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    Value Hive Podcast

    [REPLAY] Shrubbery Capital Pt. 2: Process, Simplicity, & TikTok Investing

    Fri Jun 23 2023
    InvestingMIT Investment Management CompanyEmerging ManagersEnergy Market'Gothilocks' PeriodStock SelectionTechnical AnalysisIdea GenerationResearch PlatformsBayerStock PerformanceValuationInvestment OpportunitiesLong-Term OutlookTwitterEngaging with Industry ExpertsIndustry ExperienceHistorical Context

    Description

    MIT Investment Management Company (Matico) invests with emerging managers to support MIT's mission. The past year has been eventful in investing, with supply constraints and high energy prices. The current economic situation can be described as a 'Gothilocks' period, where things seem good temporarily but a recession is looming. Stock selection and technical analysis play important roles in identifying investment opportunities. Idea generation can come from natural conversations, random encounters, or podcasts. Twitter is a valuable platform for research and learning. Bayer's stock performance and potential upside are discussed, along with the importance of fresh management. Long-term options and curiosity are highlighted as strategies for success. Engaging with industry experts and understanding historical context are emphasized. The book 'Capital Returns' provides valuable insights into investment opportunities.

    Insights

    MIT Investment Management Company (Matico)

    MIT Investment Management Company (Matico) invests with emerging managers to support MIT's mission.

    Energy and Commodities Investing

    The past year has been eventful in investing, with supply constraints and high energy prices. The war in Ukraine highlighted the tightness of the energy market.

    'Gothilocks' Period and Investment Opportunities

    The current economic situation can be described as a 'Gothilocks' period, where things seem good temporarily but a recession is looming. Stock selection and technical analysis play important roles in identifying investment opportunities.

    Idea Generation and Research Platforms

    Idea generation can come from natural conversations, random encounters, or podcasts. Twitter is a valuable platform for research and learning.

    Bayer's Stock Performance and Potential

    Bayer's stock price has been affected by glyphosate lawsuits, but the company's pharma business shows promise. The blood thinner market and consumer care business are also important parts of Bayer.

    Valuation and Upside of Bayer

    Bayer's sound parts value is estimated at €94 per share, presenting a potential upside of 70%. The CEO's performance and litigation issues have impacted investor sentiment.

    Investment Opportunities and Long-Term Outlook for Bayer

    Fresh management and the pharma pipeline could drive potential gains for Bayer. Agriculture and consumer health sectors have strong tailwinds. Long-term options and curiosity are emphasized as strategies for success.

    Using Twitter and Engaging with Industry Experts

    Twitter and social media provide valuable resources for learning about new industries. Engaging with others and talking to people in the industry can lead to insights and relationships.

    Industry Experience and Long-Term Investing

    Industry experience is preferred when evaluating CEOs and company presentations. Engaging with people on Twitter and doing boots-on-the-ground research can provide an edge in investing.

    The Importance of Historical Context in Investing

    Understanding the history of an industry and considering the memory cycle of participants are important for investment decisions. The book 'Capital Returns' provides valuable insights into investment opportunities.

    Chapters

    1. MIT Investment Management Company (Matico) and Emerging Managers
    2. Investing in Energy and Commodities
    3. 'Gothilocks' Period and Investment Opportunities
    4. Selective Stock Holdings and Investment Strategies
    5. Idea Generation and Investment Insights
    6. Twitter as a Research Platform and Investment Ideas
    7. Bayer's Stock Performance and Potential
    8. Valuation and Potential Upside of Bayer
    9. Investment Opportunities and Long-Term Outlook for Bayer
    10. Using Twitter and Engaging with Industry Experts
    11. Industry Experience and Long-Term Investing
    12. The Importance of Historical Context in Investing
    Summary
    Transcript

    MIT Investment Management Company (Matico) and Emerging Managers

    00:01 - 07:51

    • MIT Investment Management Company (Matico) invests with emerging managers to support MIT's mission.
    • Emergingmanagers.org is a website for emerging manager stock pickers, providing essays and interviews by successful managers.

    Investing in Energy and Commodities

    00:01 - 07:51

    • The past year has been eventful in investing, with supply constraints and high energy prices.
    • The war in Ukraine highlighted the tightness of the energy market.
    • Energy and commodities trades accelerated due to the events of the past year.
    • Tech market was overvalued at the time, leading to a long energy, short tech trade.
    • Structural bull market in certain parts of the energy market, like oil services.
    • Developed a theory around inflation hitting 4% and recession worries for 2023.

    'Gothilocks' Period and Investment Opportunities

    07:28 - 15:16

    • The current economic situation can be described as a 'Gothilocks' period, where things seem good temporarily but a recession is looming.
    • The timing of a recession depends on factors like people's savings and job security.
    • It's difficult to predict when the 'Gothilocks' period will end and the recession will hit.
    • The real world operates at a different speed than the finance world, so there is often a lag in the impact of events like interest rate hikes on sectors like construction.
    • The employment market may experience the effects of rate hikes with a delay of six to twelve months.
    • The risk-reward balance in the stock market needs to be considered, especially when cash investments offer guaranteed returns.
    • To justify investing in stocks, there needs to be a higher potential return than what can be gained from cash investments.
    • Asymmetric setups and short squeeze potentials are attractive investment opportunities during this period.
    • Technical analysis plays an important role in identifying investment opportunities and determining exit signals.
    • Energy charts were strong throughout the year but became overextended towards the end. However, certain segments like oil services still hold potential due to long bear markets often being followed by long bull markets.
    • Tech stocks that have experienced significant declines may present buying opportunities if they show signs of recovery after reaching extreme lows.

    Selective Stock Holdings and Investment Strategies

    14:55 - 21:49

    • Stocks are down 90% at the end of December 2022, presenting an asymmetry in the market.
    • Farfetch stock was bought at $9 and sold at $12, but later reached $70.
    • Making a 60% return in three weeks is considered good, prompting some to take profits.
    • Being selective and concentrated in stock holdings can be beneficial.
    • Having exposure to a factor while limiting it to a small position is important.
    • Respecting technical indicators and setting cut-off points for selling is crucial.
    • The performance of the rest of the portfolio should also be considered when making investment decisions.
    • Avoiding excessive concentration in one factor or becoming too reliant on it is advisable.
    • Investors should maintain a mental database of past research to access when needed.

    Idea Generation and Investment Insights

    21:20 - 28:21

    • Investors need a mental database to access previous research when needed.
    • The speaker had a conversation about Farfetch and ASOS with friends, which sparked their interest in investing.
    • The speaker took a big position in Farfetch after analyzing it further.
    • The CEO of Farfetch gave projections during an investor day, causing the stock price to drop significantly.
    • The stock price of Farfetch dropped even more due to tax selling in December.
    • The combination of events made the speaker believe that the stock was undervalued and presented an opportunity for profit.
    • The speaker mentioned not being emotionally attached to leaving money on the table if they make fast money on an investment.
    • Idea generation can come from natural conversations or random encounters with people or reading articles.
    • An example was given of discovering the container store as a potential investment through a conversation with the speaker's wife.
    • Listening to podcasts featuring knowledgeable guests like Nick Radikal and Logos can also provide new ideas and insights.

    Twitter as a Research Platform and Investment Ideas

    27:52 - 35:18

    • Twitter is a great research platform for investment ideas.
    • It's important to quickly say no to bad ideas on Twitter.
    • The speaker has a series called 'the shrubs corner of the FT' where he shares investment ideas.
    • He believes in making investment analysis simple and uses the corner of the FT as his reference point.
    • He shares an example of Valaris, an offshore rig company, as a successful investment idea.
    • He also mentions his biggest position, Bayer, which is a sum-of-the-parts play with strong tailwinds.

    Bayer's Stock Performance and Potential

    34:49 - 43:33

    • Bayer bought Monsanto in 2018 for $63 billion, inheriting glyphosate liabilities.
    • The stock price of Bayer went down from $90 to $56 due to the glyphosate lawsuits.
    • The CEO of Bayer lost the vote of confidence at the AGM but did not resign.
    • Regeneron's eye drug ILYA contributed significantly to its market cap while Bayer's stock remained flat.
    • Bayer's pharma business was weak before acquiring Monsanto, but their pipeline shows promise.
    • The blood thinner market is estimated to be a $55 billion market with significant potential for growth.
    • Bayer's consumer care business and crop science division are also important parts of the company.
    • Considering discounts to peers, Bayer's sound parts value is estimated at €94 per share.

    Valuation and Potential Upside of Bayer

    43:05 - 50:53

    • If I put all these things together, I will get, if I put a 10% discount to Cortiva, 10% discount to other farmer peers and 10% discount to the consumer healthcare peers, crop science is about 80 euros a share, pharma is 47 euros a share, consumer healthcare is 18 euros a share, and take out the debt, you have a sound parts of 94. versus a current price of 56.
    • So you have a 70% upside on a company that's $50 billion.
    • Some of parts usually... pretty crap way to lose money. But here we actually have three very good businesses: Monsanto, pharma with promising pipeline, and consumer healthcare which may be sold or spun off.
    • The CEO who messed up big time is holding back investors due to lack of trust in management.
    • The coverage by analysts is strange as they don't understand both Monsanto and pharma sides well.
    • People are hesitant due to past litigation issues but Bayer has settled many cases and started winning some too.
    • Buyer's winning cases are making holdouts nervous as their claims' value decreases over time.
    • In the next 12 months, Bayer will have a clean slate after spending cash on litigation provisions.
    • Bayer can make around 6 billion free cash flow per year if there are no provisions or litigation charges.
    • With no provisions or litigation charges, Bayer's free cash flow yield would be around 12% and earnings multiple would be around six or seven times.
    • There is potential for activism as Jeff Rubin and another activist investor bought stakes in Bayer recently. German institutions also expressed dissatisfaction with the CEO.
    • The AGM is coming soon and activists see an opportunity to replace the CEO before his term expires in 2024.

    Investment Opportunities and Long-Term Outlook for Bayer

    50:27 - 58:09

    • When fresh management is on board, the direction becomes clearer and potential gains can be made by closing the discount on consumer healthcare shares.
    • The pharma pipeline could potentially double the company's value in the next three years.
    • There are strong tailwinds in agriculture and consumer health due to increased importance of sustainable food sources and personalized health.
    • Potential losing situations include prolonged litigation or an entrenched CEO who continues to destroy shareholder value.
    • A fresh start with new leadership is crucial for success.
    • Long-term options are a viable strategy due to cheap volatility and capital efficiency.
    • The stock has been range trading between 40 and 56 over the past five years, making it a relatively stable investment.
    • The company pays a 4% dividend and is valued at seven times earnings, providing additional income for investors.
    • Curiosity is key for investors to gain knowledge and understanding of different industries.
    • Twitter can be a valuable platform for learning about specific sectors like oil and gas.

    Using Twitter and Engaging with Industry Experts

    57:41 - 1:05:02

    • Twitter and social media provide a valuable resource for young people interested in finding a new industry
    • Engaging with others on Twitter and social media can lead to great relationships and insights
    • Talking to actual people in the industry is a common denominator among successful investors
    • Research from Wall Street analysts may not be as valuable as speaking directly with people in the space
    • Finding good presentations or webcasts of companies can provide more insight than reading annual reports
    • Evaluating the CEO's background and presentation style can help categorize them as a promoter, company builder, or serious person

    Industry Experience and Long-Term Investing

    1:04:34 - 1:11:58

    • Industry experience is preferred when evaluating CEOs and company presentations.
    • Engaging with people on Twitter can provide valuable insights.
    • Talking to people and doing boots-on-the-ground research can be an edge in investing.
    • Hedge funds have restrictions on who they can speak to, limiting their industry knowledge.
    • Quarterly earnings focus on short-term results and may not be relevant for long-term investors.
    • Mainstream research is designed for mass consumption and may not provide valuable insights.
    • Understanding the history of an industry is important for long-term investing.
    • Studying past trends and speaking to industry experts can help predict future trends.

    The Importance of Historical Context in Investing

    1:11:29 - 1:16:06

    • Understanding the history and scars of people in the energy space helps explain why there was an energy crisis.
    • The memory cycle of participants is important to consider, as it can impact investment decisions.
    • The book 'Capital Returns' provides a simple yet powerful way of looking at investment opportunities.
    • The chapter on oil in the book explains why things rallied because the opposite thing happened.
    • Shorob can be found on Twitter at AGNOSTOXX or Shh.
    • If Shorob could have dinner with anyone from finance, he would choose Druck.
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