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Editor’s Note: The following is a transcript for our readers who would like to follow along.
Daniel Snyder: Welcome, everyone. Thanks for taking the time to come and join and hang out with us today. We’ve got people – oh, man, the attendee group is popping right now. Everybody, thanks for joining us today.
We’re going to dive straight into this webinar because there is a lot to unpack with Chris DeMuth Jr. here today. If you don’t know who he is, we’re going to dive into that as well get a quick little background of how he got into merger and arbs and running his hedge fund and everything else, but let me tell you.
This guy is the real deal. I’ve spoken with him personally time after time, all throughout last year has been on our podcast. We’ve got webinars. This guy has hit home run after home run. And I think the easiest way to show everybody, I mean, I know we’re just getting started with one minute and we’re going to wait a second until we actually get him on screen here.
But I want to show you guys, I mean, these are closed positions from Chris, and we’ll come back and revisit this in a second as well. But look at this. These are most recent plays that he’s already closed out. I mean, guys, numbers don’t lie. This is what makes my hobbies. It makes you guys come in here and be like, okay. Maybe we should give this guy a little bit of credit because he definitely does the research. We were just talking before we started this. I mean, he goes through all the SEC filings, he gets the ideas, he runs with it, he reads the legal documents as well, and he finds great opportunities.
Now, I want to go ahead and kick things off with just a little bit of housekeeping. Let’s get it out of the way. Obviously, if you’re here at the webinar, thank you for joining. And if you have questions, which I’m sure you will have questions throughout today’s presentation, go ahead and drop those in the chat. We have our team in the back keeping eyes on that as well, and we will get to a Q&A segment at the very end of all of this.
Now let’s see. Why don’t we just, without further ado, bring Chris into the conversation. Oh, before I forget though, I will say, and you’ll hear this not only now, but also at the end, Chris has a great promotion going on right now. For all of you that are joining on this webinar, he is giving 50% off of his newsletter for the first year. That’s $99 a year. So you can get more of his research. And like I said, we’ll get into that again here at the end. Just wanted to make sure that you guys were aware of that.
So without further ado, I want to go ahead and ask Chris to join us here and come on screen, so that we can start asking him, I mean, Chris, it’s great to have you back, man. But I got to ask you from the start, for the people that don’t know who you are, which I can’t imagine why they don’t know who you are. But for those who don’t know who you are, can you give us, like, a little one to two, three minute background of how you got into investing and what you really look for?
Chris DeMuth: I’ve been an investor my whole life. I’ve been particularly interested in public policy and inefficiencies and arbitrariness, which often leads to the public sector and regulatory and antitrust issues, and been particularly interested in corporate transactions. So a lot of my background is in merger arb. We do a lot of things other than merger arb.
But by the way, in webinar chat, I’m noticing a lot of people saying that there’s no sound. I don’t know if that is an operator, everyone on their part or on our part. Just wanted to make sure that that was something we were aware of.
But in an event, spend time in DC, spent time thinking about and studying regulatory affairs, antitrust, in particular, and interested in situations that are broadly characterized as event-driven or special situations, but where there’s always a value component, I spent a lot of time thinking about studying companies, lot less interested in the stock market and macro, and it’s something up or down in a given day, then thinking about companies.
And I think about risk is always an everywhere a function of underpaying for what we get. And to find the level of complexity where we lose some of our competition for people who want to put capital in an area, there’s often some probabilistic event path aspect. So an M&A or a spin-off bankruptcy.
Usually, something has gone horribly wrong. Usually, somebody is in a trade they don’t want to be in, and we’re kind of service providers in the capital market, buying something, something somebody has to sell. We’re selling something that somebody has to buy. So I’m very interested in the price system itself in mispricing and inefficiency. And we do kind of deep research generally taking on concentrated positions and things that we are involved in at all.
And while we are not characterized as activists, I think it’s a somewhat odd term to apply to owners acting as if they own the place. We always have a thesis on what an optimized use for capital structure would look like and are helpful and relevant where we can be in reaching conclusions that we think we should get. So I think there’s an [odd saw] the value investing to say that it is paying $0.50 to get a $1. And my addendum to that is I want a specific plan and time path to getting my dollar back.
Daniel Snyder: Yeah, that’s a great kind of overview. And now you also started sifting the world, which is a Seeking Alpha Marketplace Service. How did that kind of start? And what kind of experience you deliver within that service?
Chris DeMuth: It started because I’m hyperactive on my research and I’m busy looking at ideas, and I half joked that as soon as I’ve done all my good ideas, I started on my bad ones. And instead of being too active in a career where I’ve always been my own audience and my own audience, I’ve started writing a number of years ago to kind of slow the process down and have a just a molecule or two of formality.
So it wasn’t just research, primary source research, plus talking to principals involved, coming up with a thesis, and then the one in a hundred times or so that I find something horribly mispriced, exploiting it for profit, slowing down to writing was a real benefit to kind of keep myself intellectually honest and kind of organize my thoughts.
I got some very unhappy reactions to ideas that I would write about from fellow travelers who said, Chris, why are you giving these away to strangers, and in some cases, ruining the opportunity set, diluting us, specifically in Odd Lots and some of the kind of quirky off the run things where people. I mean, I paid for college, or at least paid for my own college expenses with Odd Lots, and with kind of off the run quirky little things. And there’s kind of a subset of the community that kind of does these, but they are capacity constrained. And I ruined one or two of these self-tenders by writing about publicly.
And so my original impetus to starting sifting the world was to write for hundreds of people, not tens of thousands of people on capacity constrained ideas that have spectacular good expected values, spectacular good IRRs, but don’t have limitless capacity. There’s only so many dollars you can make out of it.
So that’s where I kind of have my – I have my own capital and my partner’s capital at rangely and then kind of more kind of the next circle around that is sifting the world members, and we keep that to hundreds of the most capacity constraint ideas. And then the circle around that is the subscribers that read the newsletter. And then we do still everyone’s not put out public stuff, but it is not the kind of things that are as capacity constraints.
So that was kind of the what’s kicked off that and it’s been fun. And as a generalist, if I write about enough stuff every once in a while, I end up writing and finding that within our community we have specialists in almost every vertical you could imagine. So I will give my idea to valuation, with a caveat, with an event path as a generalist, somebody who reads all the SEC filings and who talks with all the principles involved, but is not expert in any of the specific industries.
And we’ll almost always have somebody who spent 50 years in some industry that I have spent five week studying. And so kind of the back and forth iterative process of writing and getting specialized reactions has actually been a very valuable one for me as well.
Daniel Snyder: Yeah. Let’s go ahead before we get into your top idea for this year, which I think is great. You’re also talking about your service, the community there, which is incredible. I’ve seen the comments streams that come from your articles and everything else. I was wondering maybe we can recap real quick.
On this time last year, we were doing a webinar. And we were talking about Renren (RENN), right? That was all last year, and, obviously, everybody can see here. You had a 34% return on your Renren call just last year. I mean, maybe we do, like, a quick recap of that and maybe one of these other stocks here that you want to touch on that maybe aligns with the mergers and arbs and kind of the angle that you approach just so that people can kind of get a little bit of a taste and understand what we’re about to dive into with the top stock for this year?
Chris DeMuth: Sure. So last year was my most concentrated book ever by far. I think I had three positions bigger than any – actually, by the end of the year, I had four positions bigger than any previous position I’d ever had in percentage and dollars. Renren was invested here for last year. The performance of Renren is a little bit hard to follow the bouncing ball.
But the easiest way to say it is, by the end of the year, we had more in distributions than we – far more than we paid. We had the position for quite some time before the beginning of this past year. But it was our kind of we listed this is our best idea for last year. But we had more than twice the distributions than the beginning of the year and, like, almost 10 times as much as what we paid. It was a good investment. It was largely litigation-driven, and it was a situation we were very, very involved.
So this was kind of a day in, day out research project for us. And something that we had owned and been pretty detailed and followed up dozens of times within sifting the world for members who kind of once the idea is presented, the kind of the big difference between the subscription and the membership is members get kind of the follow-up day-to-day. Here’s what we’re working on. Here’s what we’re hearing. Here’s what’s based on information. Here’s what’s based on judgment. Here’s how I think the situation evolves from beginning to end as opposed to a subscription, which will get the information that it’s kind of a dump and then it’s kind of much more in your lap to deal with however you want.
So that was – yeah, that was a big position that was, and the kind of pick here was picked up very much. That 34% return was picked up very much in process on the newsletter, just on the basis of when the newsletter published, but had done quite a lot by them.
In any event, the trade is largely over. I’m out. I had followed up with members saying that I thought it was worth at least $2 a share. There was actually a little mini trade because it kind of hit collapse from $2.25 or so down to, like, $1.34 in which we kind of had one last little bite of the apple back to over $2. It’s over $2 now. We’re out. That’s speed. It’s done as far as I’m concerned at this point. And we got our money, and we’ve done, dido the situation with Twitter. Also, as big in percentage and dollars as anything.
I’ve invested in the past. That had worked up very well. But we were – our positions, we have liquidity from both of those. So a lot of my end of the year – end of the beginning of this year is trying to think of what to do with all this liquidity we got from Twitter and from Renren. And that’s kind of the question for me.
Our third biggest position are currently our biggest best position is Amplify Energy. Ticker (AMPY), by far my biggest position. That’s – I just think a really spectacular opportunity under $10 per share. That one we’ve already written up on Seeking Alpha and we’ve taken that public. So if somebody’s interested, they can just look up on Seeking Alpha AMPY, and you can kind of get a sense for the evolution that brought us to that position.
But just quickly, it was something that we jumped on because of an oil spill, a leak from a pipeline that was kind of hit the stock catastrophically. But we very quickly saw this as an asset and a liability. Somebody dragged their anchor over our pipeline. We – the pipeline’s not anchor proof or bullet proof, and we don’t have a military to sink a ship that comes to near our pipeline. It was because of the supply chain disruption in Southern California that ships were basically backed up in areas they wouldn’t normally be.
We kind of saw that as a high likelihood. It’s turned up to be the case, and we thought we could go after the ships and the insurers to claw back a lot of the costs that we had. We quickly – we’re able to kind of communicate with the company. We trust the Board and management. The process was kind of throwing herself at the mercy of the regulators and the politicians who wanted to, of course, make a big deal about this, settle as much as we can as quickly as we can.
I tend to like to fight these things, but in this case, I was mush because I wanted to get this pipeline back online. I think at this point, it’s going to get back online in the first half of the year. I think it’s going to – this company is just going to be able to very quickly deleverage balance sheet, it’s really going to be very quick at being able to redo hedges.
And without hedges and without debt that has accumulated because the pipeline’s off, it’s going to just be a very, very clean asset and attract a lot of attention from strategic buyers either in whole as a corporation or chopped up by assets by the end of the year. As a standalone today, it’s worth more than $10 a share to a strategic buyer to easily worth over $15 a share, and it will be very, very tidy for a buyer only after we sort out all of the issues associated with this pipeline.
At this point, we’re following with satellite imagery kind of day-to-day, the repairs, It’s going to be repaired soon. It’s going to be back online soon. And it’s going to gosh, cash, it’s going to be a simplified corporation that’s going to be very easy for a buyer to analyze in the latter half of the year with a shareholder base that’s unanimous and wanting us sold with a management team that is shareholder friendly.
And it’s kind of a great cowardly way to invest in oil and gas right now because it’s kind of over-hedged at the moment, but has this kicker that if it’s somewhat gassy, but if oil and gas at this – anywhere close to this level, it’s just massively underpriced equity. So That’s our biggest best position. And my favorite is the only thing that I kind of have left coming into this year in a huge scale because Renren and Twitter were both monetized.
Daniel Snyder: Huge successors. Yeah. They were huge successors. I mean, that’s that – and just I want to clarify for people because I think some people might have missed this. That is one of your carryover ideas.
Chris DeMuth: Yeah. That’s my – yeah.
Daniel Snyder: That’s the last carryover idea from last year.
Chris DeMuth: Yep.
Daniel Snyder: I want to go ahead and move forward, though, like…
Chris DeMuth: Sure.
Daniel Snyder: …let’s get into the big new idea for this year, right. But, I mean, you put out this entire article. I read it from the top to the bottom, you talked about subsidiaries in the back. Let’s just dive in. I’ll let you kind of share with everybody what it is and what’s the backstory. How did you even find this stock?
Chris DeMuth: So I had two efforts that kind of ran up in the process of researching these. And, of course, we – markets open, what, 251 days a year. We’re kind of constantly tweaking, sizing, and we’re dealing with prices moving, and our information changing, and our judgments changing. We had two kind of furtive efforts what we’re going to pick is our best new idea for this year, and then we had what we are about to mention right now is the best new idea for this coming year.
The two that we were kind of deep into and then the price has changed a lot in the process were Spectrum Brands and Roivant, ticker (SPB) and (ROIV), still two of our biggest positions, but not ones that we’re kind of picking for people who follow us in this.
In an event, Spectrum, I think is a very interesting position. Beneath $75 a share, I think it’s a very good investment. It was something that we were getting involved in, as I was kind of thinking about best of use for the next year, it had collapsed down like just like just over about $40 a share and we thought it was worth at least twice that. The government has an antitrust suit, often I’m calling antitrust suits against a deal that would sell a huge asset sale.
So it’s not exactly a typical merger or like the company will survive the sale if it goes through, but a sale of a huge amount of their assets with a full fix of the thing the government was complaining about, and the government is kind of pressing on with their litigation despite a complete fix. I think it’s a weak case. I think the government’s going to lose. I think the price here in the mid-60s is plausible without the asset sale, and it’s a bonanza from here with the asset sale.
I think, in the coming months, the government’s going to bring forward this case. They’re going to lose in court, I believe. And there’s some shock that they would settle and abandon that simply because they have so much antitrust litigation they want to bring, that they might need the litigators elsewhere to kind of go after a big tech or a big pharma or something that’s even us flash here for their own political reasons.
In any event, so SPB was one that I think I probably would have picked is my best idea for this year at 40. In the mid-60s, I still think that it is – I haven’t sold a share. I think it’s a beauty. I think that anything south of $75 a share, it’s just a great positive expected value. But that was the one that I passed on first.
And the second one I passed again was we have a big position in Roivant. Ticker ROIV, I think, beneath $10 a share, it’s really a fantastic opportunity. I, again, one of my big positions, we had a big position in it, and we participated in the secondary very, really recently, got even bigger. And they have a big exposure to IMVT, which has done quite well, and a big kind of litigation catalyzing the year ahead of them.
I’m going to have more to write about that separately, but that price too had kind of run up a little bit. This was 1 at $3 or $4 a share would probably be my best idea. It’s kind of $8.50 now, I think. I think anything south of 10 is just a remarkable opportunity. But more modest just everything’s based on price and everything I look at in terms of thinking about, risk is based on underpaying – you’re still under paying less now. So those were the two that I passed on.
And here’s the one that I settled on kind of our best new idea for 2023 is a company called Innovate. The ticker is (NYSE:VATE). We started looking at this in a lot of detail in the fall. It currently costs $2.70. I think beneath 4, it’s very, very positive expected value. And I’ll explain why. But this is our best new idea for 2023, and it is a leveraged equity.
And so buy or beware, do your own work, think for yourself, not a financial adviser, but this is something that is a large position of ours and my favorite new idea. It’s kind of run up a lot less than a lot of other things that I think were priced terribly wrong.
And what I like about it is it kind of hands you a payoff structure that’s kind of my favorite payoff structure, which is they have a hodgepodge, a kind of a weird hodgepodge of assets, and there’s no natural constituency for this. This isn’t something that people kind of gravitate towards. It is first and foremost, what it’s kind of known for, perhaps is – and I’m going to post this on Seeking Alpha any kind of the next few days.
So you’re going to be able read about this if it’s of interest. They have a kind of a number of unrelated businesses. Their infrastructure business that is the largest fabrication and erection company in the U.S. called DBM Global. It’s not exactly what I’m most interested in, in this company, but it’s enough to cover their debt stack. It’s enough to equal, I think, it gets to maybe about a $1 or so equity value on top of covering the debt.
So in terms of being a leveraged equity, they have this kind of infrastructure business that I think keeps it going even throughout a recession. And there’s some funny accounting realities of a recession in a company like this in that it is CapEx intensive. So kind of the more backlog kind of can actually hit them in ways that as the backlog shrinks, it’s actually going to be kind of have some of the metrics look better in this coming year. It is a construction-related business going into, it could be a rough economy, but they tend to be really kind of big dramatic.
If you look at the kind of projects they work on, and this is like Apple headquarters. This is retractable routes on big convention centers and huge projects, not a lot of competition for their things. It’s a good business. It justifies quite a bit of the value. They have a spectrum asset, let’s just say business, but it’s asset. They should eventually sell that I think is and I’ll go more into the Spectrum business. Like, the details are not endlessly interesting to go on about, but I have them and we’ll publish on them in the next few days. Again, that’s what I’m really in it for.
But then they have an astonishing collection of businesses in their third area called life sciences. And life sciences has a whole lot of stuff that whenever you get into kind of growth investments, I always think, I love speculative investments as long as I don’t have to pay anything for them. And they have a number of shots on goal and life sciences that I think could be staggeringly valuable $15 or $20 per share that could either be spun-off or the business could be kind of rebuilt around them with things that I don’t think I’ve really seen presented other than on Sifting the World, which now has gotten to see some of this.
But I don’t think I’ve seen presented in a organized way by specialists yet, but I’m certain in the next year as they kind of go through the regulatory process, as these kind of never revealed that they are going to be shots on goal. They are early, but they – but that’s where their kind of real sizzle is.
So you have kind of a – you have hodgepodge of assets, including an infrastructure business that supports the stock and supports the debt stack, and then some very interesting life sciences opportunities with a possible spectacular upside. And that’s where I start to kind of you look probabilistically at this and think there’s a number of things that could be worth kind of high teens on their own.
And so looking at the stock beneath 4, I mean, I just keep discounting it, discounting it, discounting it, and it’s hard. And there’s certainly a broad range of outcomes we could see this here, but it’s not a value trap. We’re going to see one way or another on a lot of these in terms of the regulatory and marketing process. But I think you’re risking, call it, if you paid $4 a share for this, you’d be risking about $3 for a potential reward of about $11, and I think the kind of upside of $11 is more likely than the downside of $3. And when I say $3, I just think it’s very hard to break through on the downside through the value of infrastructure business.
So, yeah, downside of $3, upside of $11, $11 is a bit more likely on an expected value basis, I think it’s really way hot. And I can go into kind of the details of where I think these shots and goals are, but I just think you’re hugely underpaying for some really extremely promising IP that in the – even since I’ve been thinking about this one and since we’ve accumulated our significant position in it, there’s a lot of validation. There’s a lot of private equity interest. There’s a lot of specialist interest kind of putting capital in some of these areas in life sciences.
Daniel Snyder: Yeah. Let’s take a second. Let’s break all this out, right?
Chris DeMuth: Sure.
Daniel Snyder: I’m going to throw some things at you because I, like I said, I read your article about this and how much detail you provided into it. So first off, you keep talking about the infrastructure, which you said that subsidiary of itself is pretty much worth a $1 a share, right? And you mentioned there – did they build Apple headquarters? Is that right? Or is they…
Chris DeMuth: They worked on it. Yeah. They had – they worked on it.
Daniel Snyder: They take on these humongous projects that they have this backlog, I think, is what you are talking about?
Chris DeMuth: Yeah. And so it’s not my focus enough as upside as much as they. I think it really protects a lot of your downside, and I think it really is what’s going to get us through this year in terms of data comes up and so forth. For me…
Daniel Snyder: Yeah, I’m wondering – go ahead, sorry.
Chris DeMuth: For me, where I’m really spending a lot of my time. This is kind of ongoing, but I’m looking at two things. One is within life sciences, this is a subsidiary of a public company. And even within it, it is – it has some kind of new interesting opportunities. One that I don’t know if I’d say this is my fear. The one that I’m really kind of delving into that I think could be the most revealed value over the next 12 months is called Meta Beacon. MediBeacon I think is worth, I think, it could easily be worth high teens on its own per share.
Now a layout kind of catalyst and like, okay, let’s look for some corroborating details over the next 12 months. It’s not as if it’s instantly sort – it’s not a scandal if this doesn’t work. It’s a shot on goal. But it is – and what’s really important here too is that these are non-cross collateralized to the holding company businesses, right?
So, like, if we win, we really win. And if we lose, we’d like to fight another day in terms of this structure. And that’s really if you try to come up with a common theme from my rather disparate investing portfolio in history, that’s really what I’m looking for, which is heads and tails that tie structurally, not just I found something that we else found other people like money too and look for the same kind of thing, but if you could find a structure where this fits.
But MediBeacon is a non-invasive monitoring system for kidney function. It’s an incredibly good product. It’s an incredibly good business. But the way to think about it is this is just a better way to monitor kidney function and the modality is one that you have kind of an ongoing revenue stream from the product kind of once it becomes what I think is quite likely that it’s going to become kind of best-in-class, kind of widely used just a very, very, very big market opportunity. It already has breakthrough device designation from the FDA.
So I think the FDA is working kind of collaboratively. And if you look at a lot of their body language on this, it’s something they really want. It is – it just has not been written up that extensively on the investment side yet. And so that’s something that we think is really pivotal.
And then the other one – they’ve a lot of everyone’s, these are the ones that I’m focused on, is an aesthetic dermatology company with a – called Glacial Rx, and it’s a – for aesthetics on skin, they remove age spots and lighten and brighten skin. It’s a safe and effective product. It got – again, they’ve been working with the FDA effectively, working with Chinese regulators effectively and that’s one where I think – there’s just a long list of these that I kind of pull out too, but two that I think are really interesting.
And then they’re just very active this calendar year and kind of pushing through the regulatory process. Once they’re clean open stories that I think are a little bit more accessible for the market, I think, it’s going to be just given a huge amount of credit and will be revealed as very, very valuable medical device products.
Daniel Snyder: Yeah. And just so I mean, I asked about infrastructure, right? Because I was thinking about, okay, what’s the downside, right? And then you were talking about just clarify for everybody these are the shots on goal, right? These are the things that could potentially continue to drive share price higher as this comes to fruition.
Hopefully, it comes to fruition. We’ll see over time, right? And I think it was funny. So I saw a comment here in the chat. I think it was Steven who said, man, these are like so obscure, right? And like, that is what you do though. That is the service, right? It’s like there’s an entire market to make money in and you find these little place and not everybody is watching, the media is not watching and you dive into them, you deliver all this great alpha.
So I wanted to ask you though, let’s think about there’s somebody out there right now watching us saying, if this company is so great, if they have this such – this potential, why is the share price only at $2 and whatever cents a share right now? Like, what happened to get this company to this point where we’re now is this a ground story?
Chris DeMuth: So my partner, Andrew Walker says that we like to look where nobody is watching or everybody is panicking. And this is probably a little closer to nobody’s watching. But if you were going to look at the kind of caveat in the history here, there are things that I mean, I think this is a very undervalued, great value with a lot of catalysts, and I think it’s one where we I think it’s a much better idea than Renren where people more than I mean, from the meeting at the end of the year, more than doubled their money. I think that this is a like very good likelihood to treble or better, but two caveats.
One is they have to handle their debt. It is highly leveraged. I think that’s a big part of it. And then secondly, we got here with a Daisy management history. This was formerly known as HC2 Holdings. The Phil Falcone, who exited the Board, exited in a kind of contentious a proxy fight and then was replaced by Avie Glazer, who himself is a controversial character, people have different views on him.
Now one thing that’s very interesting is I think if [indiscernible] I think which is quite likely that we’re going to get a big sale and a big price sometime soon. That’ll be a ton of liquidity for the Chairman here. So if and when there’s more capital needed, I think that that gives him a lot of flexibility to focus where he wants to. I think he’s going to have a lot more to focus on VATE if that sells.
So that it’s a totally unrelated business. It can be a more unrelated business, but it’s one where I think that that’s going to kind of free him up to refocus on this if he wants to and whatever form that takes. And so I think you have the leverage. You have the management history and contentiousness. You have the unrelated businesses. So that if somebody had a particular taste for one or the other, you kind of get a lot of the other.
I think for me, that’s the opportunity. That’s how we can enter something at this price that I think is worth far more. And I think that’s where the opportunity lies. That’s where the discount is. And I think that somebody is going to see a lot cleaner story that’s going to make a lot more sense to them in a year, but they’ll have to pay a lot more for it.
Daniel Snyder: Right. And just so, I mean, you’re talking about the Chairman selling Manchester United, maybe having capital. Let’s talk about if they came to you and they were like, “Hey, Chris, we need capital.” Would you give it to them right now?
Chris DeMuth: So there is a poison pill that is in place right now that will be removed March 31, 2023. So that’s a conversation for after that. And while I would not ever really commit to or discuss subsequent trades, I would say that I think it’s a very interesting business that’s very undervalued. And there are limitations to what I can do with that far that will go away at the end of this quarter.
Daniel Snyder: I completely understand, I mean, [indiscernible] here. So we’re talking about there’s the infrastructure department. There is this which you consider biosciences waiting on the FDA approval is what it kind of sounds like. That’s kind of what you’re waiting to see hopefully that approval and that fast track and everything else from there. And then there’s also this Spectrum in the business, right? I mean, we haven’t really talked about that too much.
Chris DeMuth: Yeah. I’ve written that up and people can kind of – if you go to Seeking Alpha, there’ll be a public article on this. I’ll probably post this maybe tomorrow afternoon, something like that. If somebody’s interested in more on that, their Spectrum, they should sell it. It’s hard to optimize, not part of a kind of larger strategic business.
I would say that once we have the pill lifted, which would allow outside owners to concentrate a little more. I think there’s probably going to be more focus on optimizing each of these businesses. It doesn’t make sense, like, some of these life science businesses might make sense more as a standalone company. It’s not as if some big pharma company wants to end up owning a infrastructure, engineering and construction business. But I think that that leg of it is just an asset for sale to the right strategic buyer at the right price.
Daniel Snyder: Gotcha. And just for everybody, I see there’s some comments here in the chat as well asking about what this is the ticker and everything. This is Innovate, and the ticker is VATE. This is the big new idea for 2023 from Chris DeMuth Jr. And just remember, like, this isn’t an investment to him, guys. This is not a simple trade in and out. This is playing the long game. And speaking of long game, Chris, I mean, catalyst, the size FDA, what can we be expecting maybe from the financial side of this company? Do you see anything there?
Chris DeMuth: So we have kind of six milestones to watch for 2023. We have – there’s a number of kind of CVR contingent value, right, type investments within life sciences. I think we have things on that side we’re going to see. I think we have a lot of kind of FDA-related milestones this year. We have the poison pill expiring.
I think that if you look at – there’s a couple of things that I think are going to be kind of revealed on the financial side this year. One is that if you look at the infrastructure business, we have a lot of low-margin COVID era contracts that were really underpriced due to COVID-related pressure. As those roll off, I think the margins on the construction side will be seen as much better than they kind of look – looking retroactively. And then I think we’re going to get commercialization of the Glacial Rx device.
So I think that we’re going to have – on the MediBeacon side, it’s largely regulatory. On the infrastructure construction side, it will be a margin improvement story this year. And on the Glacial Rx side, it will be commercialization, all of which I think are, to say, it’s misunderstood by the market would be giving the market a lot of credit for paying any attention whatsoever. Things that nobody in the market is really focused on are thought about. And that once the story is very clear, we’ll cost 2 or 3 times what it’ll cost today.
Daniel Snyder: Chris, there’s a question here from Paloma in the chat that I think was something that I personally asked myself as well when I first saw you write this article and explain that this is the – your big idea for 2023 is did you feel any certain type of way when you first dove into this company to do research and you’re like, there’s an infrastructure, there’s a bioscience and like, the – they don’t match up really? There’s no – it doesn’t seem like there’s any synergy with these. Did that turn you off at all? Or were you, like, I need to dig in further?
Chris DeMuth: No. I mean, I think that I would love to be able to wildly underpay for something that was very, very liquid, very simple to understand and famous. It just never happens. So you say, like, what is Apple worth far and away the best data point for what Apple is worth is the price. And 99.99999% of what people say about it is circular an idea that they know more the rest of the market put together is absurd.
You can easily know more than the rest of the market put together about something like Innovate. It takes a few weeks to understand more in the market put together because nobody’s really following it. I think that there’s a category here of companies that have really speculative things that I would never be able to buy by themselves because it’s the kind of thing the market simply wants to pay so much more than I would ever pay by itself.
But if you kind of bury it in within a public company in a form that doesn’t really have any natural constituency, it lets me kind of sneak in some speculative investments that that I don’t have to pay for. I don’t have to risk any downside for. And the couple others in this category, it’s the kind of thing that I really like.
Security National, (SNFCA), is one that I’ve written about on Sifting the World. I think it’s hugely valuable and misunderstood. It’s a cemetery business, but it owns a ton of really valuable real estate. It has a number of other businesses that don’t really fit together in any particular way, but just because of the historical connection to the cemetery business, it has a ton of land in Salt Lake City that was bought for practically nothing in the 70s that now is worth a ton and they haven’t developed it yet, right? They couldn’t use it for anything. And they’ll over time clarify and monetize the value of that.
And then the other one we’ve written about this kind of in this category again that is SWK Holdings (SWKH). Same thing. It has a plausible valuation here for their main business, but they have another operating business that’s speculative, but I think hugely valuable. And I think the kind of passive responses, like, well, why don’t you have something that we’re a huge lender pay that’s simple enough that I can easily understand the first time you say it? And I – if you have a good example of one of those, I would happily invest in that as well.
Daniel Snyder: Chris, I saw a question here in the chat just a second ago. I want to get your take on this. Is – and I just pulled up the financials as well. The total debt of this company right now, Seeking Alpha has a $779 million, with $25 million of cash in hand. Does that not worry you at all?
Chris DeMuth: That kind of defines the opportunity. It’s a highly leveraged equity. They will be able to service their debt this year. They will be able to reveal the value of a number of the things that are deeply embedded in here. No. But that is – there are several things in it, I think, are worth teams per share in and of themselves.
So if this is something that we were looking at, at less than a $1 that we presented to Sifting the World, I think it was a $1.26. I think it’s worth at least 4. It’s trading at $2.77. Were it not for that, it would be trading at 10 times the price. So that’s kind of – it would be good to have something with all the positives and none of the negatives. To the extent that that’s a good point to make, then I will agree with that point.
Daniel Snyder: I mean, it’s kind of like if all of the good stuff is already there, then the stock’s already way away from you, right?
Chris DeMuth: Right. And I think we’ll have – it’s going to, like, with Amplify is pretty leveraged, too, and it’s a problem. And I think the problems may solve, and the people who buy it after the problem solved are going to not pay for this same price.
Daniel Snyder: Yeah. And I love – there’s a comment in here I just raised that the proof is in the pudding, and that is right. When it comes to you, your track record does not lie. So here – there’s a lot of questions I’m seeing as well in regards to biotech, biosciences, that sort of thing.
Chris DeMuth: Sure.
Daniel Snyder: Maybe for an investor or even for myself, right, I don’t fully understand that sector. So as an investor approaching this potential of FDA clearance, like, how does that play out? Is it FDA clears a device and they already have deals lined up, waiting to go, and they just start signing contracts, and revenue starts flying? How does that play out?
Chris DeMuth: Sure. There’s a couple of things to look at. One is we’ve already made some progress with the regulator so far. So you can kind of look at probabilistically where they have advanced it so far. We have a number of products that have decent odds of approval, but this isn’t something that’s like easy for a generalist like me to replicate and say, “Oh, this is what they’re going to make the decision on.” But that they have history of working with the company in a number of these products in ways that look pretty favorable.
And then secondly, and this is one part of this investment that’s really progressed since we’ve owned it just even over the last few months that gives a lot of validation is that it has become increasingly popular with private equity. There have been a lot of not kind of famous public company M&A, but there has been a lot of private equity interest in kind of aesthetic dermatology in some of the areas that this company really focuses on.
So there’s a lot of IP. It’s valuable. It’s defended. The regulators are working with them. It’s just a probabilistic bet and what specifically works this year. And I think we’re going to hear one way or another from the FDA on some of these products that could be very valuable. It’s very hard to say much more than that with level of certainty. But we’ll know more in the months ahead, and I kind of laid out this specific catalyst they can look foresee kind of right track or wrong track in the next year.
Daniel Snyder: We have a follow-up question from Tony over here. He says, how exactly – well, how exactly do you anticipate them paying their debts this year that you just mentioned?
Chris DeMuth: Yeah. So next month is kind of one of the dates. There – just the service – we have a big that led, but they are going to be able to service it, even just fix it – fixing for a second, looking at the cash that’s going to be available just simply from infrastructure, they can handle their debt this year. It’s leveraged. It’s a super valid concern. It’s one that we will be not just looking at in theory, let me say it like that. We’re – if they need more capital, I think that – I think this is a company that deserves and will get adequate capitalization to get what they deserve by the end of the year.
Daniel Snyder: Yeah. I think it’s worth mentioning as well. I mean, we – at the beginning of this webinar, we talked about last year’s call of Renren. And you wrote about Renren, and you updated people within your service about Renren multiple times throughout the year. I mean, we were on Investing Experts Podcast. You’re giving us updates. We did the webinar. You’d wrote articles. So it’s not like you’re just delivering this out and not following up on what you’re talking about. Doug…
Chris DeMuth: I think dozens of Renren – I mean, dozens of Renren write-ups that I was dealing with the company pretty much every day for the whole year.
Daniel Snyder: Yeah. You were totally on top of it. So I wanted to get to Doug here. Doug says, how do you find these unique companies? Maybe just talk about your methodology? How do you go about it?
Chris DeMuth: Sure. I would say that almost a 100% of what we do is primary sources. So I read a lot of SEC filings and I kind of white room on my own, try to get, I don’t know, 60% or 70% of the way to understand the questions I think are important questions to ask and then I spend a lot of time with principals.
So I just say, “Look, this is my understanding of what you’re doing, write everything that I can read.” I mean, I think it’s just amazing how investors can think get in the phone with management sometime and answer ask questions that you could have answered in, like, the press releases, let alone reading the SEC filings.
So I figured it’s, like, my job to read everything that one can read. And then there’s going to be limitations to how much I can understand that and then get on the final principles and talk to the Board, the management, the competitors, the customers, the vendors, the regulators, and I don’t know what else 1 would do, but I can’t imagine putting a $1 to work that you haven’t done all of that every time.
Talk to other people in the business and say if you had a gun and a bullet, which competitor would you shoot? And people, not only through dishonesty, but just through lack of introspection, don’t always have the best perspective on their business, but their competitors think about their hardest competitor every waking day, and so often have a really good perspective on that.
So I think it’s just a combination of primary source data. I love SEC filings. We’ll do other stuff. We’ll look at other mostly kind of technical industry stuff. I don’t really care for most kind of financially focused stuff on the stocks. But we’ll get as much data as we can. And then my experience with people who spend their whole career on something is if you just don’t want to do any homework yourself to kind of ask them questions, they have done 0% of work. We need to tell me everything. That’s kind of a rude and ineffective question.
But if you say, like, I worked on this for weeks and print, really trying to understand that. And you’re kind of, like, 70% right. They’ll, like, give you a rate tracker on track kind of nudge on the rest of it. And so you kind of get your thesis kind of shot to the people who understand it best. And then ideally, especially around transactions, if you’re doing enough work, you can actually be interesting to them.
I mean, if you’re – I think in an M&A deal, especially if there’s, like, a really contentious issue, you’re kind of doing okay if the CEO is going to take your call and you’re really doing okay if CEO is calling you because they want to hear what else you’re hearing from other people.
Daniel Snyder: Yeah. So Doug is following up here. He’s like, to clarify on his question. So earlier we talked about, what was it? SPB, the Spectrum Brands Holdings, we talked about Roivant, which is ROIV, is kind of like, what is that initial sort of spark? Is it something you read in the newspaper? Is it a conversation? Is it – how did this….?
Chris DeMuth: Yeah. Usually something horribly wrong has happened. And I guess I’m always asking myself the question, where would value be hidden? So sometimes, like, the dumbest reaction ever got is, like, why don’t you have something that’s simple and obvious? And I’m, like, I would be happy to invest all my money in something that’s simple, obvious, and massively undervalued.
But in reality, you have the hiding place. The hiding place usually comes from something that was unexpected and terrible. People overreact to recent and vivid things kind of in a crisis. the market’s reactions often, let’s forget everything we always knew. And so something recent in vivid happens and a stock can be cut in half. And then you have to say, like, okay, it’s probably directionally correct. Like, usually the kind of the magnitude is often most wrong where the direction is most obvious.
So I can think of all sorts of situations where there is some crisis, but it was largely covered by insurance or something like that. Actually, the AMPY Pipeline, the orbital explosion on the landing pad, one of my partners had worked as CFO for a satellite company and instantly saw an explosion that just knew the whole thing would have been covered by insurance, and it just tanked the market for the stock. And so that’s something where we can act kind of very quickly is, okay, congratulations to market. You got it right. That was bad. But it should have been down 5 bps and it was down 50% or something like that.
So in the case of Spectrum, it was this anti suite by – antitrust suit by the government that the government is kind of a hell bent on hanging on to despite the fact that we now have a buyer in hand for the divested assets that will solve the entirety of the overlap that the government is complaining about, and they still don’t want to settle.
So cool. So we’ll see him in court. We’ll see what judge has to say, but it was an unexpected crisis that the market wasn’t focused on. And so that kind of draws my attention. It’s like, okay, that’s analyzable, and we can really kind of test the hypothesis there. So where would value be hidden? What has been very vivid and recent that the price would not reflect well?
So – and then usually also some kind of non-cross flatterized, non-recourse to the parent company that we’re invested in such that we have kind of multiple ways to win. It’s almost always subjectively hairy. If you say, that I think about risk always in everywhere, a function of price, you’re kind of a service provider where your counterparty is somebody who thinks of risk as subjectively there’s something bad to talk about.
So I guess I’ve always ended up with something bad to talk about because you can’t get both. I can’t think of a situation where you’d have, oh, I’m hugely underpaying and subjectively, good things were usually. It’s usually some kind of problem. I mean, there was a pipeline problem with AMPY, and they does uh-oh, a lot of money on their debt this year. So these are things one can say if one wants to say something bad about them, always.
Daniel Snyder: Yeah, risk always find the money and the risk, right? I guess that’s a great way to say.
Well, everyone, we are coming up to the top of the hour here. Chris, we can’t thank you enough for taking the time to join us today, dive in. I mean, you gave us more than one ticker to today’s episode, and we got the follow-up on Amplify, everything.
So everyone, I just want to remind you as well. Chris right now is offering a special discount, 50% off for the first year of his newsletter over at Sifting the World. There is the full service as well. If you really want to dive in, get all of the data as well as talk to Chris and his team and enjoying the community that is available as well.
So just remember, Innovate, ticker (VATE). Chris, I got to say personally, I can’t wait till later this year when we get a follow-up on this company and see how everything is going and watch this unfold. Is there anything else you’d like to say before we jump off?
Chris DeMuth: Thanks for having me. Anybody who wants to follow-up on Innovate, I’ll put up a piece on that, probably on Seeking Alpha, probably tomorrow. And I think that’s kind of indicative. People can find – easy to find online on Seeking Alpha if somebody’s interested who wants to follow-up on these specific ideas there for you to do so. Thank you so much, Daniel. It’s been a pleasure talking to you again.
Daniel Snyder: It’s always great talking to you. I mean, you bring the data in the heat. I love it.
So, everyone, have a great rest of the day. Go check out Sifting the World on Seeking Alpha. There’ll be a link around the transcription. If you’re watching afterwards the replay of the whole thing, there’s also been a link in the chat from our team behind the scenes here, and we can’t take them enough. So take care. We’ll see you next time.
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