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Daniel Snyder
Hey, everyone. Welcome and thank you for joining. We’re gonna go ahead and give it a minute. Real. Let everybody join. Everybody’s out and about. We know that’s going on. Thank you for taking the time and tuning in with us. We have an incredible, incredible webinar plan today with Chris. So thanks for signing up. I hope you brought your questions or if they come to your head, just a reminder that during today’s webinar, you will be able to ask your questions. You’ll be able to put them in the chat box, but as we like to start off, obviously we had the inflation print this morning, everybody, I mean, I gotta ask you since you’re tuning in from all around the world, are you still seeing a lot of inflation in your lives? I know we’ve been following the food, the gasoline is coming back down here in America quite a bit. Go ahead and jump into the chat box. Are you still seeing your food prices go up? Let me know right now and let me know where you’re tuning in from, by the way as well. Yes. Food prices are still going up. I hear you. Service inflation has been going up much higher than goods lately. Yes. Yes. With lots of S’s. Yes. In Sweden. Yes, 12%. Yes from Peru. Oh my gosh. Arizona wealth manager and Panama. Thank you everyone for tuning in today. This is awesome. Yes. North Carolina. Just yeses across the board. Holy cow, man. We really hope that the inflation growth definitely slows down here soon for everyone. And let’s go ahead. It’s one minute pass. Yes. Man, I’m seeing Brazil. I’m seeing Romania. Everybody is here today. I love seeing all of you with us. As you might know, I’m Daniel Snyder. I’m over here Seeking Alpha. I like to host a lot of our video content. We do a lot of these webinars. So thanks for tuning in and we’re gonna go ahead and get into it. So let’s go on a journey real quick, back to early 2020, when the market was facing the unknown due to the pandemic. The Fed moves swiftly with a, “We will figure this out later mentality.” And part of this was the liquidity boost of the infamous flood of stimulus checks sent out to people all across the country, not to mention dropping the interest rate to pretty much zero. Suddenly we had cheap money looking for places to go. Well, what happened next? I think we all know, right? Stocks, real estate, cryptocurrencies, and who can forget the infamous, infamous NFTs being born and benefiting from the parabolic price appreciation and the everything bubble was born. But as usually happens with bubbles, it was shortlived. Thanks to inflation running up two decades high levels. The Feds slammed on the brakes, started raising interest rates and announced they would stop putting money into the market. Something they waited too long, but here we are now in 2020 and they’re finally taking some of that liquidity out. While liquidity is dried up fast and as inflation has continued to take higher, fear of recession crept in which in turn sent stocks and bonds into a bear market, putting a significant dent in 60/40 portfolios. I mean, just look at the numbers. It’s pretty remarkable. And while we tried to stabilize over the past several weeks, Fed chairman, Powell, has reaffirmed his stance of keeping the rate hikes coming until, as he puts it, the work is done. Now here’s the thing. It’s certainly not all that bad news. That’s because history has shown that in every market, even the one we’re in right now, there’s a silver lining in the form of strategies based on mispriced stocks. And there’s no one better than spotting these than our guests today, Chris DeMuth Jr. Chris is an investor and if you’ve seen these videos, we’ve been interviewing him for a long time because he is that good. I kid you not. He’s a managing partner at an event driven hedge fund where his entire focus is finding and exploiting, you can hear him there in the back, and exploiting missed price opportunities in the market. Chris is joining us today to speak about three specific strategies which he feels offers outstanding opportunities right now. And has promised, he’s going to give the names of three stocks which look great to him from a risk versus reward perspective, which is extremely important, right? Don’t forget about the risk management that we all need to keep in mind. Now, before we get started, I have a question for everyone. Because we like to be interactive, we’re gonna do a quick poll and the question today, let me see if I can find it real quick. There it is. Is, do you take a top-down approach when investing into the market? Your answers are yes, no, or sometimes. So what is a top-down approach? Do you look at the indices? Do you look at the S&P 500? Do you look at the NASDAQ? Do you look at the Russell? And you see maybe the trends or anything else? Do you use that information before you make an investment? Go ahead. Give us a yes, no, sometimes answer. Jump on in. Jack, I see you in the chat as well saying no. That’s all right. Rich, you lost me. I’m sorry. I hope you come back in just a second. All right. Got absolutely for Sean, but remember guys, go ahead and answer in the poll. As of right now, let’s see, we’re over 500 responses right now. It’s looking like 38, 39% of you say sometimes, 29% are saying no, 32% say yes. We’ll give it just one more second before we get Chris in here. George is saying yes. Clifton says I mostly trade SPY and QQQ so, yes. That totally makes sense if you’re trading in that. We got a couple in here. Michael says, no. Marcio says, yes. This is awesome guys. All right. We’re gonna go ahead and close up the poll and let’s take a quick look at the results. As you can see, 32% say yes, 30% say no, and 39% of you say sometimes. Interesting results. Now I think it’s time we keep this going. I wanted say thank you to all of you who answered, but let’s go ahead. You’re not here for me. I mean, I could talk to you all day, really, but you’re not here for me. Let’s go ahead and bring Chris into the conversation. Chris, oh, and one more thing for housekeeping. If you have any questions, I mentioned this at the top, but if you have any questions, please type them into the chat box and we will get to them once we’re done here with this first half. We’ll get to all your questions. We’ll get them to Chris. I promise you that. Now, without further ado, let’s welcome in Chris DeMuth Jr. Chris, welcome.
Chris DeMuth Jr.
Good to be here. I’m here for you, Daniel.
Daniel Snyder
Awesome. I love it. I love it. Let’s start off real quick. Chris, where are you tuning in today with us?
Chris DeMuth Jr.
I’m in Connecticut today. I kind of split time between Connecticut and Maine as much as possible and I have been doing some big trips, but back in the office in Connecticut. One of my partners is working out of New York and we kind of have meetings a few times a week, but I’m in the office today.
Daniel Snyder
Amazing. Amazing. So obviously there’s probably some people here that might not know of you, I don’t know why, because everybody should know of you in my own opinion, but can you give us a quick background of how you guys started investing and where it’s led you to where you are today?
Chris DeMuth Jr.
Sure. I started doing work in DC on public policy research, regulatory risk for prop desks and hedge funds, kind of well known large hedge funds. And did that for several years, trying to understand largely deal risk. So M&A risk from DC also distressed other special situations. I did both analysis and investigative work on that. So both trying to understand things from public sources like SEC filings, but also whose plane landed at the airport, whose lights are on a Saturday night personnel decisions. When an assignment goes to somebody is that a litigator or a settler? So trying to get very, very good information to clients and trying to use it to its maximal effectiveness. I left to go manage capital. I started my own firm, Rangeley Capital, and I have been working on allocating capital for over the last decade, but also writing up our ideas once we have. So my partner and I come up with ideas, we size our portfolio, and then we seek feedback. Once we’ve done what we wanna do in the capital markets, we are interested in others reactions, so share it largely on Seeking Alpha.
Daniel Snyder
That’s amazing. Chris, I gotta tell you, we have over a thousand people tuning in right now. I mean, everybody’s there for you hearing about how you’re sifting the world for these ideas. So can you explain your investing style to everyone and what makes you different from the majority out there?
Chris DeMuth Jr.
Sure. The value investing cliche is trying to buy a dollar for 50 cents. The event driven or special situations addition to that is we wanna know how we’re gonna get our dollar back. So we think about risk and I always think of the task that’s intractable from my job is managing risk, is about underpaying. It’s not about precision. It’s about the mispricing in the market. So we have a reason to think there’s a misperception. It’s either being ignored or it’s the result of panic, but either way we think we can substantially underpay, but we also think we have some kind of process to get our capital return to us. So it has the value investing aspect, has a process aspect, and then there’s a lot of information gathering and then there’s a lot of applying judgment to the information. So we usually have some thesis why something might be mispriced, why it is that the market doesn’t have it right, and then it’s kind of deep dive to try to understand these situations well. Frequently, compared to what I was doing in DC for prop desks and hedge funds, I had clients that cared about price, but used a lot of leverage, which we don’t, and were willing to put on huge positions at fairly tight spreads, which we don’t. We tend to look for huge spreads where we think we’re mispriced by 30%, not 3%. And you can do it at one times versus needing to do it at 10 or 20 times to get a reasonable return. And we think like Buffett as business owners and we get as involved as is appropriate and necessary. In the ones that I’m gonna talk about today, we’re very involved. So our kind of involvement just constant, we’re outside minority, passive investors, but we don’t need to be any of those things. We will be as active as necessary. And sometimes it is public, sometimes it’s private, sometimes it’s friendly, sometimes it is adversarial, but as shareholders act like we own the place because we do.
Daniel Snyder
Yeah. It’s a great point. Actually you mentioned Buffett ’cause that’s exactly where my mind was. I was like, “Oh, this guy’s a younger Buffett, “except he’s got this whole fitness side “and he likes to explore the world and stuff.” So great correlation right there. But we’ve gone into your background. The people here today want to hear about these three stocks and they wanna get into to really what you’re looking at when it comes to the information. So thanks to now what we know is pretty much the everything bubble. You believe that this is one of the best times now, right now for certain strategies. So I’m just wondering, can you explain your take on the everything bubble and why it ended?
Chris DeMuth Jr.
Sure. So this is something we first wrote about on Sifting the World in February of last year. And it was basically the juxtaposition of a number of factors. I think new free trading apps was a huge part of it if you look at new investors in the market and incremental money and what they were going towards. There was great data early on. Unfortunately they dropped it, that I was fascinated by, that Robinhood put out about their trades top ideas. They had very, very granular data that was something we used extensively. But if you added a free trading apps, stimulus checks from COVID, and zero interest rate, essentially zero interest rates, what you had was this era that was fleeting, but it was an era of no opportunity cost. You had nowhere else to go, nothing else to do with your money. And so these things kind of tend to group into the infatuation of new investors. If you looked at new issuances, SPACs got a lot of attention in this regard, but it was very similar in traditional IPOs. They went heavily to never profitable buzzy tech. Most of these companies, I think charitably would be described as aspirational or future oriented, perhaps less charitably described as fictional. And it was only in this era could you have this confluence of events that led to the everything bubble where equity is expensive, credit was expensive, the spreads were tight. And then as those factors unwound, as people went back to work, as COVID moved past its kind of initial phases, as interest rates went up throughout the course of the last year, you had this kind of dramatic reversal where kind of fictional companies that Harris Kupperman or Kuppy describes as the Ponzi sector, is probably my favorite phrase for it, but that’s his, got obliterated. And you really had this kind of changing of the guard that I think led to spectacular opportunities in Rangeley which is just the mispricing, the nature of the price system itself failed in two or three notable areas with some good examples of opportunities to profit.
Daniel Snyder
Yeah. No kidding. So where does that leave us now? I mean, we’re back into this environment with interest rates rising. We saw the inflation print here in the US. I mean, where do we go from here?
Chris DeMuth Jr.
I think the first kind of switch for me, well, there were three areas that I really focused on. I think the first was an area that did not have really any direct impact from market direction, didn’t have any direct impact from inflation, required me to do very little top-down work. Probably the least of all the different areas I look at is litigation. So we got very, very involved in a number of situations. And in the newsletter we started recently we kind of have kind of a list of these. Today I wanted to talk about one that’s my biggest one where we’re very concentrated this year. We have three enormous positions. They’re really the first time I’ve ever separately had personal family exposure beyond Rangeley Capital in specific securities. I mean in 20 years, my wife has never owned stocks and she bought several this past year. And she’s listened to me bang on for 20 years about probably half dozen ideas a day and she’s ignored them for this whole time until now. And all of a sudden in this first one bought a very significant position in this company, but litigation is a big area because it really side steps the market direction. And then I have two other kind of categories we’ll get to.
Daniel Snyder
Yeah. Well, you just mentioned litigation. I think I’m a little curious, I mean, we’ll save that one for last. Let’s do that. In regards to the other two, I mean, you’re saying that these strategies they’ve worked well over the past several decades, well, let’s just get into the first two. I’ll let you pick, which one would you like to go with first?
Chris DeMuth Jr.
So be beyond litigation, I would say beyond litigation, the next area that we’ve really been focused on is the energy sector specifically hydrocarbon specifically looking at the almost religious attachment to the idea of ESG and green energy and this huge sea change in the most massive asset allocators away from things that are needed for the next several decades. And the kind of religious attachment, kind of a mantra like attachment, to intermittent energy or alternative energy, which is not close to working, as a comprehensive strategy for our current energy needs, is something that might be much more relevant in the middle part of this century, but we have a multi-decade gap that needs to be filled somehow, and it needs to be filled with oil and gas. And to the extent that there is ever somebody that is doing something in the capital markets, other than risk reward, other than cost benefit, I just gravitate to that. My role in life is to be a counterparty, to the extent that it’s somebody else’s religion, I can be respectful of it, but I don’t have to share their precepts. And I do not in this case. I’m perfectly happy to invest in something that’s legal and analyzable and underpriced. And we’ve just found kind of a Bonanza of opportunities in energy equities trading at huge discounts to the energy, huge discounts to the commodity so that it kind of presupposes prices at a small fraction of where they are today. And the one I wanted to talk about is the most leveraged kind of way to play this, but there’s many and others in the newsletter, there’s in Sifting the World we discuss.
Daniel Snyder
So oil and gas.
Chris DeMuth Jr.
Mm-hmm.
Daniel Snyder
I wanna know everybody here wants to know what stock are you looking at right now within that, with that specific strategy that you just mentioned?
Chris DeMuth Jr.
One of our biggest positions, we have now one of the biggest positions we’ve ever taken. One of the ones that we think best expresses this theme, but also has a lot of specifics underlying to it is Amplify, Amplify Energy Corp, ticker (AMPY). If we’re approximately right, it’s going to really work. We think it’s worth at least $15 per share today. We think that their current businesses that are operating at this moment more than justify the current stock price. We think that their Beta shut down of a pipeline off of California because of a pipeline leak will get turned back on. And that it’s going to just pump oil, pump cash. It’s going to be hugely valuable because it justifies the market cap all over again. They have very good assets and once the pipeline’s back on, it’s going to allow the company to go from highly leveraged, to completely deleverage. It’s going to give us time to have hedges rolled off. And so we’re going to own just an awesome collection of assets that could be sold in parts or in whole, because it’s undersized. There’s really no reason for this to exist as is often the case for companies that I’m interested in. There’s no particular reason for them to exist as public companies in the form that they’re in, which is one of the reasons when I think about price, when I think about market participants, it doesn’t have a natural constituency. It’s a weird hodgepodge and I tend to be attracted to weird Hodge Hodges and think about what they’d be worth after the weirdness is fixed. In this case this time next year, it’s trading in the teens, high teens, Beta is on balance sheets fixed, hedges roll off and it doesn’t require me to be an energy bowl. I mean, it’s a Bonanza here. If oils call it $80, that’s fantastic, sixty is fine, south of forties, where you get hit at some point, it’s correlated with these commodities and it’s currently very leveraged, but the story doesn’t really require that. It’s a corporation that had this traumatic event. We were the victims. We were not the ogres here and we are rolling through settlements with the government and then we’re going to be hypervigilant and aggressive on litigation and claw back a lot of the expense of this from insurers, but also from the shippers that caused the accident.
Daniel Snyder
Yeah. All right. So just to recap, Amplify Energy Corp, symbol AMPY, is the first stock within the oil and gas sector as Chris has mentioned. Now you bring up litigation, right? And we’ve been talking about that as one of the strategies. And I think the next stock I would like you to dive into is actually probably the one that you came to Seeking Alpha at the beginning of the year, you were telling us about this stock. And I’ll just stop there. I’ll let you tell the rest of the story.
Chris DeMuth Jr.
Sure. So this was going to be the Facebook of China. Whenever somebody says, you’re the Facebook of such and such, never is, and this was not. So it was kind of a failed social media company had a venture capital side with a big investment in Sophie that ended up doing a well as one of these no cost trading apps that was what I thought inflated the everything bubble, but the people who were responsible for this public vehicle kind of stuck it in a side pocket for friends and family. They got sued by shareholders, including me, and we settled for a significant amount of money. We are on the kind of one yard line of finishing up the settlement. It is a settlement that is agreed to by the plaintiffs, by the defendants, by the judge. We have some ambulance chasers that are being kind of dealt with one by one, but call it the one yard line of the settlement. More cash will be returned on a per share basis to shareholders than the whole market cap of the company. So call it at least $30 per share. It’s crazy that this sell trades beneath $30 per share. You still have a stub afterwards. This stub is one that I would probably be on the high end of skepticism about its value, call it mid single digit. $5 could be worth two or $3 more. It could be worth two or $3 less. I’m probably on the low end of that, but whatever it’s worth, give it away, throw it away, stick it in your ear, it’s what you have left over after you get more than all of your money back, if you are in the stock here. So this is one that my family owns personally. It’s a huge position at work and it’s one that we’ve been very, very involved in from the beginning.
Daniel Snyder
And I mean, you teed it up. So what is this stock?
Chris DeMuth Jr.
Renren. Ticker, (RENN). And it’s our best idea for the year. It’s, along with Amplify, one of our biggest positions we’ve ever had. And it is something that, actually day to day, it weirdly enough does trade along with the market. It’ll bounce up and down a little bit, but there’s absolutely no reason. There’s cash in escrow that when we are done a legal process that I think we will successfully get done this year, either it’ll go through a formal appeal process or they’ll be other ways to deal with formally or informally the remaining steps to get that distributed directly to shareholders, by the way. So you’ll just get as if you were getting a dividend at least $30 per share. You’ll be left with something extra. I don’t have huge levels of confidence in the management, the business, or anything else, but it’s public stock and has limited liability. So the fact that if you buy today, you’re paying less than nothing for it, net of the distribution that I think is highly likely to happen this year of over $30, it costs less than $30 somehow, still.
Daniel Snyder
Man. All right, there we go everyone. The stock is Renren, ticker symbol RENN. So we’ve gotten through two of them. You laid out two of the strategies. I’m excited to hear about this next one though, ’cause I think everybody is going to want to ask you a question about this. So the third strategy would be what? And by the way, you call this the golden age right now for this, I believe. So make sure you touch on that. I think that’s important for people to know.
Chris DeMuth Jr.
The golden age of merger arbitrage. I think that for years I’ve had, I won’t call it a love-hate relationship would be dramatic, but I have been whole on merger arbitrage. Maybe there’s one or two that were okay. I don’t like kind of rate of return grinds where you make a little money if you’re right and get obliterated if you’re wrong, it sometimes has that aspect. I tend to like things more in the periphery of merger arbitrage, such as merger securities created out of deals, kind of little weird stuff, but all of a sudden this year there was just a dramatic opportunity to put money in bread and butter merger arbitrage announced definitive deals where spreads just blew out and it was really kind of right around kind of June of this year where spreads that were wide got very wide and you could just put money to work. So I was just cranking out article after article on Sifting the World and Seeking Alpha, as we would put money to work on just like deal after deal of very wide spreads. The one I wanna talk about today is the widest spread in this universe that I’m looking at, but there have been quite a number of good ones. And I think it was this everything bubble popping, just rotation problems amongst asset allocators. I would say that I like investing in distressed investments, but I love investing in regular investments that have distressed investors. So they’re trading distress but with nothing particularly wrong with them. And deal after deal is getting done. I mean, one of, this isn’t the one that I wanted to focus on, but if you look at the LBO market from June, they’re getting financing. A lot of the financing window kind of reopened a little bit on generous terms from the banks in September and people are lining up. So merger arbitrage is fantastic this year, especially the one possibly my favorite merger arbitrage deal of all time that we’ll talk about now. If my colleague Andrew Walker’s comment that we look where no one’s looking or everyone’s panicking. This is not the case that no one’s looking here, but it is one with a huge spread and one that gave us an opportunity to underpay significantly and where there’s lots of ways to win.
Daniel Snyder
Yeah. And I want to quote you because what you just said, I think is brilliant. It’s the widest spread in the universe.
Chris DeMuth Jr.
Yeah.
Daniel Snyder
In the universe. So we gotta know what is this merger arbitrage stock that you’re referring to?
Chris DeMuth Jr.
Twitter. Ticker (TWTR). Pretty known by everybody in the world. Not a company we would otherwise invest in. I would say that if you kind of look at fundamental value estimates, I’d say that as a firm, we’re probably at the very low end of reasonable ranges that I’ve heard of, but we believe in law and order and the Delaware Courts and contracts, and it has a great contract. So I would say even though our position is a very large position in Twitter, I would say that our investment is actually in the contract itself. It’s not separate than owning the equity. We own the equity, but why we own it is in a contract that was created in a very specific environment. One of the things that I look for when I read the plain language on my own of a merger agreement is I try to understand the aspects of the deal that would have led to that language. So it’s not just a clause, somebody wrote that clause and somebody had a certain amount of kind of game theoretic flexibility to write that. They had a constraint, they were on offense or defense. And in this case it was a well drafted contract. Very, very much on the side of the seller. All of the parole evidence, all of the kind of banter around the contract, explains why that was, but it’s a great contract. It’s a contract for cash for $54 and 20 cents. For a company that’s worth or whatever it’s worth, my view always has been that it’s worth much less than that, but a deal is a deal. And we say that we take no firm risk and we want no existential risk, but boy, this deal might have existential risk and firm risk for a reason other than whatever money we make or lose when this is all said and done, I think we’re gonna make a lot of money in it. But even if that’s not true, there’s this bigger risk which is, how does anybody go back to work the next day and read a contract? If you can read this one without concluding that he owes $54 and 20 cents. And if he does, and in some combination of his fame, wealth, and brazenness can just kind of wing it and kind of can walk away and that that’s okay with Delaware. To the extent that’s okay, it’s not clear what else can be done. It says that contracts aren’t analyzable and you just need to be brazen enough. And I think he’s somebody who’s done so well, winging it. I mean, he might be the wing it most successful person in history. He has a huge audience for it. He just kind of says things and they love it with no compunction about whether they’re true. And so I think that this is an incredibly important case. I think it has been assigned to a sensational judge who is a very serious person, extremely smart. She sees everything, she ships quickly. So she’s gonna decide this very quickly after the October trial, I believe, and I think is likely to, as she has recently in the past, determine that a deal is a deal and Elon Musk owes Twitter shareholders $54 and 20 cents per share.
Daniel Snyder
Chris, I gotta ask you, I think some people are having, I’ve been watching the chat here. People are surprised by these calls and I’m like, “Well, yeah. I mean, bulls make money, bears make money.” You’re finding these arb areas to find money in a down market. And this is probably the most televised publicly watched right now, especially with news coming out even today about what is happening in this deal. And we know that the mergers are never a sure thing until the deal closes at the very end. I mean, obviously we know this is going into October and everything else, but can you explain the risks and how investors might be able to mitigate them with this scenario?
Chris DeMuth Jr.
Sure. Yeah. So there’s timing risk and there’s deal risk. There’s always the risk that something new comes out unrelated to all of the problems we’ve seen so far. I mean, there was one merger, a famous deal back in the day, where a Target literally fell into a sinkhole, just the earth opened up underneath and the company fell into the ground. So something totally unexpected could happen unrelated to this. The fundamental value of Twitter. So whatever the probability is that I’m wrong and the deal doesn’t get done, is much lower than the deal price. I think there’s kind of a range of estimates kind of call it $15 to $25 per share. Some people say $30, I’m at the low end of that range, especially if you presume it broke for a reason so that there’s some material adverse change to it. If the company is discovered to be kind of comprehensively a fraud, it won’t trade well, and it will have missed this opportunity to sell. And the company was kind of shopped enough that we had information that it’s unlikely that some major buyer would’ve wanted them. So it has a horrific downside if I’m wrong, number one. Number two, you reliant on basically one person in Delaware who has a lot of discretion in the court. It’s an equity court, there’s an appeal process, and there’s some speculation that he’ll just kind of go rogue. He’ll just become a domestic pirate and won’t pay even if he loses in Delaware. And if the chancellor determines that there’s specific performance. Now, he has a lot to lose. He has other Delaware companies. And there was a counter theory that was unrelated to anything that was written in the contract that really just was wrong. But it seemed to dominate for at least a few days after his first of three termination attempts that he could just kind of pay some trivial amount of money and walk away. It was almost like Tourette’s. People kept kind of repeating this as a mantra. It’s just not true and not only is not true, but the judge has very specific language in some of the decisions she’s made about the discovery process, indicating that she fully understands that the right conclusion of this case, if it is determined in Twitter’s favor, is specific performance or is the completion of this deal. And that there’s no damages payment that could make up for the harm, largely harm that he’s caused by the delay and disruption of the deal.
Daniel Snyder
Yeah. Very solid points. So I just wanna keep things moving along. We are getting it into this. There’s a lot of questions coming in, Chris. So I definitely wanna keep this moving. Just a quick recap for everyone. The three stocks mentioned were of course, Renren taker, symbol (RENN). We had Amplify Energy Corp, symbol, (AMPY), and of course Twitter, which is ticker symbol (TWTR). So before we get to the questions real quick, I think we’ve been talking about Sifting the World, we’ve been talking about all of this data and this research that you’ve been putting out. Just so that everybody’s aware, how can they access your research?
Chris DeMuth Jr.
Sure. So my day job is Rangeley Capital. I manage a hedge fund. We invest in these. So I guess the obvious disclosure is I’m a shareholder of Renren, I’m a shareholder of Amplify, I’m a shareholder of Twitter, and a very kind of active one. I was one of kind of three shareholders kind of involved at one of the points in the litigation on Renren. We don’t have a board seat or anything in Amplify, but I would say that we have a very high level of confidence in the board and management to do the right thing by shareholders, but that’s something based on judgment and information and based on looking really closely at this company for a long time. And Twitter, we actually kind of coincidentally or not had sent them a letter to the board. Before they sued, we thought the biggest risk we had in Twitter was not that they didn’t have this good contract, but we didn’t know for sure that the board was going to fully demand their rights in court. So we kind of went to them saying, “You absolutely can’t settle for some big cut. “You negotiated this contract. “We need to have the courts enforce this contract now.” So positions of ours, I work at Rangeley Capital. Secondly, I have a community of investors at Sifting the World, that is on Seeking Alpha and that’s other investors, we share ideas. I do constant updates. We have a chat group. We kind of go back and forth on developments in this, sometimes multiple times a day. And that’s kind of a comprehensive relationship between me and this small group. And then more recently than that, we’ve launched a newsletter, also Sifting the World, but instead of kind of being the comprehensive community, it’s kind of more assertive. It puts out ideas. So in the case of Renren, for example, I put out a piece saying, “Look, if this is an investment you’ve had, “it’s the biggest investment we came into this year with, “it’s our best idea for the year. “Fortunately, it’s worked out extremely well so far, “and I think it’s gonna continue. “Here’s a couple new ideas of other litigation opportunities “that are similar in a lot of attributes to Renren.” Put out an idea about that updates on Amplify, updates on Twitter, but it’s a little bit more bare bones. It’s a little bit, if somebody wants kind of just a basic understanding of the kind of output you do, as opposed to Sifting the World membership where people kind of get, I share what I’m reading each morning, I share kind of much more, kind of granular. It’s much more being part of a team or community together than just getting the bullet points. So people can go either way. I offer both of those. And then from time to time, I just put out articles on Seeking Alpha, generally. I’m a fan of the company, I’m a fan of the founder. I was close friends with a former editor. And so I kind of just fell in with them and it’s been my kind of output. My colleagues joke that once I’m done my good ideas, I’ve started on my bad ideas. And so Seeking Alpha gives me an opportunity to kinda shift master allocation to writing ’em, kind of slows me down, tries to keep me on my good ideas.
Daniel Snyder
Chris, I gotta say, we love you over here as well. I mean, I personally read all of your stuff and I can tell you, I mean, just like I said earlier, I mean, I talked to you right after you put Renren out back in January. And I mean, everybody can go look at this stocks themselves. I mean, absolutely killer call on that. And not to mention, we actually have some of your members of Sifting the World here with us today. We’ve seen them popping up in the chat. Actually, I think our team has pulled a question from one of them. We’ll get to that here in a second. I’ll go ahead and ask if our team hasn’t already, go ahead and drop the link for the Sifting the World service down into the chat box so all of you can go check it out today. Now, without further ado, Chris, I’d like to get into some questions if that’s alright with you.
Chris DeMuth Jr.
Sure.
Daniel Snyder
All right. So first up on deck, KJ asks, is what’s you different, well, you kind of clarified this, is what you do different from arbitrage and does timing have a significant play in underpricing? So maybe lean into that second part a little bit.
Chris DeMuth Jr.
Sure. So arbitrage is kind of overused as a word. So let me answer specifically and then more generally. So merger arbitrage is certainly part of it or risk arbitrage is what hedge funds categorize when they most frequently use that word. A timing makes a big difference, especially on tight spreads, right? If your thesis is I’m gonna get a 10% IRR, takes twice as much time you’re getting a 5% IRR. That’s very different than in the case of Twitter, where 54, $20 stock, you have a spread of over $12, massive return. And it’s recovered quite a bit since the first termination attempt when it went from good to great and where we really focused our capital and our intent. It’s much less timing sensitive because if you think you’re gonna get a hundred percent return and it’s delayed a little bit, not a big deal, it wouldn’t have affected the decision. So I think that the wider the spread, the bigger the target, the less sensitive it is to precision. I wanna be able to have a great year and be up massively in a year where I’m wrong a third of the time. I mean, a huge difference between talking with investors that have to handle the P&L not just the W&L of being right, is we wanna be able to be wrongness just part of the process and that the winners pay for the losers and then leave something left over. Sizing is a huge part of it, but I think it would be unpleasant and unsuccessful to do something in a strategy where you had to always be right. You can be wrong a lot and that can be fine. Arbitrages more generally, mispricing, simultaneous different prices in different markets. Something that has an aspect for us, but we also tend to have a fundamental aspect. We also tend to have an exposure that’s unhedgeable, I would say that’s characteristic of most of our investments, where there is some mispricing aspect and some fundamental aspect, as opposed to just a true arbitrage, which tends to be very fleeting, very, very fast, very small scale. In the 21st century, much more computerized than something that’s done to the right of the decimal point. I don’t do anything to the right of the decimal point. I mean, I wanna do something that kind of crude, clumsy kind of Jim Bro look at it is more than sufficient. And if I think I’m gonna make 30% and I’m horribly wrong, and there’s some catastrophic arithmetic problem and I make 25%, cool.
Daniel Snyder
Yeah. All right. So I was gonna hold off on this question for a little bit later, but I keep seeing it. I mean, Scott’s asked it, Diana’s asked, I’ve seen it pop up time and time again here in the chat. We’re talking about Renren right? Ticker symbol, RENN. Obviously you called it, a big idea at the beginning of the year. I’d just like you to clarify, ’cause people are looking right now. They see that it’s at $29 a share. I think everybody heard you say it’s going to $30. They’re not really thinking about, I think they may have missed the beyond that part. So if you just take a second to double down on that.
Chris DeMuth Jr.
We’re getting Distribution that I think is gonna be more than $30. Might be $30, $31 there’s expenses and stuff, again to the right of the decimal point there’s a little bit of, well, wiggle room in terms of exactly what it is, so that’s the distribution we’re gonna get. You still own the stock. The what’s left, you have another public security, you have some cash, I think that it is not either easy to value or something that would be a massive priority of mine, but it’s worth probably several more dollars. And so if you think about a high likelihood in the very near future in the coming months to get more than all of your capital back, you’re paying less than nothing for the remaining company that’s worth more than nothing.
Daniel Snyder
So correct me if I’m wrong. I think you’re saying you’re paying $29 today. So you’re going to get distribution of $30 per share. So you effectively own the stock for nothing on your cost basis?
Chris DeMuth Jr.
Yeah. Yeah.
Daniel Snyder
Wow. I think that’s what people kind of maybe missed.
Chris DeMuth Jr.
And what is it gonna trade at? At least a few dollars, $4, $5 a share beyond that. I think if I gave a full valuation to some of the parts that was left, you get to eight, how much of a discount would it get? I would say almost certainly at least three. So like eight becomes five, could be a little more or less than that, but you get something after you get all your money back. That’s the short one.
Daniel Snyder
Yeah. Okay. Thank you for clarifying that. I think a lot of people that may have gone over their head.
Chris DeMuth Jr.
Well, it’s not a common situation, right? It’s like you’re getting dividend that’s more than the market cap of the company.
Daniel Snyder
Right. Right. Which is very rare. Hence why you found it and did the research on it. So moving on here, Gary asked, what timeframe do you work within? And I think this is something that you definitely might wanna touch on.
Chris DeMuth Jr.
Sure. So I don’t like to have to be rushed. If somebody tells me I need to slam on the accelerator, it makes me wanna slam on the brakes. I like to, most of my, somebody says, when do you really put money to work? The answer is when I’m done thinking about it. I’m not terribly clever about timing things. We do a lot of research and when we’re done, we decide to not invest or invest a small amount or invest a lot. It takes however long it takes. The kind of catalyst that we would look at a quickie one would be a couple weeks. We’re rarely doing something that’s kind of day trader. And I think about market prices. If you look at the reasonably likely downside, reasonably likely upside, I think about things when they move in kind of 5% increments. I think that when somebody says, “Why did this go up 20 basis points are down 30?” Noise or some reason that I don’t know, or that I’ll find out by the time it’s already corrected. And a price can never be a trade in and of itself for me, because something I own goes up 30% or goes down 7%, as far as I know, it went up 30% for some reason that revealed it’s worth 30% more or worth 7% less. The market doesn’t become decreasingly efficient just because it’s moved in some direction. So there has to be some extrinsic aspect to value that causes me to do something expect from price, which makes me lazy about worrying about the stock market by itself. I don’t have anything to say about it in and of itself. Price is a result of counterparties that have some amount of information, some amount of judgment, and every once in a while cheat. So I don’t wanna just naturally be available to trade against somebody unless I have reason to. On the longer end, there are things that we do that take, by their nature take, say, five years. So for example, demutualization can’t sell for regulatory reasons within a first three years, 75% chance on the fourth or fifth year that it sells. So frequently in a visualization, we’re doing something I think is gonna take half a decade. I can’t think of anything I do offhand that doesn’t have a catalyst in that fourth or fifth year, but yeah, five years is a long one, two weeks is a short one. And I don’t have any interest in the kind of shouty Jim Cramerr up down sell by kind of stock markets doing something. I think that benefits brokers, but not investors.
Daniel Snyder
Right. And you mentioned litigation, right? Litigation sometimes can take years to play out. So that’s a great point. Let’s see, going on here. So, oh, this is fun. So people have been with us for almost 50 minutes now. Thank you everybody for staying here with us. I think it’s time we give ’em a little treat. And this came from Del Taco who’s actually a subscriber to Sifting the World says, which is an amazing subscription service. His words, not mine. Question for Chris is on Planet Labs. Can this be a tenbagger based on where you see the evolution of the business, i.e. productization of technology increase sales focus, ESG. This is a nice little treat for everybody that’s still here. What do you think?
Chris DeMuth Jr.
Great question. I think I was skeptical of most de-SPAC equities after the redemption process and not skeptical enough of the ones that I own today that have been de-SPAC equities. There are very few. AerSale, ticker (ASL)E, is by far the kind of biggest exposure my family has for sure. And the one that we’ve kind of been with the longest. So I think that that’s the number one and Planet PL is probably number two. It is a very early company. The answer to the question is yes, absolutely. But it is one quarter to quarter that’s harder to justify kind of as a value investor. More if you were a VC firm, I think you would look at this and say, “It’s a fantastic product. It’s a really cool company. “I love using them.” I think that it is still incredibly under monetized, maybe in some ways in the way that Twitter’s under monetized. It’s kind of the image version of that. So I don’t think as a business it’s been figured out or fully exploited yet. So it’s one that I am kind of humble and cautious about, but the answer is, yes. The answer is I own it. I like it. And I think it could be fantastic if you inverted it and said, “Oh, it’s a disaster five years from now.” It’s probably one of the easier ones I can come up with. It doesn’t have that margin of safety where I say, “Look, if we don’t get Amplify’s pipeline turned back on, “it’s still worth today’s price.” If Renren remain in business, isn’t all that valuable and gets a bigger discount, but I think you still get all your money back. Twitter still has that contract even if it’s worth a lot less, I kind of have this second level of defense in my huge positions. I don’t have that in Planet, but I think it’s a very cool company. I know them well. I like them a lot. I still own it.
Daniel Snyder
There you go. There’s a nice little treat for everyone. Planet Labs, ticker symbol PL, on top of Ren, but the next question’s about Amplify actually. Bernard to ask, Amplify, he’s kind of curious, is this stock exposed to business outside of the USA?
Chris DeMuth Jr.
It is primarily California, Texas, Oklahoma, Louisiana, and Wyoming. So it’s exposed to California and California is the big problem right now. It’s exposed to California political noise risk as we sort out a pipeline disaster so that, oil and gas markets worldwide. So it’s hard to say it’s not exposed. It’s certainly exposed to events, but it is American upstream oil and gas.
Daniel Snyder
American upstream. There you go. And so maybe this leads right into Rishi, ’cause Rishi was wondering, and kind of just maybe touch on it again. AMPY, he’s thinking, why do you like Amplify over the majors that I think everybody else talks about Chevron or Exxon Mobil, the others?
Chris DeMuth Jr.
We have quite a portfolio with different energy equities. I think energy equities are extremely interesting this year. I’m glad we’ve owned them. It’s worked out well for us this year. Amplify is the most leveraged. So if we’re right, we bought a significant position in this, well, beneath $3 a share thinking that it was worth at least five times that. We still think it’s worth at least teens, could ultimately worth more, but I think today properly understood it’s worth at least $15 a share.
Daniel Snyder
Got it.
Chris DeMuth Jr.
I own other oil and gas companies. On the newsletter and in Sifting the World I discuss half dozen other positions we have, but they’ll go up 10 or 20% if this goes up five X. It’s the most exposed. It could have more volatility. It could have more in theory, the exposure symmetrical, so it could have more downside, but it’s the wrongest price of any of ’em.
Daniel Snyder
There you go. There you go, Rishi. So this question from Angus, that my team poll sent to me, kind of curious ’cause maybe you don’t cover it, if you don’t, that’s okay. We’ll move on. But Angus is wondering if you had any thoughts on the Rogers, Shaw merger?
Chris DeMuth Jr.
That one I have to be a little careful on it’s a Canadian, it’s in a very tough regulatory review right now. There’s tons of timing delay. And these are companies that have not crowned themselves in glory in some other areas that have made those regulators very unhappy. So it is probably one of the more opaque ones right now. I think that Twitter’s kind of a table pounding view. This is one that I like more than I don’t like. It is a big spread but it’s gonna take a while and it’s very, very risky. It’s probably not a horrific break. And then the companies have put forward what I think is a thoughtful, effective divestiture effort, but the regulators have not come to an agreement on it so far. So lots of risk, lots of delay. It’s one that I think is on the more precarious end, maybe the most precarious of the big current definitive merger deals, but I very much on the margin like it.
Daniel Snyder
There you go. Where it’s right on the feet. Let’s get into the Twitter questions ’cause I knew there were gonna be Twitter questions. So Steven starts it off. The Twitter Musk agreement actually says, Twitter has to provide all reasonable requests for information, right? We’ve heard that time and time again.
Chris DeMuth Jr.
It’s much more specific than that they have to provide information to close the deal, information that would be relevant to the buyer to close the deal. And they have discretion based on competitively sensitive information, talking about somebody who’s openly said he’s looking at the potential of launching a competitor. So it is extremely seller friendly, precise, specific language about what they have to disclose to Musk. Not to be pedantic about the point but .
Daniel Snyder
Yeah. Yeah. No, I’m glad you clarified. I mean, obviously we all needed to know that ’cause I didn’t know that. So with the whistleblower’s testimony, it now seems that Musk request for bot information was legitimate, information that Twitter refused to provide. Chris, have you read this clause? Sounds like you did. I think the case is gonna be much .
Chris DeMuth Jr.
Have I read the Twitter contract, was that the question?
Daniel Snyder
He says it’s probably the clause. Yeah. I would imagine you would, right? You sit down, you do this information or this research.
Chris DeMuth Jr.
Yes.
Daniel Snyder
There you go. There you go, Steven. He is the man that dives into the contract.
Chris DeMuth Jr.
There’s a sort of preposterously facile issue with the bots, which is every time Musk refers to it, he simply changes the denominator from what the companies have disclosed in their filings for years well before the contract. And you can’t just pull out of your ear a bad thing about the company and then walk away. The standard is based on what was knowable, what was disclosed when the contract was signed, a definitive contract. And the language that the company used was sincere. I think it was also pretty accurate. But to the extent that Musk has a different way he’d like to measure it, I think that’s backs into why he was buying the company. I mean, he openly discussed in the press release, let alone the SEC filings this issue and something that was improvable, presumably you wouldn’t pay a premium for something that couldn’t be improved. I think some of the recent information that’s come out says that the company’s description of bots was probably correct and it doesn’t even need to be correct. It just needs to be sincere, it needs to not be fraudulent, but being incorrect about immaterial minutiae, which every large organization has all the time, is not sufficient to get out of the contract, but the bots are very active. So if you had a large account, Musk has huge one and a huge following, you actually can have a fairly small percentage of users that are bots, but a fairly high a percentage of activity. From revenue basis, customers kind of know what they’re getting when they interact with Twitter and they know what they’re paying for. So it’s kind of this talking past each other conversational where people change the denominator and then act scandalize that they get different numbers. Okay.
Daniel Snyder
Hmm. Interesting. All right. So moving on here, we got Lance asking the question and says, if Musk goes, “rogue” after an adverse court ruling, how do you see that playing out?
Chris DeMuth Jr.
If I own the movie rights instead of the Twitter shares, that’s what I would hope for. I would say that we will, as shareholders be in a better position than we are today if the chancellor in Delaware sides with us and we get specific performance for the $54 and 20 cents the word, that would be a huge process. I think that’s 99% of the battle. And the other 1% of the battle is fun stuff to talk about, but we can talk about stuff that’s fun to talk about. There is an appeals process. I think that the Courts of Appeals will be able to render a decision in 140 characters or less, that will affirm the chancellor’s decision in this case, especially because she chose to allow Musk to include whistleblower issues. I think that actually strengthened her position in a lot of ways to keep everything in this one court under this one jurisdiction, as opposed to have that kind of this outlying issue.
Daniel Snyder
Yeah. Lingering on. Makes sense.
Chris DeMuth Jr.
But what if he just says, no? His other companies are Delaware companies. I think that he will have… I don’t know quite what the relationship is like between his lawyers and him, because when I go to Delaware, I’ve been a witness, I’ve been a plaintiff. And my lawyers look at me very seriously and I’d say, “Tell the truth, don’t volunteer anything.” And he’s kind of taken the inverse approach to that, which is to do the opposite in both regards. Kind of volunteer constantly things that utterly undermine his case on Twitter itself. So kind of an amazing strategy when you’re in court. And one of the things about it is that he’s just such an impossibly huge scale that spending tens of millions of dollars on lawyers is just kind of a lark, right? It’s like if you bought a stick of gum, you don’t have to think about it too much. But I think his lawyers would probably not want to go rogue and be kind of a domestic pirate kind of flying around Texas say, “Ha-ha, I’m not gonna pay.” I think that being in contempt would make it very difficult on Tesla, very difficult on SpaceX. I think it would be difficult for, it’s unclear that, is Morgan Stanley gonna be part of the pirate conspiracy, is Skadden gonna be part of the pirate conspiracy? Boy, this will be fun to follow. A conversation about that will be fun. I think that he has serious people around them that he might be more important than any other one client, he almost certainly is, but I don’t think he’s more important than every other client put together. And if he wants to stick his middle finger up at chancellor McCormick, I’m glad I don’t want to. I don’t think Skadden does. I think that everything else they have is more important than Musk. And I think they’re gonna have to pick.
Daniel Snyder
Yeah. And your perfect movie ending to the movie rights of course is, he loses, he doesn’t want to pay, he jumps on a rocket and rides into the universe
Chris DeMuth Jr.
To Mars.
Daniel Snyder
to Mars.
Chris DeMuth Jr.
Yeah. I don’t know what the extradition treaty is like for Mars or if we’d have to send another rocket to go get it. Yeah, Mars definitely plays into this in .
Daniel Snyder
Who’s the lawyers for Mars? We don’t have.
Chris DeMuth Jr.
He’d have to get that guy from the Simpsons. You know, the guy that’s in the kind of the Mall lawyer or somebody like that. ‘Cause I don’t think a major law firm’s gonna want to, if chancellor McCormick decides with us, I think this is 99% over at this point, but I think that he’ll be well advised to pay what he owes at that point.
Daniel Snyder
Yeah. All right. Chris, I got one last question for you before we let everybody get outta here. We’re hitting our three o’clock hour time. So Matt asked real quick, is there a buy buy by date for the Ren stock to qualify for the settlement?
Chris DeMuth Jr.
No.
Daniel Snyder
No. Easily said. Easily done. All right, let’s go ahead and leave it there. Chris, thanks so much for taking the time. Of course, as we all mentioned, if you want to go and get access to Chris, of course he does have this Sifting the World service. If you’re looking for more of his research, you can find that as well. Our team has been dropping the link in the chat for you guys. I wanna say thank you so much for tuning in and hanging out with us. Hope you enjoyed it, hope you learned something new, found some new stock ideas. We gave you more than three. How cool is that? Just for you sticking around that’s for you. You’re tuning in all around the world. We love you, we appreciate you, and we hope you have a great rest of the day. Chris, why don’t you say bye to the people?
Chris DeMuth Jr.
Thank you so much, Daniel. Thank you everybody for tuning in. Thanks especially for people from Sifting the World who joined us here, even though you probably already are sick of me and get too much of me as it is, especially full members. Thanks for newsletter subscribers. And I hope if this kind of thing is interesting to you, subscribe to the new Sifting the World Newsletter.
Daniel Snyder
Yep. There you go. All right, everyone. We’ll leave it there. Have a great rest of the day. We’re outta here.
Chris DeMuth Jr.
Bye.
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