Stocks Neat Podcast – Price Gouging – Forager Funds – The Global Tofay

Stocks Neat Podcast - Price Gouging - Forager Funds - The Global Tofay Global Today

EPISODE 30

 

[INTRODUCTION]

 

[0:00:03] ANNOUNCER: Just a quick reminder, this podcast may contain general advice, but it doesn’t take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDFs. Assess whether that information is appropriate for you. And consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance.

 

[INTERVIEW]

 

[0:00:39] SJ: Hello, and welcome to Episode 30 of Stocks Neat. I’m Steve Johnson, Chief Investment Officer here at Forager Funds. And today in the hot seat we’ve got Harvey Migotti filling in for Gareth Brown, regular filling guest for us on the podcast. How are you, Harvey?

 

[0:00:54] HM: I’m good, thanks. And yourself?

 

[0:00:55] SJ: Very well. Thank you. Portfolio manager of our international fund. As I’m sure most listeners know, coming up to five years now with Forager, Harvey. I’ve had a lot of calls with investors over the past couple of months just going through the delisting process for our Australian shares fund and few listeners to the podcast as well. Number of people wanted me to pass on their thanks to you for the difference that you’ve made to their portfolio over the past five years and the changes that we’ve seen for that international fund of ours and the improvement in performance there and shaping up to be another really good financial year for the fund this year as well.

 

[0:01:28] HM: Well, touch wood it continues, and thanks a lot. Appreciate it.

 

[0:01:32] SJ: But you’ve done really well, you like owning businesses that are in sectors that can grow, and I’ve got some tailwinds behind them. We’ve had a number of those work well, for us buying at times when people were less optimistic about it. Obviously, the theme that everyone’s talking about now is artificial intelligence, it is very real in terms of the money that’s being spent on the space out there. You and I’ve just been talking prior to this podcast about some of the adjacencies, and I thought it was a really interesting insight into how you think about the world of investing, and how the obvious theme is really the best investment.

 

[0:02:09] HM: Well, it’s probably the best investment if you’re very early, but by the time, it’s starting to materialize and it’s starting to come through numbers, you sometimes find that they’ve run away, but there’s many ways to make money off of one theme. This AI data center build out, obviously semis, and yes, semis have run but there’s other companies that were first derivatives of that such as Vertiv, in the US, industrial company where 70% of the revenues coming from data center cooling products. Very obvious in hindsight, but their orders are growing 50%, 60%, 70% year on year. They’re getting pricing that stocks up 7x over the last year.

 

So, the opportunities were there, and we actually think there’s a lot of them out there that are still somewhat flying under the radar. They’re getting more recognized, I think, over the last month or two, but they’re still under the radar. That’s just more to do with the power gen side, and the transmission side and so forth. Think about solar companies in the US, or power generation companies, transmission companies. Guys that supply cables for all this stuff, copper as a commodity, natural gas, potentially as a commodity, because you need that energy. I mean, people are estimating that US energy demand needs to grow by 30% over the next kind of seven, eight years.

 

[0:03:21] SJ: 30?

 

[0:03:21] HM: Thirty percent, yes.

 

[0:03:22] SJ: Just the impact of building data centers?

 

[0:03:25] HM: It’s not just data centers, but there is some baseline energy growth that should happen. US has been staggering for 20 years, and you’ve been absorbing some of that capacity. But you’re also at the margin closing down things like coal plants, and so forth as a result that are in recent years in the ESG push. So, pockets like solar should outgrow that base number.

 

Europe, I saw an estimate yesterday. I think it was from Goldman Sachs. Don’t quote me on that, though. But it was that demand there needs to grow 50% in energy supplies or it needs to grow to 50% to keep up with demand over the next decade. I mean, incredible, incredible numbers after the last 15 years work in energy savings and cost efficiencies have come through the system in lower demand.

 

[0:04:04] SJ: It’s interesting, some of these adjacencies, it’s almost less risky than most of the companies that are actually – I think there’s still a lot of uncertainty about how much this is fundamentally going to change businesses and whether the amount of CapEx that even in some cases, large companies are spending on this is actually going to be a good return on that capital or not. A lot of that is unclear. But if you’re the person that’s the beneficiary of the capital spend itself, it seems like that is locked and loaded for the next five to 10 years. There’s going to need to be more capacity built.

 

[0:04:36] HM: In a gold rush, you kind of invest in the pickaxe manufacturer, so to speak, right? So, we’ve kind of done that. I mean, we own applied materials in the semi-cap equipment space, and a few other companies that I think we haven’t disclosed but in the solar space of solar capacity and generation in the US and a few other areas. We definitely are long certain commodities, uranium, copper, through Glencore and so forth.

 

[0:05:00] SJ: Do you have any views on taking the investment piece to one side, but just ways in which that life is likely to change over the next decade, in practical ways, because of the influence of artificial intelligences?

 

[0:05:13] HM: It’s funny, I read this tweet, and it actually resonated with me. It’s like, I don’t want bloody AI to come and do art for me and this kind of stuff. I want to say, I had come and clean my house and help me do laundry. So, I can do art. That really kind of resonated with me, because I feel like there will be jobs out there that probably disappear to some extent because of this. I mean, you just think about the content that some of these systems are generating in terms of videos. You can just type a little script and then all of a sudden, wham bam, you’ve got a little kids show, 5-minute, 10-minute episode of a Bear and some Bunnies, whatever, shenanigans happening the woods, or new Tom and Jerry episode, and it’s probably really – it’s going to, or 5 to 10 years, going to be something that these things can generate.

 

A bit scary for certain industries, I think, to some extent, potentially ours as well. But it’s definitely going to make things more efficient and I think you’re already seeing that. I know, another fund manager who was telling me that he writes his monthly and then he puts it through ChatGPT, and it gets it to spice it up and kind of make it sound better. It’s sometimes –

 

[0:06:16] SJ: Change underperform to –

 

[0:06:20] HM: I’m not sure blatantly lies too much just yet, unless it’s doing legal stuff, I heard. So, that’s definitely saving people time. I mean, look, everyone’s debating AI. I kind of don’t want to sit here and put my five cents and two cents, and whatever. There’s no point. I think that parts of our lives will get harder as a result of it and people might need to find other careers and paths and that scares me. On the other side, things should in theory, get more efficient, but you still need to do your laundry, and you still need to do all that menial stuff. I’m looking forward 20, 30 years, that’s when I really hope some home robots like the little Roomba have, can actually save us stuff that we don’t want to do, to give us more time for the things we do. That’s where I feel the real benefit would be for many people, I think.

 

[0:07:02] SJ: I think every single technological transformation that we’ve had. People have underestimated the amount of additional usage that it causes the amount of additional supply of things. So, everyone’s thinking, “Well, it’s going to take these jobs.” They don’t think that with the tool, a person can create 10 times as much content. We are going to be inundated with content.

 

The Economist had a piece in a recent issue of that where they took the video, so you can now, as you just touched on, this ChatGPT video equivalent where you can go and say, “Make me a video of X, Y, and Z. They went to three different marketing firms and said, “We want you to test these three different video AI tools and tell us what you think of the output.” One of the responses there was, “I had these three different campaigns. I got to write, make me a video of them, and it’s nowhere near the standard that I would actually use to run an ad.” But could I take it to the client and say, “I’ve got these three ideas. He’s one, two, and three,” you get the general gist of what we’re trying to do here. He said, “Absolutely. And that was a week’s work for us working on a pitch deck, that’s now five minutes. Okay, I’ve got a great idea, put it into the engine, get the engine to make me something rough.” And then there’s a lot of time that needs to go put into making that a professional – that will get better. But ultimately, they’re going to be able to create dramatically more, is the short of it.

 

[0:08:19] HM: I mean, this is today, but we’ve kind of seen that play out in other ways in the video gaming space where you had all these engines come out to make life easier for game creators over the last decade. What actually happened to the industry is that it multiplied. The size of it just grew exponentially, because you now could create more content. So, more high-quality games were being made. More people were being employed in the industry. As people to some extent worried back then, it didn’t actually kill jobs. So, I think that’s 100% correct. In many cases, you’ll just see, perhaps higher quality, more product, as opposed to one guy loses the job and it’s mutually exclusive. It may not be that way.

 

[0:08:57] SJ: I think on the flip side of the bullish frenzy at the moment, there’s also I think, to what exactly what you’re saying, a number of companies, plenty of companies out there where they’re being tarnished with a brush that your business is going to be obsolete because of artificial intelligence that are – it’s not easy. I think you really do need to determine whether the future is in doubt or not. But there’s some interesting opportunities out there where people are just assuming that the business is going to become obsolete.

 

[0:09:22] HM: There are. I mean, we’ve been writing one that’s up a good 40%, 50% here today. TaskUs, low-cost outsourcing for high-tech companies. Chat support and helping people navigate through issues logging in and whatever else and that was massively hammered as the AI hub has started to bubble. But look, they’re their revenue is inflicting back to growth, and I think you still need these things. It’s dirt cheap or was cheaper, I guess a few weeks ago, and you do have these opportunities 100%.

 

I mean, one thing we were doing a lot of work on and close to pulling the trigger on is in the gaming space, was also seen as an AI loser, went down from 30 times earnings to 12. And lo and behold, the 75% offer from private equity came over the weekend. You can bet your bottom dollar that these guys hired a lot of industry experts to kick the tires. I was in private equity. I mean, you spent a lot of time and money doing diligence on the operations and resilience of the business, at least on a five to eight-year view, your holding period, and became, I suspect to the same conclusion that we did.

 

This is actually not that detrimental. There’s parts of the business that will benefit. There are some parts that will lose, but this is still a cracking business. I think there are still opportunities out there. They’re painted with that brush. And equally, that assignment is 100% things that have run really far. There’s some crazy stocks in the US trading and hundreds of multiples of P just because there’s some sort of AI link or ties to whatever.

 

[0:10:49] SJ: I think, that was percentage of companies that mentioned AI in their earnings call. Is it five?

 

[0:10:56] HM: Exponential growth.

 

[0:10:58] SJ: It’s up to something like 40.

 

[0:11:00] HM: When you have a copper miner telling you how AI is going to make the mines more efficient. I’m sure it will. I’m sure it will. But I’m sure that that software was already there 5 years ago, 10 years ago, anyway. I know that the mine optimization software has been around for ages, right? We’ve covered the industry for a while.

 

[0:11:15] SJ: Now, being global.

 

[0:11:17] HM: Exactly. Now, they’re just putting the AI label in front of it and using the buzzword. It’s hilarious to see, we’ve been through this many, many times across various topics and certain things.

 

[0:11:27] SJ: If you’re the miner and everyone else is going to have the same technology, it’s going to end up in whatever efficiencies you get, will ultimately be passed on through price.

 

We might move on to some commodities chat. But before we do, it’s supposed to be a whiskey podcast. You haven’t mentioned a whiskey yet. We’ve both been working pretty hard. We had a birthday party for my wife recently and she was gifted a couple of bottles of whiskey that had her name written on them. So, you can do this through Archie Rose. Really, really cool ID. You get a bottle of whiskey and it’s got your name on it and the year that you got it. The Archie Rose whiskey, it’s another one of these we’re going to sell you. I don’t even know that until you already spent six and seven-year-old whiskey. They claim that the whole age thing is a bit of a furphy. But for me, I think you can taste the lack of softness in the newer whiskeys.

 

[0:12:17] HM: Where’s the –

 

[0:12:18] SJ: That’s an Australian –

 

[0:12:18] HM: Well, it’s interesting. I mean, if you go on a tour of Manly Spirits, they will tell you why in Australia, you can do what Scotland does in 12 to 15 years in 4 or 5, and it’s the humidity and the temperature.

 

[0:12:30] SJ: It also means they don’t have to hold inventory for 10 years.

 

[0:12:34] HM: It’s better to be at – well, you might not get the premium yet. But it’s definitely better to be an Aussie whiskey producer from an inventory and working capital perspective than a Scottish one. I can tell you that. But that’s an interesting tour. Well, actually, I think we should get a nice Coastal Stone Whisky from Manly Spirits given it’s up here, and I think a lot of listeners can easily pop up to the to the brewery, go to the process of how they make it and have some cracking whiskey that’s made and very limited supplies that you can only get them in certain places. So, let’s tee that up for next time, I think.

 

[0:13:03] SJ: Sounds great. She got a Nant that was the same actually, a better whiskey from my perspective. Very tasty one. But really great gift idea, I thought, for someone that likes their whiskey. Get a bottle with a name on it. Super idea.

 

[BREAK]

 

[0:13:14] ANNOUNCER: Stay tuned, we’ll be back in just a sec. Are you a long-term investor with a passion for unloved bargains? So are we. Forager Funds is a contemporary value fund manager with a proven track record for finding opportunities in unlikely places. Through our Australian and international shares funds, investors have access to small and mid-size investments not accessible to many fund managers in businesses that many investors likely haven’t heard of. We have serious skin in the game too, meaning we invest right alongside our investors.

 

For more information about our investments, visit foragerfunds.com. If you like what you’re hearing and what we’re drinking, please like, subscribe, and pass it on. Thanks for tuning in. Now, back to the chat.

 

[INTERVIEW CONTINUES]

 

[0:13:58] SJ: We touched on copper a second ago. It’s been something that you and I’ve, I think, mentioned on the podcast before, certainly written about in the reports. I’d say, I feel like the returns on capital in the commodity space are going to be higher than they have been historically due to ESG and a number of other factors across the board. But we’ve been particularly interested in the copper story. It’s historically just been a good proxy for the economy. But good reasons, I think, for that unlocking. You’ve had both copper and gold hitting highs recently, up fairly strong years.

 

[0:14:32] HM: Yes. Multi-year highs. That’s right. Copper is up 25% just over the past two and a half months or so. We’ve owned Glencore for a while for exposure there. We’re constantly screening for other names. I mean, they have rated the pure-play copper companies to some extent, but there’s a good reason why. You have a multi-year story here in the demand side and if you think about the “new economy” that the world is trying to transition to. They need a lot of copper. EVs, charging stations, data centers, grid capacity expansions, all that jazz. You just need it. It’s hard to see where the supply is coming from at the moment, because nobody’s really investing capex. That was years ago already and still kind of hovering at lower levels versus history, and certainly versus GDP and so forth. Order rates of existing mines keep getting worse.

 

It feels like every few months, there’s some sort of mine disruption in some part of the world, particularly in emerging markets and, and so forth. So, I think investors, traders, mining executives, for a multiple number of years now, have warranted that the world’s going to face a critical shortfall of copper, that green industries just are gobbling this up, and they need it. Yet, on the other side, you’ve got some inventory built in certain places people are concerned about and a slowing China, which is a decent user of copper, particularly in construction buildings, and so forth, waters, and whatnot. That’s kind of kept a lid on it and it looks like it’s finally starting to erupt, for lack of better words.

 

[0:15:58] SJ: Yes. I’m seeing it mentioned more and more. But I do think the whole India demand story is really starting to move the dial across all of these commodities, I’ve been quite worried about Chinese demand, whether it’s coal or iron ore or copper. That economy has been on an unsustainable path for some time. But what’s going on behind the scenes here is the Indian economy is growing very quickly, finally, and there’s lots of negative stuff written about the PM over there. But I think it’s almost required a strong man type approach to get the economy going in the direction that it needed to go in. It’s become a genuine powerhouse and there is a lot of infrastructure build going on there and there is an enormous amount that needs to happen over the next 20 years.

 

So, it has really become a demand engine and possibly made me less concerned here about the impact that China coming off the boil is going to have on some of these markets. It’s another China in the making in India.

 

[0:16:54] HM: I mean, I think we’re generally positive about the wider commodity space, for the same reason, and we’ve touched upon kind of the energy side of things at the beginning of this podcast. So, there are multiple drivers. You don’t need all of them to turn on for trying to go up, if that makes sense. We just need some of them to still be there in three years, four years’ time, and so forth.

 

[0:17:12] SJ: Yes. The supply side, it’s just not going to get any easier to develop a new mine or even add capacity to an existing one is. Maybe rightfully so, there’s a lot more constraints on where and what people can do. But to the extent that we want all of these new technologies and want to drive electric vehicles, it’s going to need to be found somewhere. I think, it’s just going to require higher returns on capital, and the cost of these things are going up as well, and that means that if you own an existing reasonably low-cost asset, you’re going to be sitting on a very, very profitable, literal goldmine. Gold and copper together.

 

[0:17:49] HM: Yes, 100%.

 

[0:17:50] SJ: The markets been a bit like that this year. So far, this calendar year, even Harvey, it was a very, I think, narrow range of better quality stocks into Christmas and January that were driving the market. But there’s more going on out there. Now, I think there’s other things that have been leading the market more recently, including a fairly strong commodities recovery recently, European financials. We’ve talked about them in the podcast with Gareth, the sector that people hated for 15 years. I think you were saying the best-performing –

 

[0:18:20] HM: Yes, as of I think this weekend, it was the best-performing index in Europe. The banks and financials index. So, that’s amazing. I think, if you ask most people, they probably wouldn’t think that. But it has been. It’s funny that the rally have certainly broadened and that’s good to see. I think it’s healthier than just certain pockets getting overextended. But we’re still finding some really interesting opportunities. There’s a bunch of sectors that are still I think, in the doldrums consumer discretionary. Still has a lot of opportunities. There’s still a lot of opportunities in certain commodities. Solar has gotten beaten to a pulp. That’s went from being the hottest thing on the face of the planet to trading at multi-year low multiples. A lot of this solar kind of component manufacturers and whatnot. And I’m not even talking about the commoditized things like the panels that China is dumping and whatnot, which the US by the way, said they’re going to put tariffs on now, which is interesting.

 

[0:19:14] SF: Haven’t you heard, Australia is going to be a global powerhouse in solar manufacturing.

 

[0:19:20] HM: Yes. So, I think there’s still pockets of opportunities there, and I think, this stock I briefly mentioned that was seen as a “AI loser” has a cracking 2020-year record and just really good business. Just got a 75% takeover offer. So, there’s definitely still stuff out there. I think, if you look across countries as well, US and the Nasdaq certainly have rated to higher multiples. But you look at the UK, on the other hand, and still trading at very reasonable valuations and parts of Europe as well. So, there’s definitely opportunities out there.

 

[0:19:53] SF: I feel like there’s a fragility to it or there’s still a lot of fear about those things that haven’t worked from the last decade, whether that’s financials or even here in Australia, that the small cap end of the market. We had Gentrack out yesterday with a profit upgrade that share prices up five or six-fold over the past couple of years. Any business that’s downgraded, we’ve got a couple of tourism-related stocks where the share price has halved over the course of the past six months as well, on their downgrades, but they’re cut the value of your business here by 5% or 10%, and the share price has halved. I didn’t think they were stupidly priced to start with. So, nobody wants to be left holding any business that’s disappointing sort of momentum aspects, that if you get on the wrong side of it, it’s still share prices having here, rather than your normal bull market environment where everything is just up no matter what they do.

 

[0:20:47] HM: Definitely, I think it is very momentum-driven. I also – it reminds me of a quote from someone that me and you both know. I won’t say his name, but one of my favorite salespeople out there. “Big moves start with big moves.” I think we’ve seen that year to date with some of our investments. I think Zeta comes to mind where the company is competing and raising since we’ve owned it for two and a half years, and the stocks not done very much. And then all of a sudden, they do it one more quarter, which was in Q1 and lo and behold, it’s doubled year to date. We still think it’s an attractive multiple. It’s just that you’ve had all of this earnings growth over three years compound, and you’ve had all these beats and raises compound in the stock did nothing and then all of a sudden, wham goes up a lot on earnings, and then just continues. It’s been up I think every single day almost for the past three weeks.

 

So, sometimes it comes later. You don’t want to be missing that and things you don’t either. But it is momentum-driven. Once this started, it’s continued. You don’t overstay your welcome. So, I think it’s very important to be disciplined. It’s certainly a momentum-driven market at the moment. I mean, not that it hasn’t been for many years now, I suppose.

 

[0:21:49] SJ: That’s actually a really interesting topic, and maybe one for another conversation. But something Alex Shevelev talks about a lot is this, understanding what type of business that you own in terms of whether you should let some of those things run more or less. This idea that a business can be an open-ended growing business where it might be perceived differently by people down the track, versus one that is just, this is not the world’s greatest business. I bought it at a stupidly low price. I need to sell it at what’s probably still a low price as well. But a stock like Zeta, there was plenty of skepticism. And even internally, we’re asking plenty of questions about whether they were going to deliver on the promises they had made to people.

 

So, it’s okay, they beat once. I’m still skeptical twice. It’s been six of them, right? But you get to the point where even I go, well, that concern that I had is gone away, and therefore instead of it being 10 or 12-risk adjusted multiples that you think’s the right number for that business, it can actually be 20 or 25, or even 30, if the business is going to keep growing. That’s what’s happened with Gentrack as well that you’ve had earnings growth, and because of the confidence that that growth is going to continue, you’ve had the multiple business go from –

 

[0:22:59] HM: They usually come hand in hand, and that’s when you get the multiplexers run.

 

[0:23:02] SJ: In that case, it’s 50 times, two years out earnings now because everyone’s climbing over themselves to own the stock. So, I think that is an important thing that we’ve really tried to incorporate into our portfolio management skills over the past few years is be aware to the different perception that this stock might have about it, if the investment thesis goes to plan. If it’s Seven West Media, it’s shrinking. Everyone knows it’s going to shrink. It’s never going to be perceived as anything different to that. Need to be aware of that and you need to be willing to sell those businesses at what seemed like still cheap prices. If it’s a business that people are potentially going to be willing to put a higher multiple on, it doesn’t mean it is going to happen. But as that probability goes up over time, you need to give them a bit more runway.

 

[0:23:45] HM: I agree, I’ve always been a fan of letting things run. I manage the position size. Don’t let it get crazy and be a huge chunk of the portfolio because it’s multi-bagged, but you let things run until the companies, the thesis breaks, or the company has a bad miss or something like that happens, right? I mean, obviously, if it gets to a really ridiculous multiple, you better step back and hope for a better opportunity. We had that with Celsius a few times. Then, we bought it back, what two, three times, and then should double our money each time? So, things do always get ahead of themselves as well. But generally, yes, I totally agree. Perception is everything, to some extent. Market is inefficient, we think. So, just being a step ahead there and letting others put their perception onto the stock price is a good thing.

 

[0:24:27] SJ: Yes. Put yourself in someone else’s shoes and say how would this particular type of investor, if that stock has now become appealing to them, think about this, rather than us with our cash flow based. We want to earn 12% per annum here, right? So, this can be as simple as these people will think seven and eight, the right number, the right sort of business.

 

Okay, everyone, thank you for tuning in. Harvey, thanks for your time again. You’re in the country for a while or you’re heading off anywhere soon?

 

[0:24:52] HM: I’m here for the time being. I got a conference later this year in the US again, kicking the tires on a few things. But yes, here, otherwise.

 

[0:24:59] SJ: Enjoy being home for a while. We spend a lot of time on the road, so it’s good to have you around. Thanks for tuning in. Any questions, send them through to [email protected]. Thank you for your support. Don’t forget to share the podcast and like it on whatever podcast app that you use. Thank you.

 

[0:25:15] HM: Thank you.

 

[END]

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