Judd Arnold (CIO of Lake Cornelia): Hunting For Distressed Multi-Baggers

Speaker A: It has been far too long since I've had you on the podcast, my friend.

Speaker B: And great to be back.

Speaker A: I am stoked, uh, to discuss a host of things. We've got six main points that you sent me to, to, to review and they're kind of all over the place. You've got uh, we're talking energy Covid, normalization, autos, healthcare, and then some thoughts on on two. Uh, I wouldn't call them like special situations, but I feel like one of them is this, you know, business transformation. And then the other one is um, just this crazy reflexivity story in, in. In Leslie's, which I remember finding Leslie's on like a left for dead screen. And uh, and my buddy Unemployed Value DJ wrote it up and I never bought it and now it's done this crazy like 10x. But uh, we'll get to all of that. But before we do, you've got a disclaimer you need to pump out there.

Speaker B: Ah. So just. This is for discussion purposes only. Nothing should be considered investment advice. Some are. All the securities we're about to discuss may or may not be suitable for you. Consult with an investment advisor before making any investment decision. Investing in the market contains a series of risks, including especially the risk of loss. Some are all of what we're about to talk about may or may not be true. Do not rely upon it for any investment decision. Nothing in this discussion is about forming a group or grouping under 13D or G rules. And everybody's free to trade. We're public market investors and I have no material non public information. So there, There we go, Mr. Lawyers, start your engines.

Speaker A: All right, so I think the first thing is you've had some sort of.

Speaker B: The first thing I think we get to do like a first first thing.

Speaker A: Yes, let's do the first first thing.

Speaker B: Um, well, let's start with, with just what I'm doing and then we'll do the first first thing.

Speaker A: Yes.

Speaker B: So I have launched Lake Cornelia Commentary substack. I went away for a little bit last year and then I came back, I went in house for a client and realized I like being on my own. So you can find me online at Lake, uh, Cornelia Commentary on Substack or still on Twitter under Lake Cornelia. Uh, and we're still have the client business with a few people, but most of what I'm doing is running my own money and then and the substack. So it's been, it's been nice to be on my own, go through that midlife quarter Life crisis of realizing being on my own is, is what I want to do.

Speaker A: And it's that uh, is that just a personality thing, being on your own, not wanting to work with, I mean, not working.

Speaker B: I think it's also like time of life and age. Like I worked at three mega hedge funds and then my team spun out of the last one and we launched a hedge fund at a big asset manager. I just think I sort of have had my fill. Um, you know, the guy at one main, um, you know, you're on your own. You know, he said on a podcast, I think earlier this year, last year, that like, at some point, you know, investing becomes a deeply personal experience that like, you just have to do it your way. Um, and to me that was, you know, when you're younger and you disagree with those around you, you're like, well, they have experience and whatnot. You get older and you disagree and you're like, I don't know if they're, I mean, because somebody who's better than you, like what, like you're talking especially within something that's uh, in your zone of expertise. Like, you know, like the, the mega hedge fund managers of the world that are, that are just awesome and I'm never going to be one of them. You know, they can have, they can do 95% of what their senior analysts can do and they can do that across every sector. And then on risk management and sizing, they're probably a little bit better. But when you isolate just to like a one on one stock discussion of a name that, you know, cold, the probability of them bringing up something that like really makes you think as you get go to older, it really shrinks. Um, yeah, and you want to do what you want to do. So I think that's part of it. And then they're all obviously, you know, the confidence to be on your own, uh, and the financial aspect of being on your own too becomes relevant. So, you know, it's nice. I, you know, who knows what tomorrow brings, but I'm having this, I'm having a ball. Like this year has been, you know, easily my best year since I've been on my own, um, which started in February 2020. And so it's nice to be, it's easy to be happy in a good year.

Speaker A: So, so what do you think? Besides obviously getting the, the stock picks right, what has made this year the best year? Like what, what conditions were present to help you have the best year possible?

Speaker B: I think it's a bigger evolution than anything like this Like I, uh, you know, going on your own, you. A lot of things change. I mean, it goes without saying, but one of the biggest dynamics that changes is you go from a world where you're essentially fixed universe and with all these constraints, you can only pitch that which is going to get in the book. Yep. The constraints of what gets in the book is partially impacted by the risk managers and also the person who runs your group and the realities of running LP capital and whatnot. Okay. When you're on your own, you have the whole field and like, look, I don't have, I'll admit, I don't have 5 billion or 10 billion or $20 billion. So like, you know, um, what's relevant to me and what can be impactful, um, is just fundamentally different. And so I talked about this a little bit earlier this year, uh, with Andrew on his show, which is one of the mistakes I found I was repeating over and over again on my own was being too cute by half and getting these names that were less liquid and that people didn't care about. And I was waging a war almost to get people to care. And what you trade with those names is you get valuation obviousness, you know, because that's why, you know, they're attractive, they're less liquid, but you lose the liquidity and you lose sort of this upside optionality of something that people can care about. And you're going to get flows and you're fighting for flows where if you go one level up from that, you start with, okay, people already care about this. And if I'm right and sort of not dismissing valuation, but cadence and momentum and all sorts of other things are, are important and said differently. Great businesses almost never look optically cheap, you know.

Speaker A: Yeah.

Speaker B: Um, it just is what it is. And they, they look cheap in hindsight, but not in foresight. So, um, you know, there were a few big ones historically, you know, over the last few years that have changed my thinking. Asats I missed. That was a big one where I, you know, I knew people would care. And the fact that I missed it, especially once it had its definitive moment. The stock was, I think it was like three. It ripped a five on the big announcement that changed everything, came back to four. I didn't swing in and you know, it went up to 40 within six months.

Speaker A: What ticker is this?

Speaker B: ASATS ASTS. Um, but that was one that was sort of, you know, a special sit. And it was like it was a busted spack. Could it be interesting? Uh, Nebbyous. That's MBIS was one I was all over. I didn't match.

Speaker A: I think you came on my podcast and you had pitched nebbyous, like, yeah.

Speaker B: And that one, seeing it work, you know, it's just sort of reinforced and it clicked. And I'm like, you know, that was one where, like, it really didn't optically achieve you. But everything else clicked, which is the CEO was awesome, the story was awesome, the space was, ah, you knew these guys were going to execute. So, um, you know, and that just moving away from that stuff, um, and making sure that I'm in stuff that people care about. And we. We'll talk about this a little bit later in our show. And it's like one of the ironies is toi, the oncology Institute's my biggest position. It's been, you know, one of the biggest winners, if not the biggest winner of my life. And, um, you know, I got. Got. Got involved, you know, initially in 23, left in 24, early 24, because I didn't like what was happening. It bottomed in late 24. I came back to it, started rebuying it like 25 cents and got my whole position on at 70 cents. Oh, my God. And now it's, you know, north of 5, and I think it's got a real chance to go to 30. But, like, that's one where I look back even today, I'm not sure, like, with the evolution I made that I. I don't know if it was like, I wouldn't do that again. It was so illiquid at the time. And I was literally over my skis. And I think there's easier trades to be had. Um, and we'll talk about agl, uh, which is my biggest. What a huge winner this year. Um, and Leslie will go through, um, and a few other ones. But I think making sure that I'm in stuff that people care about and that is already liquid or close to liquid. Uh, yeah, big thing.

Speaker A: Well, how do you do that? How do you keep. How do you kind of shift from making sure that stuff is liquid enough that people will care, but also maintaining the core pillars of, like, the reasons why you found those ideas. Like, like how you found TOI at 25, 50 cents, how you found AGL down at 3 to 4, like, how you found Leslie where you did. Because, like, that to me is the most interesting part, where it's like, yes, I understand you can kind of scale this to have, you know, some sort of liquidity constraint. But, like, there's a process behind all of these and like there's similarities between AGL to I Leslie when you let's go to Tidewater.

Speaker B: Because that's the other one that really illuminated this for me too. Because when you're young you don't appreciate setups and how long they take. I started in the hedge fund industry in 2005. Uh, November 2005. I started in finance in summer oh three at Lehman. You know, went back full time. I was in the power and utility group and in the power utility group and then I was the power utility guy at ah, my first hedge fund, King street. Um, and I worked on the Calpine bankruptcy that filed a month after I joined King Street. And you know you're buying distressed power plants, those things. Like at the moment I was like oh, this all exists because of the Enron boom, bust the TMT bubble. All this stuff got bolt out. You had El Paso, uh, Dynasty, all these names, Duke Energy. Most of these things are still around but like different, different forms and different iterations. But like something happened years ago. There was a loss of capital restructuring. Now we're finding cheap assets years later as things change. And like you know, because the like at a foundational thing what I found is like my best trades are when I buy value or uh, you know a value situation and I sell growth. A growth stock.

Speaker A: Yeah.

Speaker B: Because I, I think too many people and I, I say this as a person who started as a distressed guy. Too many people focus on. I bought something really quote unquote quote cheap. It doesn't matter like you can make a little bit of money. It's like value stock investing. Great. I bought a portfolio of 5P stocks.

Speaker A: Yeah.

Speaker B: I bet you the ones that make the most money are the ones that the earnings inflected. Not the like the driver is that earnings influence collected. Not the one that like oh, I, I scalped somebody. I bought a five times P business. I bought it three and a half times, then I sold it at five. That's just a miserable way to live. Like you want to buy stuff that just fundamentally changed. Look at like uh, I don't know if it's the best private equity deal of all time anymore, but like it's certainly top five. Uh, Apollo buying Lionel debt in the the financial crisis. They bought it at EBITDA 0 or negative EBITDA and within a year and a half because of the shale revolution. So you know your chemicals is super easy. You're short Henry Hub, um, you're long Brent Oil and that spread just massively blew out and you Know, they, they made over $10 billion on almost nothing. So, yeah, perfect example of like something starting distressed that became just incredibly interesting because of like, what happened. So you need to call these inflections more than anything else. And so it goes back like with Tidewater. You know, we, you and I talked about that at length. And you can do rig, you can do all this stuff. Like the seeds of that started in 0607 with offshore really mooning. It didn't really struggle during the financial crisis. Then we had this massive building boom of rigs. And you can extend this to ships because Navios is another position. I, uh, you know, I still like you. This building boom through 2014 and then the OPEC bust in November 2014 and it went to zero. And how many people went broke or lost a ton of money from 15, 16, 17, 18, 19, 20, 21 trying to call the bottom in shipping offshore, all that stuff. It wasn't until demand came back that this stuff became investable. And so Tidewater, what was my pitch coming back? You know, this is at like 17 a share. The stock ran up to 18, 100, 110, I think. And then it came back back to 25. Uh, and now I think.

Speaker A: Where are we?

Speaker B: We just bounced off 80 again. Now we're 60.

Speaker A: Yeah, 66.

Speaker B: Um, but again, like the whole story isn't that like that that was available for a decade that you could buy ships, OSVs or rigs for 20 of replacement costs. But it's not an investable situation or that interesting in any meaningful way until you get the demand story back.

Speaker A: M. Well, so let's, let's go to, let's go through these examples because I'm, um, I, I think we'll be able to kind of weave in the trading.

Speaker B: You got to do energy first.

Speaker A: Yeah, yeah. So let's do energy first. And again, this is one of those trades where, uh, I think anyone in commodities, myself included, like going into this whole thing, if you would have told me all the things that had happened and then told me where oil would eventually trade, uh, I would have, you know, been like, oh, my gosh, like this. There's no way that could happen. But yet here we are at like, I think we're 70 or maybe sub 70. And it's just destroyed. All the oil bulls, like all the oil bulls on Twitter are just destroyed.

Speaker B: I m. I have this thing and this came out of the financial crisis and it really clicked for me during house, like with housing, uh, in 09. So I'm sitting at you know, great distress fund called King street, it's still around and like it had made money in 08. Like saw the housing thing. Just unbelievable. Risk management, the PM at the place, one of the greatest hedge fund investors of all time. He's retired, the other guy is still there. Um, you know the organization's doing great but you know he sort of presses and uh, this is what I took away. Not necessarily what he was saying, which is you'd hear by 09 obviously everybody was an expert in housing. You couldn't exist. Like every data point was known and there were all these bears there. And he sort of like poo pooed it. He's like, no, it's just time to get long. Like it's all out there. Like the price, the price action is low enough and it's telling you like we have bottomed and like whether we get the bull case or not, at some point it, you can only be a contrarian on a macro and overrule price action in the beginning. Every day that goes on with a macro change, like a major macro thing that goes on, the price action becomes more and more true. So you know, like about two months ago I just got really bearish on energy during, in the middle of this thing I'm like, well here we are like and to your point all the people were doing the math and all this stuff and I, there's two types of people who are energy sector heads and hedge funds. Most of them are math freaks and they have all the math and that's the way they defend themselves against their pm. And I was like a low case, mid case, high case guy that never wanted to commit to anything because I was just. Now it's, let me just step back for a second. Being the energy guy is the worst, it's one of the worst jobs ever. You're going to look like an idiot constantly. Your sector correlation is super high. So you either have all these buys and no sells or you have all these cells and no buys. The PM can't, especially if the PM wasn't an energy guy can't differentiate. So it's like the tech guy and the TMT guys, like here's my five buys, here's my five cells and they're going to be the standard deviation of the variance of uh, like their calls versus reality is going to be really, really tight and they're always going to have this balance pitch thing. They also have uh, a plethora of opportunities constantly so they don't get attached to things. As an energy guy or commodities guy. You have one or two things that might be interesting on a three year basis. So you anchor, you defend it to the hill.

Speaker A: Yeah.

Speaker B: And then you're like fighting this constant macro game that like, you know, at Citadel they'd say like, there's a transient factor. It's like, yeah, it's not a transient factor. It's like a big oil price move. I can't, there's no hedge for that. You know, oil goes from oil in a range. You can hedge from, um, you know, at the money volatility, but like oil moves from like 60 to 90, the first, second, third. Derivative implications are massive. You can't, you know, it's just like a regime change. So I never loved doing the grant. The more macro a thing gets, I get very leery, um, precise estimates because I just don't think you can do it. And with this, like, this being the oil thing turning around, I just was like, all right, well, this is it. I hear what the math guys are saying, but like, maybe China, like, I don't know how much the oil they're sneaking out, but like, you can't for two, three weeks say I'm right. The price of oil, literally one of the most liquid commodities of all time, in the middle of one of the most liquid liquid things or liquid moments. Like, it's just, it's not even about arrogance. It's like arrogance that you're going to overrule it. It's just like as time progresses, the price is right and then you need to think through what's going on now, how we've left, you know, this Iran. I'm calling it Iran War One because I'm firmly convinced you're going to have Iran war too. This is like a Versailles situation where we're leaving Germany, in this case Iran and the Gulf states. In a situation that's just bound for war. Like, in the short run, Iran's going to pump a lot of oil and also take tolls on Hormuz that's untenable for the Gulf states to pay that forever. They're going to have workarounds and whatnot. But, you know, you, you think about oil right now, okay, Venezuela is massively outperforming now. We'll see what this earthquake does, but it's clearly massively outperformed. I don't know if people, I mean, Iran sort of dwarfed the Venezuela thing. Venezuela would have been the news in the oil market if it wasn't for Iran. We're going from, um, one million barrels a Day to maybe four within three years. I mean, what these American oil services firms have been able to do, I mean, not shocking. Um, well, it's shocking. All the experts said you couldn't ramp up Venezuela production that quickly. Like they're ramping it. So that could be 3 or 4 million barrels a day. UAE drops out of OPEC and is building more bypass pipelines. So three is probably going to go to five, five and a half or six. And they left opec. So what is that going to do to the cartel? Right, um, Iraq rumored to be leaving Iran is going to get a lot of investment and it's going to ramp up production because they need the money. And we just dropped dollar sanctions on Iranian, um, production, production and sales. So you ramp all that up and you know, I don't know where the Ukraine, you know, Russia, war ends, but like OPEC, you know, plus production, we might be talking 7, 8, 9 million barrels a day of growth on a 105 base for the world. 105, 106 million barrels a day like over the next two, three years just from OPEC and OPEC plus that is the most bearish thing ever for non OPEC production. It's terrible for offshore investment because why would you take long duration investment risk? The US it seems Trump wants to produce more in the US as a geopolitical weapon. So I, I look at energy and I'm like, you know, I just don't. It, it seems very bad to me. Um, and we also saw the ultimate, you know, the pricing maximum, the worst possible thing happened for supply and prices only went to like 110.

Speaker A: Yeah. And I think that's the biggest thing is my biggest realization is at the end of the day, like, price is king. And like, you know, Alex and I have a saying, price is truth. And uh, especially in what you said, one of the most liquid markets, one of the largest commodity markets globally. Um, when you started to see oil just fade 100 and just keep making these lower highs and everybody was screaming like, oh, oil has to go to 150, it has to go to 200. Um, and the price action was just dangerous, disconfirming that hypothesis day in and day out. Um, it, you know, again, hindsight's 20 20, but like that's something where if you, if you kind of remove your bias and, and remove your anchoring, like you say, like you could probably make the argument that, oh, you know what, maybe I'm missing something.

Speaker B: And maybe the price from process standpoint too, it's A really good point. And this. This comes out of being a distress guy because you're always looking at bonds, right?

Speaker A: Yeah.

Speaker B: And both of the first two funds I worked at, the second one was called Anchorage. It still exists. The founder left, and it's reincarnation. But, you know, founders came out of the Goldman special situation desk there even more so than the first place. It was this huge focus on. Explain the price today. You've got senior bonds, you got first liens, you got unsecured. What is every single guy. How do you get to the price of the securities? You may disagree with them. We're going to get to that. But, like, how do you get there? And you'd oftentimes find these situations where you, you know, you'd say, or, you know, I. People working for me too, where they'd be like, look, I. I can't get to past 70 cents. And I'm like, well, the bond's at 95. So if we can't even conceptualize what. Like, we're off by, like, orders of magnitude here. Like.

Speaker A: Yeah.

Speaker B: You know, and it would happen to me, too, to. To a boss. You know, the younger you are, the more you think you're right, which is, you know, a you thing. You get older, and then you get too humble because you've been humbled so many times. Uh, so you. You go the other way, but you got to go both ways and really understand it. So, you know, when I, uh, to your point, all the. The oil bulls screaming like, the price is wrong, you know, up until even two, three weeks ago, I'm like, well, how are we. Like, what's more, more likely your spreadsheet's wrong or the price is wrong?

Speaker A: Um, so how do you. How do you see the next. Call it 12 to 18 months unfold in the oil market? Like, are you. Are you even touching it?

Speaker B: Are you.

Speaker A: Are you scoping it out?

Speaker B: Like, I thought the only thing that was viable in. And I'm just talking the equities, I'm not talking the commodity. Right.

Speaker A: Yeah.

Speaker B: Um, I thought the only thing potentially interesting coming out of this was the LNG names, because Qatar is like 20% of global export capacity, and it's really the baseload. So the biggest buyers of LNG are Japan, Korea, and Asia, um, because they need it. And if they need to do get, like, backup slash redundancy, the only place to get that is the United States. So that's super bullish. US lng. And you can express this through vg? You can express it a little Bit through Cheniere. Uh, and maybe next. Right.

Speaker A: I was pulling up Cheniere's chart. It's actually kind of nice. Nice little pullback here.

Speaker B: Yeah. But the problem is now you look at this and it's like, well, I don't know if that's true. Like, you know, Carter's probably going to come back online sooner than they think because it always happens sooner when it's that critically important.

Speaker A: Yeah.

Speaker B: Um, and if Hormuz is just going to be, if Carter is going to be in on it, like their, their LNG tankers are going to get out of Hormuz, maybe, maybe that's not as good. And maybe none of it matters because oil's just going to, to 50. And that's just, uh, you know, and in that case, like the worst, the best house on a bad block is still a terrible house. Glng is another one that might actually get a ship into Iran. But you know, it, the whole, it just doesn't feel like I want to touch anything in the sector. And I, I, I think my base call has been, uh, on my sub stack has just been, let's see where this stuff bases out. You don't have to touch it. Like, the real good thing is oil's going down, um, interest rates are going down. And those two things are very correlated. And boy, is that all of a sudden the most awesome thing for literally everything except energy and commodities.

Speaker A: Yeah, yeah. No, well, and it's, you know, then I wonder if you could also make the case, like, oil going down, interest rates going down. Like, eventually that could become the bedrock for the next like, precious metals bull market. Because I think you also have the similar kind of anchoring mechanisms and biases, which I fully admit I did. Like, I, like we made a correct call in late 24, early 25, um, early to mid 25 on gold and silver. And it worked really well. And I got anchored to that and did not let go of that thesis for a while when the price action was clearly telling me that something had changed. And so now you have, you have gold down 30% from its highs. You have silver down. Gosh, I think silver is down like 50. Yeah, 50 something percent from its highs. Is that a space precious metals that you partake in?

Speaker B: I don't touch it. I mean, uh, silver, you've got obviously the AI thesis with data center gold went parabolic. I don't know enough. I, I know like, in my world, I'm like, okay, oil, I can take a view on that. I feel reasonably sure. And I'M taking it via stocks. And I just feel like in the short run, you know, for the reasons I mentioned, I, I just think OPEC production between Venezuela, Iran, uae, maybe Iraq, uh, I just think they're going to pump like crazy.

Speaker A: And I remember, I started, I remember selling some of my, I had some physical silver back. Started uh, buying it like in the 30s. And uh, I remember tweeting that I was selling it in like the mid-80s. And the response on Twitter was hilarious. Everybody was like, you're so dumb. You're so dumb for selling. It's going to 150, it's going to 200. And I was like, all this stuff

Speaker B: is like Bitcoin, like from a trading dynamic, which is especially the, you know, when I started this business, it was like this legend of the gold bugs. And like the guy I worked for was like, the gold bugs. The gold bugs. And he meant, he did not mean it in a positive way away because at this point, like, you know, this is like 030405 and like, he's talking about guys who like hit max bullishness, like price action was great, early 80s. Then it collapsed and it didn't start rallying until after, you know, 06 07. Right. And so he's talking about guys who've held a view, been wrong forever, but are like super convicted that they're right. The dangers come though, and then when you get the price reinforcement, obviously, you know, like the biggest mistakes I've made in my career have been to a, to a name almost securities or commodities that I, I had a view, I made money right away. And then I let the price action dictate. And then I stayed with it way too long.

Speaker A: Yeah. Last year into this year. So let's go to, uh. So we'll put oil and energy aside as something that's just, you know, too, too complicated right now. And maybe we'll revisit it like sub 50 or you know, around 50. I think that could be interesting. What I really want to discuss is this whole Covid normalization thesis. Um, we have turned pretty bullish. Biotech and healthcare, um, most of it thanks to, you know, people like yourself and a couple other smart investors that have kind of pounded the table on healthcare here. So walk me through that whole Covid normalization thesis. Because it's not healthcare. You have these things like pools and autos. And one of the things that you've been, you know, kind of, uh, vocal about, which I haven't seen other places, is this whole used car cycle. Thesis. So let's. Maybe we'll start there as the wedge into Covid normalization.

Speaker B: Yeah, the COVID normalization thing was really. I came up with it later because I realized all my thesises, or most of them really tied to Covid. And this just goes back to our early conversation, which is setups take time. And most of the COVID stories, and we'll walk through this are stories of, oh my God, Covid happened. And we're, we're printing money. Then, then we had the supply crunch and we had capacity come to meet that supply crunch. And then the world, then interest rates and the world fell apart and the world changed and we got normalization. Right. Um, so are you still there? Did we break up?

Speaker A: Sorry. Oh, wait, yeah, I'm still here.

Speaker B: All right, you froze. Um, so I came with that later. But like. So used cars is a simple one. So you can look at the Mannheim used Car index. It's. You can Google it online. Cox Automotive does it and it's the price of the average. I don't know if it's like a five year old, seven year old, eight year, whatever, used car during the financial crisis. So 07080910 used car prices went down for one year and came back, uh, auto abs was actually left Covid and, or sorry, left the financial crisis as like the clear winner of an awesome asset. Because people when, when pressed, like give up your house or give up your car, they kept the car, slept in the car because they needed the car to get to work.

Speaker A: Crazy.

Speaker B: And so, you know, from everything like that, naturally the credit guys in the market are going to overdo it then and then auto ABS is going to ramp and then blah, blah, blah. Then we had the big problem. So Covid, you had this surge in demand as people de urbanize. Leave this, leave the cities, go to the burbs. Now everybody needs cars. Age of average used car went I think from eight years to 12 years, from 2020 to today. Uh, each of our car on the, on the road. So a four year increase, which is crazy because what happened was used car prices went up about 60% between 2020 and 2020, late 2021, we didn't have enough car production. Then you had the disaster, which is you had a three year period that just ended where used car prices declined. The Manheim index decline a cumulative 25%. So think about making a car loan, right? You know, the car is going to depreciate. You know it's going to happen, right? You have this curve. You're going to mix, make, do some stuff. What happened? You had interest rates went vertical and depreciation went down. So your borrowers got screwed. And the way subprime lending works, it's sort of all uh, right in a. And this isn't just autos, okay. This is just general subprime lending. All right? When the economy's good, your good people prepay, your bad people don't default. So you make all your money because nobody defaults in a bad economy, the good people don't prepay, the bad people default. But the good people, because they didn't prepay, you get to make that like 12 to 15 interest rate on them for five years. And that's how it offsets.

Speaker A: Yeah.

Speaker B: The nuance with COVID that blew up a firm upstart, literally the entire subprime space was because of COVID stimulus and interest rates that those two things going up Covid stimulants meant more. All the good credit, you had all the good credits prepaid. And the bad people, the defaults were still massive. And then with autos, it was even worse. Your collateral, your residual value ended up being way worse.

Speaker A: Mhm.

Speaker B: So and then the other piece that really impacted Covid, and this just goes back to sort of the price surgeon leading into Covid. And this is sort of where the COVID normalization thing comes too, which is you can look through, um, Ford Motor Credit, they publish financials, it's not public. They give you the stat of the number of people at the end of their car lease that return the car pre Covid it was very stable, about 80% a year during COVID because prices surged for cars at the beginning. Nobody returned the car. They bought out the lease.

Speaker A: Yeah.

Speaker B: So you think about the velocity of cars on the road, what that does. Right. So at Moon used car prices. Right. The OEMs then didn't need to produce. You had bad car earnings because everybody was keeping their car for they didn't see it right away, the Ford gms and whatnot. Because the demand for cars went up so exponentially because of the de urbanization that went away. Then you just had this and it's just it fed on it. So now that number. So 80% of people pre Covid returned their car at the end of lease and got a new car. Okay. Now that at the bottom of COVID it went down to just 12% of people were returning the car. 80, you know, 7. What is that? 80? 82. 88 of people were keeping the car, buying out the lease. Yeah, we're back to 55. So for that car ecosystem, think about it, right? If you buy a car, lease it at the end of lease, give the car back, that car goes to a local dealer, likely gets moved around the country on a car hauler, gets moved around to a car auction site. So I'm talking now Copart. I'm also talking uh, pal Proficient Auto logistics moves the cars, Lithium owners, autonation whatnot. If you're buying out the car at the end of the lease, you just need way fewer cars. And that age at first, the age of cars on the fleet, I think it's, it's not going to peak at 12 years but like the rate of change is going to come way down, right? Because people want newer cars. And so you think about that auto ecosystem. This also impacts carvana too. Um, the velocity of cars is going to increase. We've seen the Mannheim index stabilize. It went positive for the first time in three years this year. So now we can lend more. You know the lending gets easier because you're more comfortable with it. So I, you know, look, I was expressing this trade through Elpro open lending which was my big winner in 2020. I got back in the thing at A$25 a share and the sponsors True Wind in this uh, private equity room called Bragal Sagemont which took it public, um, they just, they rode the thing from 40 down to 80 cents, came back to 2 and they just sold it this year at 3. Yeah 15m. And I'm just like beside myself that they gave, they took all the pain and they just gave it away. But you know other plays in that KMX just reported great numbers on their auto loan book. America's Karma with crmt I don't a little too spicy and I think million

Speaker A: dollar market market cap.

Speaker B: But look at the debt. You got America's CRMT. You got 600 million of abs. Then you got uh, 300 million of whole co term loan. Silver Point owns it now that one's likely a liquidation and I just don't do liquidations. They've closed. They had 150 dealerships, it's down to 95. They've got. The real question is you got a billion five auto loan book the probably net value of that because there's going to be losses obviously it's probably a billion bucks. So that covers the abs and the term loan leaves money for the equity. I mean the equity could be zero, it could be 20. But that just sounds too hard. It's a liquidate like you, you want to Go in concern. Um, so that's why, you know, Cam, camx, you know, which is Carmax or Carvana or the car guys, Lithia Land, Autonation or Ally, you know, auto levered bank. This is all just normalizing. Um, L Pro was the one I like because it was a play on. They did credit defaults. You know what, it doesn't matter because they just sold the company. I'm so bitter. I had the perfect chess piece for this. But we're gonna, we're gonna find, uh, Copart's the other one, which is the car auction sites.

Speaker A: Uh, and that one's gotten, that one's gotten crushed recently.

Speaker B: That's a super high quality business. There was a comp to it, I double A, which was like a poor man's version of it that got sold and like that was a whole corporate saga.

Speaker A: So, so why is, why is Copart. Because this is one of those compounder bro stocks. Um, why is it down 50 from its highs?

Speaker B: Go back to what happened with leases. Because the age at average car went from eight. The age of average car on the road went from eight years to 12 years. People are keeping the cars. You want the velocity of cars to increase. So at the end of lease, you buy it out, you give it back. It's the same reason. You know, Hertz I don't love but the odd. But, uh, Avis, look, this is like the best thing ever for Avis. Hertz I don't like because they have too much debt on it. And you know, the fixed charges went from. It's one of those things where you've just been distressed too long. You kick the can down the road peaky with does 2.3 billion. They fixed charges four years ago were 9,950 million. They're now 1.7 billion. So all the value that could have been in the uh, equity has already been monetized by the cap stack. But for Avis, think about the rental car business, right? And what we just talked about. You buy a new car, you sell it three years later, and then you try to earn money on it, right? So the residual value like you just went through the worst possible thing, which is residual values went like, like undershot massively. And you, you know, you almost got murdered. And that's what happened to Hertz and that's also what happened to Avis. But now the residual values that Mannheim index is getting better. They're gonna, means they're going to be right on residual, which means depreciation is going to be, you know, correctly stated. And they could make more money. They could make money on both sides. So, um, you know, Avis, I think is the one. And Avis just picked up 700 million bucks from Pentwater on the short squeeze litigation. I mean, Avis, you're paying I think three times peak right now, 10 times forward, like for a very equitized balance sheet. And if hurts, I mean, Hertz is just going to restructure is what the answer is. But like, you got weak competition, you know, it's a great way to play the manhunt.

Speaker A: Um, so I mean, Copart, I'm looking at Copart.

Speaker B: Oh. So yeah, they have, they have never

Speaker A: been cheaper over their past 10 years.

Speaker B: Think about it, right? Which is it, you want as many people possible returning the car at the end of the lease because that, that you cycle through more cars and more cars end up in the auction site and you're retiring cars sooner. This is the worst thing that could have happened to Copart. Yeah, just on the macro alone for corporate, it's gonna, it's gonna, it's gonna flip.

Speaker A: This looks interesting though.

Speaker B: Yeah.

Speaker A: M. So then let's, let's go to pools. Because one of the funnest stories in markets I think is Leslie's Pools, which went, let's call it, uh, it Bottomed

Speaker B: at around 20 21. IPO. IPO at the peak split adjusted, it went from a thousand, no more than a thousand a share to uh, a dollar to a dollar, dollar a share.

Speaker A: And since, since then it has gone from a dollar, call it 90 cents to nine bucks and change. It's up 6% post market.

Speaker B: Simple numbers. And this is the one especially. Look, um, there's, I'm gonna say there's 10 million shares. There's really only nine. But like, so, you know, I started looking at this thing when they reported last earnings. It opened it to that day, closed that day, I think at 425 a share. Um, they finally had a positive comp. But like here's the numbers. You have $750 million of term loan. You have an eight, uh, an asset backed lending facility, which is against the receivables. Just call that zero because in the off season you pull on it and in the summer the cash balance goes to negative. So the real, it's just a working capital need. So it's 750 million of debt, 10 million of shares now trading at about 9 bucks a share. So 9, you have 90 behind 750. All right, EBITDA, Pete in 2022 at 200 uh, 75 million I think.

Speaker A: Yep.

Speaker B: On Ah, 1.4 billion of revenue. And last year it did 1.1 billion of revenue and 60 million of EBITDA. So you just had massive deleveraging. And the store count, look, the stores in 19 in 2019. So the year before COVID you had 950 stores. They searched stores the last five years and now they just rationalized back to 950. So in 2019 you had, I want to say 970 of revenue.

Speaker A: And 2019 you had 9, 9, 30,

Speaker B: and then um, 160 of EBITDA. And today, you know, the guide for this year is about 70 million of EBITDA capex maintenance capex is 10 to 15 million. So the term loan is trading at $0.40. So the term loan saying it's just BK. Now I, whether I am going to stick around for the trade, whether this is a trade or whether this is investment. This is one where I think seasonality. You know, you have a, it's got weird fiscal quarters. The net the next quarter ends June. Um, they report late July, early August. It's obviously the Memorial Day thing. Um, and then you have one more summer quarter that you make money and then after that you get the two winter quarters where you lose money. Money. Okay, I don't know like what has to happen. All right, they have to find a way to screw over the debt and they can. The, the covenants are Swiss cheese. You can take collateral out of the box. You can do a coercive exchange. The debt isn't due until.

Speaker A: So when you say, when you say take collateral out of the box, that sounds technical. So for someone that's not technical, what does that mean?

Speaker B: So it's a quote unquote secured term loan. Okay. There aren't restrictions preventing the collateral, which is the whole company from being removed and new debt being put on that new stuff. Like you can take out uh, 4 or 500 million of debt. So how this would work or of assets, how this would work is you take 500 million of assets out of the credit box, get new lenders to lend against that, and now then you take that money to tender at a discount hopefully for the term loan like the equity bulls. And there's a few guys who follow 13 GS on this thing. What the equity guys are saying is this, we're going to find a way to extract discount somehow. Now they've hired Kirkland. It's not a secret. Like they've hired Kirkland and Ellis, they've hired center. I Think center bridge or center view, whichever is the bank. One of them is the bank. One's the private equity firm.

Speaker A: Yeah.

Speaker B: They've hired the bank as a restructuring advisor. Like the, the bulls on this are like every 10 cents of um, discount we can permanently extract from the lender group is 75 million bucks. That's 750 a share. That's almost the entire share price. The, the thing, the loans all owned by clos. This thing was trading at par up until mid last year. It shouldn't have been training apart now. I don't think it should be trading at 40 cents. Um, but you've got the next two court like they can raise capital to extend the Runway and screw over those guys. They can do a coercive exchange, which is they can offer a new bond to holders of the credit group. Hey, take discount and get this new bond that layers the people who don't take it. Like there's going to be some element there. Okay. The other thing that's going on is this thing was poorly managed. Okay. So you got, um, broadly new management came in about a year ago. The CFO is especially competent. Uh, it's got a really good background, uh, with other companies. Touched. I had a great call with him just to walk through. So they closed, you know, I think 50 or 60 stores. They had over penetrated. So they close. All the stores they closed weren't EBITDA positive. Too much inventory. They rationalized the inventory. They have local distribution centers to even fine tune that a little bit more. That's reduced the working capital thing. The other thing about this, and the big story when this thing went public, 50% of sales are pool chemicals and they were massively over earning on the pool chemicals. They were just charging like crazy.

Speaker A: Yeah.

Speaker B: So EBITDA margins compressed from 20% down to I think 5% last year. A lot of that is the pool chemicals. Home Depot, Lowe's and a lot of other guys have come into the space. Leslie's is just totally mispriced on that. So this, you know, starting three, four months ago, they were like, we have to get our chemicals in line. And the value of Leslie's is chemicals get people in the door. But we want to pool, we want to do all your stuff. So of the 950 Leslie stores, they are within 10 miles of 90 of the pools in the United States. So they're, they're there. It's like this is a sticky customer base. Whether it's Leslie's or whether you go to pinch a penny or whether you Just have your local mom and pop thing. You and I, like, if we had a right, we have our guy. You and I aren't gonna sweat this. Like, we're not gonna constantly reshop this for 25, 50 bucks a month. Like, you want to know it's done right. There is high customer attachment. That, that's the nice thing about this business, which is switching is pretty low. So you finally caught positive for the first time with the changes they did. Uh, last quarter they had a plus 6.6% comp the remaining. The. The next quarter coming up, they're up against the negative 12.4%. Comp the streets at 91 million of EBITDA. Last year they did 81.5. Weather's a big deal too here last year, on top of being mispriced.

Speaker A: Um, yeah.

Speaker B: So you already know whether I've been tracking the weather. The Northeast is the big swing. Um, whether in the Northeast has been awesome. So there's two. You know, I was explaining this to somebody yesterday. I'm like, look, you can agree with me or disagree. I think their, their guidance is likely conservative. I think this new management team came in to beat and raise. But one thing is very clear. The guidance has a variability for weather. And you now know with 100 certainty that this quarter the weather has been awesome.

Speaker A: Yeah.

Speaker B: Um, and I know they're gonna as much as possible. You know, they're gonna beat the street. And so the question on the reflexivity is this, which is. Yeah, you have this leverage stub.

Speaker A: Yep.

Speaker B: Right. You know, they're gonna beat. And then the next quarter, they're cash flow positive too. Like, how did. Like, I don't. I just feel like this can really rally.

Speaker A: Um, and so when you say really rally, what is that price target? Like, it's like it's up 700.

Speaker B: Okay, let's do that. Like, yeah, if you can get back so on 950 stores in 2019, you were doing 160 million of EBITDA. Ah, you're back to 950 stores again. All right, now, the chemicals, you're not earning as much. There's been some cost inflation, whatnot. But you are. You have other pieces of your business. You're now in hot tubs, which is about 10 of the business. Your distribution may be a little bit better, blah, blah, blah. You probably can get back to 175, uh, of EBITDA because you've done cost cutting too. What's the multiple on this business? A fully penetrated, essentially subscription cost, sticky customer business that's north of a 10 times multiple. I think this can be a $2 billion business. And if you get to that $2 billion business, the interest isn't that high, you're going to pay down some debt. So call it 2 billion less at that point, 500 million of debt, maybe less. A 1.5 billion market cap on 10 million shares, that's 150. So um, I'm sort of, you know, my bookends are 150 upside. The other side of this, you know, is like when the stock was at 5, I said the CFO, I go, why don't you just issue 50, 250 million bucks at 5, take the share, count from 10 to 60, get debt down and then 500 million of debt. Like you can carry that all day. He seemed incredibly disinterested in that idea. Um, and now, now the stocks, you know, uh, obviously is higher. Now this is going to come, come down to look I, how much can they beat? Am I right? That they're going to beat. But like in terms of reflexivity to your point, the higher the stock goes, the match just gets better and better and better on that same get back to $2 billion valuation business. Assuming they do 250 million 5 and buy down debt at par, that match still gets you to 30 bucks a share. So it's like in my mind it's 30 by 150 if I'm right versus uh, a ten dollar stock. And from like just a tactical thing. And this is sort of the thing, this is kind of like a poker hand or a blackjack hand where I'm like, I don't know if they're going to get to 2 billion. I don't know how this is going to play out. There's some execution risk. I certainly know that the next card, or I feel strongly that the next card I see which is earnings for this quarter, I think that's going to be a good card. And if the term loan goes from 40 to 65, 70, you know, the equity goes up to 20. Maybe they issue a little like I, I just. And then you have one more summer quarter after that. Like this thing can run. You can, you can get away from this without really taking true terminal value risk with a really big number.

Speaker A: So how did you, how did you find this? Like, how did, like how did this stock surface and hit your radar?

Speaker B: Um, you know, you look through screens, you build a big network. You know, people show me stuff and that's the other value of having, you know, being, having the Substack, having Twitter, like, you know, I try to keep as many networks as possible, and I'm running screens too. And this thing, the parallel. We can go to AGL after this.

Speaker A: Yeah.

Speaker B: You know, the thing that I sort of glanced over that I want to make this point, which is there's a million of these equity stubs. And we sort of talked about America's, uh, Karma CRMT. And I'm like, well, you had 150 dealerships. Now you've got 95, because you closed a bunch. Your average car that you're selling is $17,000. It's really a subprime thing. Like, if that went away, like the business quality there, I just don't know if that needs to exist.

Speaker A: Yeah.

Speaker B: And you're not dealing with great management, blah, blah, blah here. Like, you got sticky customers. You have like, you know, 1.1 billion in revenue. That likely goes back to 1.5. Um, Pool Corp, which is more wholesale, does own a competitor now. It's a franchise model. That's pinch of penny. You've got Home Depot and Lowe's that are in this space now. In the chemical side, would it be worth them to buy, you know, a retailer that's. That's consumer facing? I. I just think your asset quality with that level of revenue and this Nash, like, you have the national footprint already built out. You've established the store footprint. You actually overestablished it now. You've. You scaled back. Like, yeah, there is a buyer for this business at the right debt load. And there's a, like, there's a reason this would exist. This isn't going to end up in a liquidation. Now, the juices of people that care. You do have these universes, right? First off, you have all the debt guys. The higher the stock goes, the debt guys are going to be like, oh, my God. Leverage. Stuff like this is just like, it's, you know, it's sexy. Um, and you can tell this Covid story on normalization. Pool Corp. We didn't talk about, but that stock chart looks eerily similar to this too. From the same over capacity issue, which is we surge the number of. So the number of pools in this country grows about 1% a year since the financial crisis. Pre financial crisis, when the housing boom was happening, we were growing the number of pools 3, 4% a year. All right. The only year since the financial crisis that the number of pools in the country grew More than 1% was 2021, when we had all this de Uranization. So Pool Corp. Leslie's everybody else. They surged capacity to meet it and then it immediately went away. You know, so.

Speaker A: Yeah, I mean, Pool Corp. Actually that chart looks pretty good too.

Speaker B: Full Corp looks really good. Everything I'm saying about Leslie's works for Pool Corp. And that's why this Covid normalization thing.

Speaker A: Yeah, yeah.

Speaker B: Because it's taken three, four years to cycle through. We met a uh, demand surge, was met with supply right at the peak of demand. Then demand comes back a little bit. Now we have deleveraging through the whole system because we got to pull back capacity. Now we get uh, margins collapse. We had cost inflation through the wazoo. Pool Corp's gross margins have actually been really stable at 30% a year. But where they've been crushed is their EBIT margin, which is all that sgna. They just, they got murdered. But that's gonna sort of stabilize and now you're gonna, you're up against easy comps.

Speaker A: Yeah, well that, so that seems like a theme in these ideas and we'll, we'll, we'll get into healthcare next. But one of these, you know, you talk about inflections and, and, and you know, you're not just buying stuff that's cheap, but stuff that's you know, gonna like.

Speaker B: What am I saying about. We just talked through autos. Now we talk about pools. Like the story has to make sense for the entire comp set. Otherwise you just have a fixed point trade. And that's a really good check. Great point. You know, uh, because again like I want to buy value, I want to sell growth. So you got to get comfortable on the value side. Why are we here? And then what's my story from here? And you know the, the, the, the connecting tissue for all this stuff is Covid. Wasn't it a one year thing? It was really, you know, it's 2019 versus today. You had a boom bust and then readjustment and then the move in. I mean a lot now we have the Iran war.

Speaker A: Yeah.

Speaker B: Uh, a lot's happened. A lot of dislocation. And when dislocation goes away, you know, things can sort of work their way through.

Speaker A: So let's.

Speaker B: Last point on Leslie.

Speaker A: Yeah.

Speaker B: You know, everything I just said, I said at the start about oil and interest rates. Super levered company. You take the 10 year treasury, you know, oil goes to 50, where's the 10 year treasury going to go? Down to 4, you know, and it makes, you know, refinancing debt a heck of a lot easier.

Speaker A: Yeah. So pivoting to healthcare now and we'll use AGL as an example, but I do want to discuss TOI, but AGL is another one. 2021 highs.

Speaker B: 11 billion dollar IPO in 2021.

Speaker A: Yeah, it's down 90. It was at one point down 99%

Speaker B: over a thousand a share split adjusted down to 8.

Speaker A: Yeah. And so now here we are though from 8 we're up to, or actually from the lows. I mean shoot the lows here. Like yes, call it, uh, call it seven bucks. Now we're up 1500%. Up to 700 or up to $107. So like crazy ride, right? So like when, when did you find this idea and then when did you start accumulating?

Speaker B: I, I, look, I've been touching healthcare most of my career. Look, I made a bunch of money and then I really torched a bunch of money in 21 on these value based healthcare names. And I kept following them and whatnot. But let me tell the story a little bit more high level, okay? Healthcare cost inflation. If you look at Humana, United Healthcare whatnot, pre Covid was running, you know, 4 to 6% per year. Okay. Then we had a year 2020 you couldn't go to a hospital. So MLRS, medical loss ratios for the insurers looked awesome because 35% of healthcare spending happens at hospitals. So if nobody's going to the hospital, we don't have medical expenses. And so we print a bunch of money. Then AGL was one of the ones that went public. Value based care names, they take direct, they, they provide care and they take risk on providing a lower mlr. And their argument is by giving better care we can lower the mrrs and we want a share of that. All these things came public. Oak Street Health, Kano, caremax, uh, Privia One Medical. Oh man, I could go down the list. Alignment Healthcare. There's a lot of them that went public because they all printed money, uh, in 2020 because MLRs at the national level typically are about 90% across. You know, uh, Medicare Advantage pools. When you, when you do all the math for the insurance, they were like 70 that year because nobody, nobody went to the hospital. Then 2021 we start going back to hospitals with uh, an elderly population that we just gave, you know, I'll give the COVID conspiracy theorists their due. A potentially poisonous shot we injected with you. Behavior changed as well. We didn't go to a hospital for a year. So we, we did not early diagnose a lot of stuff. Yeah, Healthcare cost infl and then we add in all the Inflationary pressures across the system. Right. All of a sudden healthcare cost inflation goes from, you know, 3, 4, 5% to 7, 8, 9% a year. 21 and 22 rates are reflecting the 2020 awesome year. Rates reset up high enough so now you're just lighting money on fire. Then you've got to start setting rates higher. Which we've done the last like this year, uh, this current year, you know, the cms, Centers for Medicare and Medicaid, you know the baseline rate increase is like seven and a half percent. So we're finally catching up. But what are we seeing at the start of 2026 lo and behold. Oh wow. It's a good, you know, Q1, it was, it's a good trend here. We're way under cost trend now. You know, we'll see what they report in Q2. The non deal roadshows in the conference circuit the last few weeks, you know, the big health insurance have been saying it's not just a good trend here. Maybe trend's just going to go back to what it was pre Covid. Yeah, uh, um, when rates are still reflecting a ton. So that's like the big high level story with value based care specifically. Most of these names went bankrupt or were bought out. So see it CBS bought uh, Oak Street Health. It would have gone under had they not bought it. Kano, uh, CareMax gone one medical was bought by Amazon. I'm sure it's going to get wound down. Um, this one just got just losses upon losses upon losses. Now what AGL does specifically, they partner with primary care providers. They do a 60, 40 partnership in favor of AGL where they take the value based risk and they coordinate all the third party medical spend. So you're going to go to the hospital, you're going to go to a specialist. They do all of that for 60% of the economics because they're partnering with primary care groups in state. There's no capex really. So they're getting the patients and they're sharing the economics. And that's the attractiveness of the model. You get massive scale. You've got about 600,000 Medicare Advantage members. Okay. What AGL did and this restructuring started two years ago, um, was they started going to the health, the health insurers that they partner with and they said I'm gonna go bankrupt unless you give me rate. And on top of that I'm not taking mlr risk on the whole suite of medical spend. I'm only going to take mlr risk on the stuff I'm Actually touching.

Speaker A: Yeah.

Speaker B: So that they ended. So they carved out part D, which is oncology, uh, drugs. They carved out a lot of stuff. And basically what, what those negation negotiations yielded was the big health plans acknowledge that AGL and the other people do what AGL does, help them get stars ratings. If you get, if you get four or five stars from CMS, you get 500 basis points more on your rate, your Medicare Advantage premium from the government. Okay. The second thing they do is broadly without an agl, you know, really doing the blocking and tackling at the patient level with the physician Humana UnitedHealth would deliver probably across the population about a 90 MLR. With AGL or their competitors, they probably can get that down to an 86. So give me values, give me some of the 500 basis points for the star ratings. Give me some for what of the value I'm actually providing. Let's carve out everything else. So the standard deviation of my earnings is going to go way down. That's not really appreciated yet. Um, the big thing that is appreciated is these guys all got enough rate to go positive. So, uh, agl, you had this just unbelievable nightmare convergence of things, which is, you know, this thing never should have traded at 8. Okay, there, there's, they did a reverse split that shook out a lot of people. The restructuring had been going on for a year. So you had all these first wave and second wave guys come in and get their face blown up. Uh, they left. You know, value based care has just been a wasteland for so long. And medical trends just been, you know, gone for so long. People thought this business was just a zero. So at the bottom, you know, you entered this year with 290 million bucks of cash, 40 million bucks of debt. You thought you were going to burn. Sorry, $370 million of cash. 370. Not, not to 270. So you started this year with, yeah, 370 of cash. You thought you were going to prior your claims, you thought you still owed 250. So that brings your cash down to about 121, 25 by year end 26. What they told you, you, um, got 40 million bucks of debt. So call it 85 million. And they thought they could do EBITDA zero this year and go cash flow positive next year. And you could buy that business with. This is the funny part, with $5.5 billion of revenue, you know, if they get it to a 10 margin, you're like, okay, which is what it probably should be. That's 550 anyway. At the bottom, you know, this thing had net cash and you had, you know, eight times, uh, 16. What is that? I mean, under $100 million market cap. I mean, I was buying this thing for under 200 million bucks, 5.5 billion of revenue. And you know, you do the work and you're like, if these people are telling half the truth, this could be, this could be an $11 billion business again, if you really turned it around because you've carved out all the risk. You got rate upside. You also have a sponsor alignment. So CDNR, Clayton, Dublier and Rice took it public. They still own 25% of the business, so they had a reason to care. And that was something I glanced over with Leslie too, which is critically important, which is Leslie has a 40% equity holder, um, in this Chicago mutual fund. Um, having the equity sponsor is just so critically important, Oprah. Which I'm pissed about. The sponsors screwed me because they wanted to just take their money and run and please their LPs. But anyway, back to AGL. So I had the sponsor there, I had the numbers and then the, you know, so we got involved at 8. Because I thought I was, I was like, this is just too interesting. And I think on the reverse split alone, this is probably going to rip. It went to the 20s and then they gave it away. And this is what, this is when conviction goes to 120% from like 50, 50. They didn't have a CEO. Uh, the executive chairman was running the business with the cfo. They hired the CEO and I knew they hired this guy. And I was like, oh, they're gonna. Let's see what the comp plan is. Let's see what the comp plan is. With the stock at 25 a share, they hire this guy, his performance stock vested in three tiers. The tier struck at 50, 100 and 150. And you just, you sit back for a second. You're like, performance comp plans for those people who don't know tier one and tier two are supposed to be gimmes. Tier three is like, that's supposed to be hard. What had to have happened in that. And you got that you got the CEO comp before you got first quarter earnings. And I'm m. Like, but you knew the CEO had the earnings. You're like, oh my God, what is that negotiation like that. They ended up that the low end of the performance stock plan is up a hundred percent. I was like, 100. They're be. I. I was like, I, I was like, every share, Every share They're gonna beat. And they, you know, the stock ripped on earnings. I mean it's just so rare that they give it away like that.

Speaker A: Um, so is that, is that and sorry, sorry to interrupt. Is that a core part of how you identify potential ideas is looking at. Maybe it's PSUs, RSUs and then like

Speaker B: what's your process for really relevant in this? It's also relevant in other situations too. Like when a company gets distressed, you either get a new comp plan to realign management. Okay, this was like insane that you got a uh, CEO at the bottom turning over and they, and like, you know, when it happened, I'm like screaming at people, I'm like, we won. So, you know, and like it wasn't hard either because the company was guiding. You just had to believe the guide. And it was, nobody was looking at it because the space had been so obliterated for five years now. Where the COVID normalization thing dawned on me was once they started talking early in this quarter about the trend, it not being a good trend year, but the trend has carried on. And I was like, oh, we're just going to go back to pre Covid. And then you sort of connect the dots to other things because it was like, I'm looking at Elpro and the auto thing. I'm like, this is Covid. This is like this is all co normalization. And then you start really getting in an upside case. So like going for AGL, you got 5.5 billion in revenue. They're growing this year. That's the other thing. All these things that, you know, evh, we're not gonna have time to go through all these things. EVH is growing. That's Evelyn Health went from 34 to 2. It's now five, six times lever, two and a two and a half turns of equity layer. That's a, that's a nice leverage stuff too.

Speaker A: Yeah.

Speaker B: Um, but all these things you get value and number one, like the value side of it and then the gross side for agl, just to put a fine point on it, one, I have way better contract structure, which means multiple is going to be higher. I have acknowledgment from my customers, the big healthcare payers that I need to exist. I, we went back to them over the last two years. We're like, I'm going bankrupt if you don't give me rates. They gave you rate and they gave you better contract structure. What does that mean for your terminal value multiple? Like a lot more. You're signing new contracts you're growing, your margin is going to flow through and then you add coven normalization. So for AGL, you know, the stupid math is you're currently 5.5 billion, maybe 5,7 of uh, revenue this year. Your peak revenue is 6,2. I think they can easily get. It's so crazy. They only have 600,000 members. You know, there's, I think it's 40 million. We can look this up. I forget what the total Medicare Advantage population is. It's big. Um, but this can be a 15 billion revenue company and a 10% margin. You can be 1.5 billion of EBITDA at least 10 times. That's 15 billion because there's no CAPEX.

Speaker A: Um, right, right.

Speaker B: Oh, and you're getting, and that's, and all of a sudden you're wave, you're, you're, you're back to the IPO valuation of 11 billion and then some. I mean, you might like. This can just be an epic monster. And so for back to sort of what we said at the start with the ASTs and Nebius. So with AGL, the first thing that grabbed my attention, 5.5 billion of revenue in the market cap is, you know, buying it for an EV of 160. I mean, like the management team's awesome. You know, it's the quality of a management team that runs a 5.5 billion revenue business. You had a great financial sponsor with CDNR. Um, you just had all these elements there and now you have a growth story. So it's one. You know, my first buy was, you know, was at 8 bucks. I really sized up in the 20s after the CEO thing because I just, my conviction went to 100% and you know, my last ad was like 55 bucks a share.

Speaker A: Wow. Um, what a ride.

Speaker B: Yeah, it's, uh.

Speaker A: And do you, do you just play these through common stock? You don't buy, uh, options or anything like that?

Speaker B: I just like, there's plenty of juice with common.

Speaker A: And I guess especially if you're buying these like leverage stubs too. It's like they're basically call options.

Speaker B: Yeah, yeah. And look, the, the thing that I can't do, right, you put me in a market neutral context. I can run hot and I can run cold, but I'm gonna get shaken out and. Yeah, because it really doesn't agree with how I invest and how I think about the world. Um, because you don't. Look AGL played out. I mean, I think there's a lot more meat on the bone, but like, you know, two and a half months and I, you know, more than 10x from my, you know, like it's not a bad, like that's, that's a once in, you know, if that's a once in 10 year occurrence on a major position, you know, you're, you're winning toi. You know, I'll go back to that one. Like, you know, I put it like from the bottom at like 11 cents. I really, you know, got involved sort of at 20 cents and I sized up at 70. It ran up to three bucks and then it traded for a year and a quarter between 3 and 4.75, bottoming this year, this spring during the war at 245, you know. And I, I mean I think toi can go. You know, I've got a 35 page note on my substack about it. I sort of talked it to death. But um, they're basically an oncology drug dealer attached to oncology clinics where they'll give you the IVs, but most of the money they make is giving you the, the oral oncology drugs. Um, you know, that one I think can be 30. You know, that one's grown revenue from, I mean they're going to do, let's see, I think it's 600 this year. The goal is to get. Yeah, I think it's about 600. Um, they've been growing revenue, the pharmacy revenue has been growing at about 40% a year. The whole company grows about 30 a year. That one, you know, you're hoping to get to a billion of revenue by 20, 30. And I mean I think that can eventually be 3 billion. But like it's just a smaller company. There's more blocking and tackling. So you want it like how many people could have gotten shaken out of toi? And like, look, I haven't been proved right. Like I made a lot of money but like I'm a liquid. Like I need this thing to go, uh, you know, to 10. I mean I could just crush this thing if I wanted to. But um, yeah, you know, some of these take a lot of time. And so going back to the options, like look, these are also less liquid stocks. So you're a bit aspirin on the options. How much, how much are you going to get? Um,

Speaker A: yeah, it's a good point. So let's, let's end the discussion then with uh, giving you this challenge of let's say you had to start clean, right? Let's give you like this, this portfolio challenge where you fund it with 10, $20,000. And your goal is to recreate, uh, a portfolio that you think can do really, really well. And you can't invest in any of the names that you already own or have made, you know, tons of money in. How would you go about finding the next batch of opportunities? Like, what is your. Like what's the daily process for Judd in finding these and then comping them against the opportunity set?

Speaker B: Sure. So we do like, I put out something called the two year holds list, and it's like the core product of my substack. Okay. And what I say that the two year holds list is this assumes you're running $50 million. And the rule is, I'm saying I'm comfortable. I'm comfortable giving you the recommendation, never talk. Not talking to you for two years. And I'm comfortable I'm not going to blow you up. And this was a choice I had to make with my substack, which is the other people give trading ideas constantly. They're in, they're out. And I just, I really didn't want that pressure at all. Um, and I. It's not priced for that. I charge 200 bucks a year, and if you want to join, great. If not, so be it. I don't, you know, I wanted something that like, I got value of and I didn't have the pressure of. I'm giving you trade recommendations. I'm in, I'm out. And I need to tell you, like, I think that's a very hard thing to do. So I came up with the two year holds list a couple months ago and I update that about every quarter. And it's things that I think the hurdle rate that I say, you know, is I think you're going to do 50% or better on a two year basis. That's the hurdle rate. And it's going to be big enough, it's going to be liquid enough. So the number one thing on that is Navios, which is a shipping company trading at 50% of NAV.

Speaker A: So funny. A two year hold is a sh. Was a Greek shipping company.

Speaker B: Yeah, but that's another one. Do you think about the setup? I mean, shipping is really having a big inflection. It's a shipping conglomerate. It's just really like shipping has rationalized. You had massive overbuilding and you now have this sweet spot where she, uh, Angelihi, the CEO, she's doing a bunch of new build, more so than anybody else. And because she's the only one building, relatively speaking, residual prices are really high. So she's selling 20 year old vessels that are right in the middle of their special survey for 70% of new build cost, recycling that capital. It's actually insane.

Speaker A: Yeah.

Speaker B: And you know you're not that levered relatively speaking. The stock's at 70 bucks. I think in a cycle it's probably gonna do 13 per share of cash flow this year. It is a shipping company so there is, you know, they have to recycle. Um, it probably does 25, 30 bucks a share of earnings in, in a real cycle. I mean you might be buying for two times earnings. The stock can go to 250.

Speaker A: Mhm.

Speaker B: Um, porch is one we didn't talk about. It's like yes, it was a spac. Now it's in this, this insurance company. Apollo is more liquid. I've talked at link. That's my way to play sort of private credit distress. I think that's most likely an unlevered double. Um, so Apollo, I think it's 125A share today. The math on that is then a theme is eight bucks a share of earnings and then everything else is another 8 bucks to 9 bucks a share of earnings. So it's you know, it's about you know, a 16 earner. Now there, there a theme. There's a lot of back and forth on that where people are like I don't like it, it's too levered. Blah blah blah. Look, 40 of Apollo's AUM um is now captive from a theme. It's going to keep going up. I think it's got a chance to be a Berkshire Hathaway. And once they, they're going to get to a scale where they're going to stop raising big private equity funds and they're going to realize principally investing their own private, their own money in their distressed private equity deals is the right way to go. And I think that's going to be a great evolution. I think you can get to 250 a share without a lot of heroics there. Um, and I think that's a good place to play. Um, you know I've got a whole list on my site and I just encourage people to come out. But my core product, you know, we write up a lot of names, we speak a lot of names and you know, I'm not sitting here telling people buy this or buy that. Um, I'm putting like I very much appreciate that what's interesting to me isn't necessarily interesting to everybody. And one of the things that I took away from sort of my hedge fund career and My consulting career before I did the sub stack is, you know, you work for a fund, the PM's only going to care maybe 10 of the time, maybe 5% of the time they're actually going to put it on.

Speaker A: Um, yeah.

Speaker B: So you don't know what's going to resonate with people and really everybody. I hope they end up with the portfolio number one that they understand especially it's a name that's coming from me. I hope they understand all the risk we can take it the next level. But because you really need to own your own risk and you need to have not it. Right.

Speaker A: Yeah. No, I appreciate it. I. I always enjoy these conversations because I learned something new every time. And, uh, you know, you always, whenever, whenever I talk to you, I always end up looking, uh, I, I just. I dust the cobwebs off the left, uh, for dead and, uh, cheap versus own history screens where I'm just looking through stuff that's bombed out because the special sauce. Right. Is finding those AGLs at 5, finding the TOIs at at 1, finding the Leslie's at at 2. Like, you know, it's nice to find them at 10 if you think they're going to 65, but it'd be great to find them at 2 if you know to find them at 2 before they go to 8. Right. Obviously.

Speaker B: Yeah.

Speaker A: So that's.

Speaker B: There's always another trade. That's the other thing. You know, the older I get, the more it's like it's easier to let go and just shift, shake off when you miss stuff. Because it's like the number one cure. You know, I. I guess this is where we can leave it, which is. I've had a lot of ups and downs in my career and I, you know, a lot of friends who have ups and downs. And I've now become with for my friend group, like the guy to call when you're going through a tough time. Because I, I've had. I've always climbed my way out and it's like my number one. If I write something on my board, it's like the number one cure for every slump is finding the next trade and the confidence to know that it's going to be there, you're going to find the next one, and it's just.

Speaker A: Yeah, I like that. All it takes is one. Awesome. Judd, thanks so much, man.

Speaker B: Uh, thank you for having me. This is great.