personal Fascination with Japan

    51:37 - 58:25

    • The speaker is not worried about losing things in Japan and believes that if something is lost, it can easily be found.
    • The speaker discusses the possibility of the Japanese government taking a portion of bank deposits to recapitalize the country's balance sheet, similar to what happened in Cyprus in 2013.
    • The speaker speculates on the potential impact of such a move on the yen and Japanese government bonds (JGBs).
    • While acknowledging that these questions are beyond their expertise as a market participant, the speaker finds Japan's social perspective and current situation interesting.
    • The conversation touches on personal fascination with Japan, including its food, culture, and venture capital arm.
    • A brief discussion ensues about the Bank of Cyprus imposing a one-time bank deposit levy on uninsured deposits during their financial crisis.
    • It is noted that insured deposits of €100,000 or less were not affected by this levy.
    • The speaker mentions that much of the money affected by this levy was believed to be from Russian sources.
    • There is speculation about how Japanese citizens would react if a similar measure were taken in Japan.

    Investment Strategy and Idea Generation

    58:18 - 1:05:08

    • The speaker believes that idea generation in investing is not a structured process but rather a result of experience and pattern recognition.
    • The speaker does not rely on screens or quantitative factors to find investment opportunities.
    • Instead, they look for setups that resemble situations they have seen in the past and apply their knowledge and expertise to new situations.
    • The speaker receives many investment ideas from others, but they still personally sort through them using their own criteria.
    • They read articles on various websites, newspapers, and Value Investors Club as part of their research process.
    • The speaker recently got involved in a company called FAR, an Australian oil and gas explorer with no assets except cash from a soon-to-be-producing field in Africa.

    Investment in FAR and Australian Small Cap Opportunities

    1:04:39 - 1:11:17

    • FAR is an Australian oil and gas explorer with no assets except for cash and an earnout from a field in Africa.
    • The CEO claimed they had a dollar of assets, but the stock price was at 45 cents.
    • The transcript mentions a hedge fund trying to wind down the company and extract value.
    • The speaker bought stock above their bid, taking the risk that he could extract value even if they backed off.
    • It took longer than expected to extract management and get them to see the light, but progress is being made.
    • The speaker argues that despite frustrations, this investment has a superior risk-reward profile.
    • The Australian small cap space is inefficient, with many undervalued opportunities.
    • There are examples of companies where value was not priced in until an announced process occurred.

    Process of Deals and Opportunities in Australian Small Cap Space

    1:10:49 - 1:17:47

    • Stocks trading cheaply coming out of COVID due to shutdowns and fixed costs
    • Hedge fund or private equity fund acquires 10-15% of the stock at a premium
    • Strategic bidder expresses interest in bidding, but price not disclosed
    • Earnings report shows improvement, stock trades up but still undervalued
    • Allegro bids for the company, board considers offer and improves bid
    • The deal takes several months to finalize at a higher multiple than initial bid
    • In Australia, small-cap companies offer more attractive opportunities than large caps
    • Captive capital from superannuation system favors equity investment in large caps
    • Commodities present special situation investments rather than straight bets on specific commodities
    • Structural underinvestment and slow supply response contribute to over-earnings cycle in commodities

    Commodity Investments and Ethanol Producer Alto Ingredients

    1:17:20 - 1:24:01

    • Commodity prices are down due to a demand air pocket and China reopening weaker than expected.
    • Many commodities are undervalued and have long mine lives, making them attractive investments.
    • The market suggests either spot prices will decrease significantly or there is negative term about it after year five.
    • There is no clear catalyst for these commodity companies, so investors will have to rely on dividends for returns.
    • Historical price ranges for commodities are likely to remain, but there may be temporary spikes in tight markets.
    • Returns through the cycle will be around 25-30% with volatility.
    • The speaker is involved in coal and oil drilling-related plays, but not heavily invested in tight water trade.

    Transformation of Ethanol Producer Alto Ingredients

    1:23:39 - 1:30:55

    • Alto Ingredients is an ethanol producer trying to transform from a commodity producer to a specialty producer.
    • The regulatory environment has changed in their favor with the inflation reduction act, which offers subsidies for carbon capture and sequestration.
    • Alto's main campus in Illinois is well-located for carbon dioxide storage, reducing transportation costs.
    • The suggestion is for Alto to divest its Western asset and sell its main asset, the Peakin Campus, which could fetch a premium due to the opportunity in carbon capture.
    • The current CEO has had a negative shareholder return of -60% since 2013, making it questionable if they can turn the company around.
    • The ethanol markets are improving this year, with better fundamentals for the commodity business.
    • The crush margin, which measures the difference between ethanol and corn prices, has improved significantly.

    Crush Margin and Potential Opportunities at Alto Ingredients

    1:30:32 - 1:37:37

    • The crush margin, which is the difference between the price of ethanol and the price of corn, is currently around 35.40 cents.
    • Last year at this time, the crush margin was negative five cents.
    • A one cent move in crush margin equals a million dollars in annualized revenue for the company.
    • The carbon opportunity at Alto could generate around 150 million EBITDA.
    • The commodity ethanol business is currently experiencing a favorable period due to lower corn prices, increased demand for ethanol, and reduced costs.
    • Green Plains GPRE has faced challenges in implementing value-added transformations despite having better resources and management than Alto.
    • The stock price of Alto is currently low but has potential given its valuable assets and replacement cost perspective.
    • It would be beneficial for Alto to sell its assets to a partner interested in ESG or decarbonization initiatives.

    Puppy eh1 and Research Business

    1:37:08 - 1:39:25

    • Puppy eh1 can be found on Twitter and their website raperecapital.com.
    • The research business is technically closed, but people can add their name to the waitlist.
    • On the website, there is free content available going back to 2014.
    • Engagement letters and other information can be found on the website.
    • Puppy eh1 also shares a lot of free content on Twitter.
    • They are open to engaging with followers through DMs.
    • The host thanks Puppy eh1 for being on the podcast and wishes them luck in their social activism endeavors.
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