Vladimir Zakharov
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Courage & Conviction Investing talks nuance in small caps stocks and why he doesn't pay attention to the macro picture (1:10). Portfolio management vs stock picking (11:30). His top small cap picks and updates on his favorites (15:30).
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Transcript
Rena Sherbill: Courage & Conviction Investing, great to have you back on the show.
Courage & Conviction Investing: Hi, Rena. It's great to be with you. I had a blast the last two times and thanks for the invite in a third time.
RS: Yeah, indeed. I've also enjoyed myself the past couple of times. I know investors have, I know a lot of listeners have. You run Second Wind Capital on Seeking Alpha. That's an Investing Group that you run. You focus on small cap stocks. That's what you've been talking about last couple of times you've been on the show, but also how you approach them specific to certain stocks and then broad picture when you're talking about small caps.
It's a space that's been talked about a bit in the marketplace. What's going on with the Russell 2000? What's going on in the markets in general? I'd love to get your thoughts on how you're looking at small caps, thinking about them, how you think investors might want to think about them? And then as broad as you want to go more macro than that, welcome to do so.
CCI: Sure. So, there's no in and out of the pool in my world. Are we drinking from a firehose? Are we drinking whiskey for breakfast? I mean, I'm aware of the macro. I read the macro, but I don't – it's 100% bottoms up, fundamental analysis, synthesizing the conference calls, understand the companies, trying to understand the valuations, developing your imagination to see where things could go, what I can pay to own an asset relative to what the market thinks.
There's an art in terms of what is mispriced because out of maybe a 100 opportunities, there may only be 5 that are really compelling, maybe 10 that are interesting and the rest you're probably going to lose money or you're going to underperform the market.
And so that's what gets me up at 4:00 in the morning. I wake up excited every single day. I get excited to greet the world. What am I going to learn today? What's happening in the world? What's happening with the hundreds of companies I follow? What's happening with the companies that we own? I'm so excited. I'm like a kid in a candy store during the earnings season, 4x a year. And so, like Buffett, I'm going to be doing this till the day I die. It's a passion, it's an obsession. There's so much better to get and we can cover that later because I'm still really leaving a lot of money on the table.
My stock picking has been really, really superb, my portfolio management has been pretty poor, just to be candid. That's something I think that we could talk about, but in terms of Russell, I don't even know where it is right now. I know (SMCI) is a big driver and that stock, they pre-announced in January, it was like they opened at 347 and it got to like 1,080. And that's the biggest component and that's been a driver.
And it's Nvidia's (NVDA) world and everyone's living in it. And I get all that stuff, but that's not what I do. I'm peripherally aware of it, but I'm just focused on trying to buy good companies at good valuations that I think the market doesn't understand or not so good companies that are like in the dumpster diving, just completely disconnected where I think there's a nuance, there's an angle that I see that the market doesn't see. And I think I'm getting paid really well to do that.
So, again, I don't even know where the Russell is today. I don't even look at it on a daily basis. I don't pay much attention to the macro. I don't pay too much attention to the technicals. It's just old school bottoms up. And then also I talk to a lot of management teams because I've written some decent pieces and I'm able to talk to a lot of the management teams.
I have really good rapport with at least 5 or 6 teams and currently, and I really enjoy that, picking their brains, learning from them, and learning about their businesses. So, again, it's every single day I'm excited. What am I going to learn next? And so, blessed to live in the United States and thank God my kids are healthy. And so, there's a lot to be thankful for. So, that's my long winded intro.
RS: No, I appreciate it. To wit, Second Wind Capital, no long windedness here. I think it's, it's nice to hear like you have your first wind. When you're talking about investing a practice and art, a skill that gets a lot of people down, even though there's been a lot to cheer. I know it's not your focus, but I'd be interested to hear you articulate what you think drives things like the Russell 2000 and in a line or two, why you don't pay attention to it?
CCI: So the Russell got smashed like two weeks ago and I went back and I looked at the data since 1987, the day it was down 3.96%. Just because I was up at 4:00 in the morning, I always am, and it was the 72nd worst day in the history of the Russell 2000. And I wanted to provide, and if you took out the crash of ’87, 2020's crash and ’08 crash and then COVID crash, I think it was like, I don't know, the 35th worst day, right? This is empirically going back like 36,000 trading days. But it's just kind of par for the course.
And the Russell, I would say that, don't quote me when the last time I looked at maybe a year ago, maybe the medium market cap is approaching a billion, or maybe it's 900 or 800 million. I mean, like SMCI is a $40 billion company now, and that's in the Russell.
So, where I play, it's mostly sub 500 million. There are definitely some micro caps sprinkled in. I do selectively and artfully play in the mid-cap space periodically if I think there are great businesses that are on sale that I really love and there are a few in the portfolio now, but I just don't think you can make any money on the macro.
And so, I went to UMass Amherst undergrad, then I go to Babson at night, my MBA. And there were some great speakers. If anyone has ever been to Babson, it's in Wellesley, which is like one of the nicest, most wealthy places in America. And you have all of these like former CEOs and CFOs and Titans of industries. And so, a lot of them teach at night there, but it's directly across from Wellesley Country Club in the college, it's like, I don't know, a couple miles away. There was the Chief Investment Officer and she's still the Chief Investment Officer there, she started in February of 2009. She gave a great speech at Babson probably 2010 and she just talked about how the market timing doesn't work.
So, yeah, it's great that you sold the S&P at like 1,400 or 1,300, and then it bottomed at like 663 or something like that, but then you had to be right getting back in. And so, when you're in a dominant institution like a Buffett or these big mutual funds, you can't get in and out of billions of dollars’ worth of stock. Then you have all these tax implications.
So, that really stuck with me. Like Seth Klarman spoke about - the billionaire Value Investor - wrote Margin of Safety, which I read, just some great insights. You're not going to make money timing markets, right? If you're trying to do this for a career, for a long period of time, yeah, maybe you get a ’02 right, or you caught the peak of the Cathie Wood euphoria. And she made a brilliant, brilliant call with Tesla (TSLA). I mean, it was up 20x wherever she bought it and she did great, but it was tough sledding since then.
So, notwithstanding highs and lows and peaks and valleys, like it's fun to try to time markets, but the serious, serious money is made picking stocks, understanding businesses, and putting capital to work when you think you're getting paid to do it. So, I would just – as long as you keep some dry powder on the sidelines or you adjust your portfolio when the headwinds intensify or the conditions get more fierce, prices adjust and oftentimes in small caps they overshoot.
And so, if you really understand your companies and the management teams and your valuations, it's a tremendous opportunity within the context of a portfolio. And I run a pretty concentrated portfolio to aggressively double or triple down if you think the thesis is intact. And that's something that I do very, very frequently on the core, core names.
So, that's kind of why I just don't really pay any, I mean, I'm aware of it, but I just don't think you can make any money. I don't think there's much alpha. Again, notwithstanding if you had the foresight to say, the Fed's going to hike rates at the most dramatic pace in history. Yeah, if you were on the right side of that trade, sure, but it's hard to do that.
And then the problem is, you're trying to wake up and do that every day. And these tectonic shifts don't happen that often. So, at least in my view, similar like a Peter Lynch, I'm just trying to figure out businesses.
RS: So, talk to us a little bit about figuring out businesses and what you're looking at? We're deep in towards the end of earnings season. You mentioned how excited you get around them. What are you looking at or what are you understanding about the companies that you're looking at when you're looking at earnings season and what is it telling you maybe if it's telling you anything broader than that?
CCI: I'm not really looking for trends. I mean, obviously I'm aware that AI is exceptionally hot. Like we had a small position in SoundHound, (SOUN), at like $3.65 because my friend happened to spot the file that Nvidia had a position in and we bought somewhere like $3.60 and I think it was pushing $7 today. I think I made a quick 25%. So, because it's not that good a business, but it's just the AI excitement and wave that's obviously pretty obvious, but there's nothing unique that I can say.
There are no unique insights I have about the technology or the businesses or those trends. Like back in Q1 of 2020, I saw the housing renaissance. I wrote a piece on SA, which my whole playbook was this whole predicate on this housing renaissance, and it was a brilliant call that was worth tens of millions of dollars if I had monetized it better, but usually, I'm not a macro person. So, I don't think I have anything unique or interesting to say.
RS: Before we get into picking apart what you are looking at, the names that you are looking at and maybe earnings regarding specific names, you mentioned before a certain nuance between setting up your portfolio as an investor and stock picking. Do you want to discuss that a little bit?
CCI: So, I'll give you a perfect example. So, we were lucky enough to go to Orlando last week, school vacation week, because I have three kids, age 6 to 10. My wife works extremely hard. I work hard. I mean, I love what I do. And so, this company Root Inc. (NASDAQ:ROOT). It's an insurance company online that are tied to Carvana (NYSE:CVNA). And I've been following this company. I wrote a piece on SA on the free site. I don't know, it was maybe $10, $11. They got a buyout offer at 19.35.
They rejected it. They have A and B shares, A or B, I forget which the vice versa has super voting shares. So, whether the bid was legit or not, they wouldn't been able to do a tender to buy the company because they didn't have the super voting shares. So, the stock got to like $15. Market said it's not going to happen. Last week, Monday, the stock was like $8.60. Okay. I had a 5% position at $10.38 cost basis, right?
I knew earnings were out Wednesday night. We're at, I'm under the Hulk Coaster at Universal. We had just got off the Kong Coaster and we had a blast at Harry Potter. And by the way, as a quick aside, there's no recession in Orlando. The place was packed. The highways, the hotels, the theme parks. So anyway, so the numbers come out at 4:15. I read, I'm at Universal, kids are on a ride, I'm like trying to like multitask and synthesizing the letter.
I was like, Oh my God, these are incredible numbers. The company inflected to breakeven EBITDA, tremendous growth. They have 500 million of unembedded capital. It's complex, how you have to pledge the capital and everything.
But long story short, I'm sending a note to my subscriber group, group Second Wind Capital. Hey guys, I'm at Universal. I am adding 50% to 60% to my Root position. I'll read the conference call at 11 o'clock tonight when the kids go to bed. Okay, so I added at $9.75. This is February 21st. Stock closes at $10 in after hours. Read the conference call at like 11:00, along with like three other conference calls. It doesn't matter if I’m on vacation. I have to be on top of this stuff.
So, it was fantastic. I sent a note out at like 8:00 to the group and I was like, this was fantastic. This looks amazing, yadda yadda yadda. There's only 14.5 million shares.
So, two days later, stock is $14. So basis is like, I don't know, 10 because I added. And this is like 10% or 12% position, but I bought some CID, as I would say, and the other part of the book, so I'm overdrawn on my capital. Not margin, but this is family capital. And I have to keep a certain amount of capital.
So, say the portfolio is a million, I have to keep 400 in cash. It's just the rules I have with my investment committee. So, I'm overdrawn by 20,000 because I put, entering this year, 625,000 capital I can put to work, but I have 120 of these like C ideas. They're not even good ideas. Like they're marginal, just terrible portfolio management on my part, like admittedly. And so, sure enough, and I know the rules of the game and engagement with my committee, hey, we're overdrawn by 20,000. We're up 35% in Root. We were down entering the week 15%. Why don't we just print it? We'll cash it in, make a nice profit. It alleviates our condition. Okay, so I do.
Stock's 24 today. My thesis played out exactly as I thought. Okay. The price action was exactly as I thought and my spidey-sense said the stock’s going to 20. Yet, because my portfolio management is so bad, I'm selling something that I waited a year to happen at a 35% gain because I got 20% of the portfolio and C ideas at a down 10% or 15% at a huge opportunity cost.
Give you another example, a Children's Place (NASDAQ:PLCE), I called the short squeezes in the archives of the Second Wind Capital, right? The Saudis, the Group, I forget the name, the Mithaq, took their stake from 11% to 26%. And so, this is an issue, let me just quickly walk you through it, right? So, The Children's Place is a disaster, management's horrible, they've done such a bad job, they've misallocated capital. Stock was $19.75. They come out and say, we're going to trip our covenants. We've got a horrible Q4. Stock opens at Friday at 8.5. So, you're down a lot from 20 the night before to 8.5.
And I was watching, and I bought a bunch at 10.5 in pre-market. It opens at 8.5 in my face. I'm like, ooh, that's great. I'm down 8,000 in like 30 minutes. So, it ended up trading great, close to 12.5. Next Monday it goes to 16.5. Great. I took it off because I missed timed and made money. And I was kind of watching it. B. Riley downgrades the stock. It puts a $4 price target. This is stupid, right?
I read the report. I was like, I don't think this is that good a report. I think they have options. They own their DC. I don't think they're going bankrupt. This is probably the trough of the cycle. So, I picked some up. That night, I got totally lucky, Mithaq buys, I hope I'm not saying it incorrectly, buys a 25% position. I sent a note out to the group that next morning, hey guys, huge catalyst. I think we buy it. I think it's going to squeeze. I think it's, I called it, I said GameStop 2.0?
So, bought pretty aggressively at 13, stock gets 14.5 the next day, whatever. That night they filed, they took the stake up to 54%. I couldn't sleep that night. I was like, Oh my God, like this thing is going to go to 25 or 30. I was counting down the seconds from 6:45 to 07:00 to be able to buy stock at 7:00, literally. I couldn't sleep. It's like 2:00 in the morning, I'm staring at the wall saying like, “How high is this thing going to go.” So, bought another 2,000 shares at 16.50, sent an immediate alert to my group, guys this is huge yadda yadda yadda.
Idiot me, I was absolute muppet. I sell it at 22 at 10:30, at like 12 o'clock the stock hits 38. So, you're talking about like 3,500 shares. Yeah, we made great money on it, right? Our basis is like 14 or something, but the difference between selling at 22 and 32, you're not going to hit 38 on 3,500 shares or 30 – whatever it was, 3,000 shares, I forget exactly. That's a lot of money.
Same thing with Root. And I've done this so many times and I know better, but because my portfolio management is so poor, because I have to be in a lot of different things. My core positions are big. I don't really trade those like Arq, which we talked about, ADES, they changed the name to Arq (NASDAQ:ARQ). I still own a ton of it, right? Up big on that one, as well as Farm (NASDAQ:FARM) and some others.
So, I have a marginal like 20%, 30% of dry powder that I like to play around in. And because I get myself in trouble, you have these great thesis and you catch nice pieces of the move, but literally we're talking 90 minutes later, or in the case of Root, two days later, we're talking about ridiculous amounts of alpha, just missing them.
So, I'm 43, I've been doing this for, God knows how long. I'm literally obsessed. I'm more obsessed with this than 90% of the hedge fund managers making tens of millions of dollars. It's a sickness. I'm so obsessed with this stuff, but I just love the art and the intellectual curiosity. I love the game.
And it's like, I'm still making stupid mistakes. So that's what's so dynamic and exciting. You never know what's going to happen. Your week, your day, your quarter, your year can literally turn around in one or two ideas because small caps are so explosive. And that's why I don't short. Why would you short? Most you can make is 100%. You go long, you can make 3x, 4x, 5x, 10x.
Can't get any more candid than that.
RS: You mentioned earlier about investors would be wise to not try to time the market. And it strikes me that what you're talking about here is having to solve for human emotion, human fear, wanting what's in front of you as opposed to betting on something that hasn't yet come, even though you're just about certain that it's going to come.
Is there real solving for that? Are there people that have nerves of ice or ice in their veins or nerves of steel or whatever it is that they're able to do that, but for most people it's quite hard? Are you just not listening to your own best advice when you come to the money time that you're talking about and you're making good decisions, but you could be making amazing decisions and what human makes amazing decisions all the time?
CCI: I mean, look, Tom Brady has ice in his veins, Patrick Mahomes does, some of the NBA players, right, but those folks are making $50 million a year. So, yeah, I just think it's, I just need to be more disciplined in terms of what's a A idea, what's a B idea, completely avoid the C ideas. Even though the C ideas are 2% or 3% allocated, it's like 50/50 in gambling in a sense. They're sized so small, they're kind of, I don't want to say irrelevant, but my risk tolerance is so much higher than most people.
I try not to get above 15% max positions, but I regularly have 8% and 10% sized bets. So, I kind of look at these little 2% or 3%. I'm just kind of speculating or this makes sense and it may or may not play out, but the problem is, you have 5 or 6 of those and it's 15%, 18% and then all of a sudden that's taken up capital or maybe your bandwidth gets a little bit depleted, but I think the difference is that I am so well versed in a drawdown. Can I weave in a current example?
RS: Yeah, please do.
CCI: So, I don't even flinch. I'll give you something that has gone down 60% in my face in like three weeks. So, I did a ton of work on a free site on Carvana. It's still on the free site. The stock was between like 22 and 32. This was like 2022 and Vroom. And so, I owned them both and Carvana ends up squeezing to 58 and whatever, Vroom hit like 2.80 a couple of times. But doing an incredible amount of work on those companies, I worked out that I said, you know what, Vroom is toast.
They're just not going to be able to do it. Carvana has won this race. The scale that they have, they've won the consumer. They bought the auction business to sell at wholesale if they need to move inventory to because the depreciation schedule is accelerating, yadda yadda yadda.
So, long story short, I had done a ton of work on Vroom and we sold it in like the 2.20s. We made good money, but I thought it was going to be a home run, but whatever. Long story short, this year, January 22, Vroom comes out, ticker VRM comes out and they say, we're shutting down the e-commerce business, right? So, if you look at Vroom's balance sheet, they still have a ton of cash. They have a July 2026 convertible.
The face value left is $3.25. It trades at like $0.50. They've bought half of it back, but they also own this business called United Auto Credit Corp. They paid $315 million for it in February of 2022. They own CarStory, which is an AI business that, I don't know, I think they paid 100 million for it.
So, I'm looking at the balance sheet and I'm saying, all right, the book value is like 250 million. And at the time the market cap was like, I don't know, 35 million, something like that. So, I was like, I'm going to buy some of this. I know the company, you can't go bankrupt because the converts aren't due until July 2026. And if you read the language in the press release, they specifically say they want to maximize the value of the residual assets. And they specifically delineate that the money hemorrhaging e-commerce business that never scaled has ceased, notwithstanding some winddown costs and some severance, that business is going to – it stopped. They'll liquidate the inventory.
So, I said, okay. So, even if you take a severance assumption, you take a loss assumption to liquidate the 240 million, which is like 8,000 units. I'm like, this thing doubles, right? The thing literally, and this is before I did a 1 for 80 split a couple weeks ago, I bought it like $0.30. The thing - split adjusted it went down like 65% of my face. And they came out, then Carvana comes out, crushes numbers, the stock rips.
And within Carvana's letter, the February 26th letter on the fifth page on the footnote, they say that they bought 2,800 units from Vroom. So, I'm like, you know what, so split adjusted, I'm in this thing at like 24. So, I was aggressively adding it like, I don't know, 9 or 8.5 to 10 or 12. So, now I'm in it at like 15. And if I read the press releases, I'm like, they're not going bankrupt.
The debt's not due till July 2026. The debt tied with the floor plan financing is going to just offset the inventory, which they've converted to cash. I could paint a scenario, split adjusted, this thing's worth $50 to $75. Yesterday it was up 36%. I don't know what, it's probably down today, but my point is like, I don't even flinch. I'm down 65%, but I'm saying this doesn't make any sense because I'm synthesizing what management's saying.
I'm looking at the balance sheet. I'm looking at the different scenarios if you bought back the convert to different prices. And I got like I don’t care, because I just think the upside's big. Now, this is high risk. No question. But now this is like a 5% position. And so, I'm not really worried about what the stock chart looks like, what the price is doing or anything else.
Because I think the market doesn't understand it. And a lot of the big holders that were long time holders, they got absolutely crushing this thing. If you look at the SC13 filings, they all sold out the end of December. And so, literally it's the wild, wild west is no one real in this company. It's all day traders and hot money. And I think it's interesting. So, I don't know, we'll see, but I don't really care where the stock price is, because if I think, if I understand it fundamentally better, I'm not afraid to buy down 65% in my face in one month.
So, that risk threshold, that tolerance like, it's been so battle tested and hardened that it's probably an advantage, but I just don't think there are a lot of people that can do it. And I think that's one of the competitive advantages within the context of a portfolio, right? I'm saying that positions 5%, I’m not saying it’s 15% or some outrageous number, but I think I'm getting paid to take the risk. So, that's what I'm doing.
RS: What are some of the other names that you're looking at these days?
CCI: So, here's a really interesting name BuzzFeed, Okay, (NASDAQ:BZFD). This is fascinating, right? So, this was a SPAC. They own BuzzFeed, which they do like social stuff, quizzes, goofy stuff, but it's a pretty good following. And they own HuffPost, which is political, Arianna Huffington. And they have some other businesses.
So, last Monday, two Mondays ago, the stock had, let me just walk you through the capital stack, right? You got $150 million 15% convert due 2026. You had $33.8 million in the term and the term was super restrictive. Okay. So, you had to keep $25 million in cash. They only had $42 million in cash. So they had no liquidity. And the revenue is down like 20% this year.
In 2021, they did $41.5 million to EBITDA. They lost a little bit of EBITDA in 2022, but this year, because they already – when they filed this, I'll get to the next section, they're going to be about breakeven on EBITDA. But the problem is, when you have 15% debt at $150 million-plus you have the LIBOR plus 5, and the term is $27.5 million in interest expense.
So the equity was $0.22, you got 150 million shares outstanding, you have $32 million in market cap, enterprise value is like $170 million two weeks ago. Lo and behold, they sold Complex, I hope I'm not getting that wrong, for $108.6 million plus the buyer's paying $5.6 million in severance. Literally transforms the company overnight. Okay.
The company – there is the 70 million in revenue, probably breakeven, maybe low single digit EBITDA. They've issued the 8-K. They paid off the term, and there was also 17.1 million of letters of credit, right? So the restrictive cash issue is gone. Then they came out and paid $30.9 million of the 15% convert. And if you read the 8-K very closely, you've got to understand the subtext, right.
And here's where I think the key nuance the market is missing. They specifically say, right, because the term's gone, all those covenants are gone, the company also intends to amend the indenture governing the convertible notes to provide that 95% of net proceeds of future asset sales must be used to repay the convertible note. So if you're paying any attention, what does that mean?
This is what I think it means. One, they're going to sell another asset if they get a good price. And two, they want to – as a bargaining chip, they paid 20% of it down of the convert. There is probably -- guessing these things were trading way below par, right, you’re paying these things off at par, or maybe what you could even been one-on-one, I have to go look. And that kind of opens the door up to buybacks, or some other strategic thing.
So the stock gets to like $0.52 in afterhours that night, next morning it's trading $0.42 to $0.46, trades up to $0.46. Two days later, the stock is like $0.32 or something. I absolutely loaded up at like $0.36, right? And it's bouncing around, but the enterprise value of this business post-sale is like $85 million because you got $108.6 million, bankruptcy is off the table. And the other thing is that they also said, they've taken $23 million of cost out of the business in 2024. So they've taken a ton of cost out such that revenue is down 28% in 2023.
They still broke-even in EBITDA. That’s taken another $23 million of cost out. There's some interesting nuance on the AI front. I don't know if it's marketing sizzle. And you got an election year with HuffPost. So if this business stabilizes the top line on a dramatically lower cost structure, this thing could make positive EBITDA. The bankruptcy risk is off the table. And this is a key nuance within the 8-K. All you have to do is, read it and synthesize it, suggesting either there's more asset sales on the table, or perhaps, and this is my imagination, there could be a buyback.
And so yeah, the stock went from $0.22 to $0.52, all this hot money trades, 100 million shares, hot money trading in and out $0.5, fricking nonsense. And the dust settles and I'm like, oh my God, like I can buy this business for $0.36 at a $48 million market cap or $50 million market cap, with the debt out of the way.
And so that's what I'm talking about in terms of dumpster diving in the trash. You look at the stock chart, you see this thing is going to zero. I don't care about the stock chart. I'm literally synthesizing and I'm digging for diamonds, right, turning coal into diamonds. And I think I'm getting paid for it. I don't know. We'll find out, but it's stuff no one would ever even touch.
They'll say, oh, look at the stock chart, the revenue's down 28%. I don't care. I'm buying assets where I have multiple ways to make a lot of money on this trade, like a lot. Worst case, maybe I lose, I don't know, 25% or 30%, who the heck knows, but this thing is so asymmetric. And these opportunities, I find these once a month, I find stuff like this.
Because if you're doing the work, if you're reading the conference calls, SA has incredible news. I read all that stuff. I read the conference calls. I follow all these companies. And if you can synthesize and you can understand nuance, you understand art. You look at a hundred things, you may find 3 or 4 that are really, really interesting.
RS: And despite the asymmetry there, what would have you worried if it comes to pass, or what are you worried about?
CCI: Well, it's unknowable because the revenue declines have been so dramatic. If you read the conference calls, they talk about how there's been so much disruption and it's been like a winner take all with the big platforms like Google (GOOGL) and Meta (META) and whatnot. So the cost to attract traffic has been high and so the revenue has gone down, but so has the expenses kind of gone away. But at some point, you have to stabilize that top line and figure out how to grow again. But they do have a big audience, but you need to monetize it.
So they need to show stabilization of the top line. But if this thing does inflect, and it may not, if they can't arrest the declines in the top line, and that's problematic, then you could have EBITDA positive company with a completely cleaned up balance sheet. But no question, man, there's uncertainty as to what the trajectory of 2024 revenue is. Their forecast has been pretty poor in the past. And then, so what does that revenue and EBITDA look like?
But I think I'm getting paid at $0.35, wherever the heck the thing is trading at, I mean, whatever the day trade is doing with it from day-to-day, because I'm taking a step back and saying, well, wait a second. This is the – the stock was literally going to go bankrupt.
Now they've closed the sale. They got the cash. They paid off the covenants. Debt is not due till 2026. Took out huge cost cuts. And I haven't really modeled it to see what the uplift could be at HuffPost, but the most traffic and energy and both good and bad and the political election cycle is always this year. And I would think at least partially HuffPost should benefit from that engagement.
RS: Any other names that you want to get into? I'd also like to ask you what your updated thoughts are, if you have any updated thoughts to say about kind of previous names that you talked about on the podcast?
CCI: Yeah, sure. So let's quickly, so Arq is still my second biggest position. It was ADES, they've converted --they changed the name to Arq. CEO’s doing a fantastic job, own a ton of it, up nicely. The EPA PFAS hasn't formally been mandated. I would think it's coming, but even if it gets delayed, or diminished somehow, the market is very under supply.
The CEO, Bob Rasmus, I've spoken with him multiple times, he's a really sharp guy. They filed an 8-K like a week or two ago, which is -- I know the company so well. It's very bullish and no one's paying attention to. In their Red River plant in Louisiana, they have $150 million nameplate capacity on the power-activated carbon. Say you can run it at 90% capacity. In order to stem the operating, the cashflow burn, they did a big 15-year deal with Cabot, the carbon back, it's a $3 billion company out of Massachusetts. They had spun-off their coal business to private equity that was renamed Norit.
So we don't know exactly how much of the capacity is tied to that cost plus arrangement. So it's not attractive margins. But if you read the 8-K, it looks like Bob and this guy, he knows what he's doing. He – it appears that he restructured that contract with Norit in exchange for them selling granular activated, which is what that treats the water and that's where this market's going. And so market is not even paying attention, right? So I don't know what Q4 is going to look like.
I don't really care. I'm playing this thing. If they can deliver the 25 million pounds of granular activated at their CapEx budget on time, and he alluded to in the calls and press releases, he's going to try to sell out those 25 million pounds before it even gets produced. I like to -- wake me up at 5, right, if the EPA PFAS thing happens, wake me up at 10. Don't really care if it's 3.25 or 3.80. I own it at - I don't know, like upward, like mid-to-upward 1s or whatever because I bought so much. I want to triple down on it.
Farmer Brothers, name we talked about. The management team is fantastic. They had a good quarter. Thesis is in motion, right? The team is great. We talked to them a couple of weeks ago. They're doing what they said they were going to do. Again, they sold an asset to TreeHouse, different businesses than BuzzFeed, but they were going to go bankrupt. They had a ton of debt. They sold an asset, paid-off the debt, balance sheet's fine, but they're really turning this business around. I feel good about it. I think it should go to 5 plus. We'll see if they execute.
Red Robin (NASDAQ:RRGB), still own a ton of Red Robin. They report tomorrow night. Stock's been ridiculously volatile. Like it's, I forget what I bought it, like 13, it hit 15.80, and it hit 7, it's 12.80. It's the thing moves like for no reason. Big believer in the management team, G.J. Hart and Todd Wilson, ridiculously low valuation.
They need to prove that they can get traffic back. I think 2024 is the year they need to prove it. But this thing trades at like 4 times EV-to-EBITDA. I'm not counting the leases. They've sold some - they own 36 restaurants. I think they've sold like 18 and they are in the process is selling like the last 10 -- I don't know, they're going to keep a couple. But they're doing everything they said they were going to do. Valuation is crazy, but literally, the stock moves 3 points on nothing. So we'll find out there.
I think those were the, oh, (YTEN), that was a crazy binary thing. They're not going to go bankrupt, or at least not near term. They had a gun into their head literally. They did sell a $3 million licensing deal on the Camelina and they still have the Omega 3 piece. It's still not out of the woods, but it had - it maimed like a month ago to like $0.55, $0.58. I don't even know why. It's trading right about $0.27, or the $0.28 what we talked about originally. I still own some, but not as much. It's highly risky still, but the valuation is really, really low. I think those were the key things that we talked about.
RS: Since this is going to come out after earnings, what are you expecting/hoping for from Red Robin?
CCI: So they guided to $77.5 million EBITDA, like $1. 3 million of revenue. I'm hoping that the Q4 was in line, they're somewhere in the vicinity of $75 million. What the street really needs to see though is that they're upbeat about 2024. And so in terms of the traffic and in terms of growing EBITDA and then on a path to refinance the debt, because they're paying 12% on the debt, it's not that levered, but it's in terms of turns leverage, but again, it's very expensive.
So they just need to show that they're blocking and tackling. And so say, hopefully say, this is tomorrow night, the Q4 is in line, they do $70 million, $75 million -- I'm sorry, $75 million to $78.5 million. Say it's somewhere in line. I mean, the stock's way down. So in line should be, get back to 11, but it's going to really hinge on guidance in 2024. I'm hoping it's like 85 million plus. And there's tangible evidence that the strategy's working.
If that happens and it may not, the stock should be 10, 12, 15. I mean, if they really can show traffic comes back, it'd be 15 in a blink. It literally blink, it's 15. But that may be overly optimistic. But what happened is, last week there was a block of 353,000 shares, only like 15.5 million shares outstanding. I don't know who came out of it, but Stiefel had the block and it wasn't placed well. It was priced at like 9.36.
I think some hot money bought it, looking to trade it for $0.50. The stock went the other way and it got down to the 8 and I bought more at 8.5. And so we'll see. So I don't know, but in it to win it. And I think I'm getting paid. The valuation is ridiculously low, they have scale, it's a real brand, there's tangible progress in the strategy, management's really good. We'll find out. So it's still pretty shorted too. So I don't know what the heck the shorts are thinking. But can I weave one more into, we have time or we are over the time?
RS: Yeah. Yeah. Yeah. Go crazy.
CCI: So last one. So Encore Wire, I wrote this up – ticker is (WIRE). I wrote this thing up, I don't know, November of 2022. Okay. So this management team is unbelievable, right? These are Texas guys, these guys are really sharp. This guy, Daniel Jones, the CEO, he's been doing this like 30 years. Yeah, this guy's a pro, extremely intelligent. And when I wrote the piece, the stock was $142 and they had incredible 2022. But everyone knew the copper spreads had peaked. ]
So they do, they sell insulated copper wiring to huge industrial wholesale customers. And they have the best customer service. They have great supplier relationships on the copper side. They take the metal, they bend it, they shape it, and they get it coast to coast at the fastest, at the best service turns. So think of like W. W. Grainger in a sense, not as just -- W. W. Grainger is much more sophisticated like an HVAC side, but incredible customer service, right? You have these huge projects, data centers and government buildings, industrial, 25% residential, yadda yadda yadda.
Long story short, within that article, I said the consensus estimates was -- I have to look here, I don't know, four something on EBITDA. And I said, I'm betting the over, right, I'm betting the over. These guys are fantastic and the market just doesn't get this.
Lo and behold, they announced two weeks ago the numbers and it was well ahead of consensus. They've bought back a ton of stock. But what's so amazing to me, the short interest comes out tonight after the bell. But there's like 16 million fully diluted shares of this thing. And as of the 31st of January, there's like 3.3 million shares sold short. Company has got $500 million in cash. They did $18 in EPS. They're probably going to do it again this year. Right? And they took tremendous market share. If you synthesize the conference calls, like these guys are A plus operators. The CEO owns 750,000 shares of the stock.
Like who the heck has short this company? And if you look at the volume, like a trade, it's outside of like the pre-earnings day and then like post two, three days, it trades like 50,000 shares or maybe 100,000 shares. You'd think trades on appointment. So how do you physically cover, I'm sorry, so the 2023 EBITDA was like 418 million, and I think they did over 500 million. I wrote it up for the group after the look. I don't want to get too far off. They crushed that number.
So how do you cover, what the heck is a short thesis? How do you cover 3.3 million shares? The stock's up 80 points in your face. The management team's phenomenal. They have the best customer service. They have the best relationships. Copper's extremely tight. There's a ton of infrastructure dollars going into copper. There's 3 days of physical supply of copper. It's not rich on any metric. Right? Who the heck is short this thing?
That you could wake up one day, this thing could be $400. Just like Avis Budget when it squeezed from like 2.25 like, like 500, there was a couple of funds that blew up because I have a friend that's, I'm not going to say the company, but I know for a fact that like that a fund blew up. So that's a name that I own a lot of.
And it's just like, it's like a 3.6 billion market cap, or something like that, but they have 500 million in cash, just an incredible business. Market got it completely wrong. And I love betting against the shorts. I hate the shorts. I really do. And so anytime I can bet against them, why I think it makes sense, because they are pretty smart, some of these people. And so I'm not like willy nilly long something just because it's highly shorted. I have to have a fundamental thesis, but when I do, and it lines up, I love betting against the shorts. Because I just don't like the profession.
RS: Very good. Courage & Conviction Investing, another great conversation. Anything to say to investors, subscribers, potential subscribers about what's happening at Second Wind Capital and what you have going on over there?
CCI: If you love small caps and you're serious about this, whether you have a $5,000 account and you're in college or high school, right, or you have a $10 million or $20 million account, the value add is ridiculously off the charts, but you have to be committed to small caps and you have to love small caps and you have to understand drawdowns and you have to understand highs and lows and the depths of the valley and the pinnacle of watching a Root, which I messed up, go from 8.5 to 25, or Children's Place short squeeze from 13 to 38, and again, I messed it up, but you're going to get some stuff wrong.
But I don't think, I have friends that are in it really wealthy. And they're like, I don't even know how you'd find the time to synthesize all these companies and do all this stuff.
And so what's incredible while at Seeking Alpha is, we're literally bringing something at a very accessible point $600 a year, right. It's like $50, I can't even tell you how much money we spent in Orlando for lunch and parks and everything else. The value add is so ridiculous. But you can't just say, oh, you know, I tried it for a month and I bought a stock and I went down 25% and this guy's an idiot. Like I am going to be doing this till I die like Warren Buffett because I love it.
And I love to write and to be candid and share the feelings, the ups and the downs. We have a great live chat group. We've got a really good group of smart people, it can get a little heated, it can get a little lively, more so than probably every other service because it's the wild west. So you got to be a little crazy in that sense. But then again, you're in small caps. So it's kind of par for the course. Like we're not buying Nvidia and we're not buying Microsoft (MSFT) and Google and Amazon.
So anyway, Seeking Alpha is an incredible resource for retail that they would have never have access to it. The news is incredible, how well they do with the conference calls. It's a great resource. And so the reason I'm a part of it is because I love, I really do, helping the average person that's not a jerk. Like I hate dealing with jerks. And so unfortunately you get a few of those, but the genuinely nice people that want to learn, that want to engage, it's rewarding intellectually. And that's why I do it.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
