TIP758: Current Market Conditions & Investment Opportunities w/ Derek Pilecki

24:58And how do you see these interest rate cuts impacting the economy? Interest rates are restrictive at this level. I think we have a bifurcated economy. We have the AI, non-interest rate related sectors. There's humming along just fine. And then we have interest rate related sectors, whether it's housing or autos that are struggling. And so existing home sales were bouncing here just below 4 million units a year. Whereas in 2021, I think 5.5 million existing homes were sold. And also real estate development has really struggled with higher rates. Developers just haven't wanted to borrow at 8 % rates.

25:36to build new apartments or build new warehouses or whatever we have. So the construction economy is lower. And so I think we really need rate cuts to help the interest rate sensitive parts of the economy. I'm frustrated with the conversation around inflation. I think there are three big parts of the economy that are driving persistent inflation, and none of them can get solved by higher rates. When I think about it, it's housing, college education, and healthcare. Higher rates is not going to make healthcare prices go down or the growth of healthcare prices go down. Neither is it going to affect college education.

26:13And the housing, with the land use regulations and the nimbyism and the zoning practices and how long it takes to get things entitled, higher rates aren't going to fix those problems. In fact, it makes them worse. If I had a slowdown in apartment construction so how does that get lower housing prices if we're not going to build apartments and so i think there is a disconnect here between you know rates and inflation and what's really going to change inflation if we want to get inflation down the fed can't fix those problems how do we fix those problems like hospital administration staff and health care has exploded compared to the number of doctors like why is there so much more bureaucracy on health care college education and same thing administrators at colleges have exploded like compared to teachers.

26:56We have so much technological improvements, but we teach the same number of college kids. The big elite colleges emit the same number of students in 2025 as they did in 1990. That's crazy. We can deliver education so cheaply now. Why do we have capacity constraints on that? And prices would just come down if we could just use online teaching to educate more people. So higher rates are not going to fix those inflation problems. I think there's also huge deflationary forces in the economy. The internet is still deflationary. Globalization. Globalization is maybe having a little bit of pullback with the tariffs and the immigration changes, but the internet is still a huge deflationary force.

27:35And I think AI is going to be a huge deflationary force in the economy. So I think rates should be lower. I don't think it's going to create too much speculation. Maybe there'll be a little speculation, but the IPO market's been dead for four years. I really don't think there's a problem at the moment. I know that people are worried about private credit or some sectors like that, but I really don't think that inflation is going to rocket just because they cut rates two times the rest of the year. I believe that Powell said that he was really looking at the job market when it came to lower interest rates, wanting to help stimulate the economy in light of a tighter labor market.

28:13What's really puzzled me over the past few years is how real estate has reacted to mortgage rates going up so much. In 2020, I believe people were getting interest rates below 3%. And then just recently, you see some mortgage rates are around 7%. That is a significant increase in the cost of interest, yet home prices overall haven't significantly come down. And part of that's just there's not a lot of activity. Some of the more pricier markets like Austin, LA, and some of those markets have come down a little bit. How do you think the interest rate cuts are going to impact mortgage rates and maybe the real estate market overall?

28:53Yeah, I think 30-year mortgages are around six and a quarter today. And so I think if we get a little bit of steeper yield curve, like the short end keeps going down, I think people could potentially switch into 5-1 arms. And I think 5-1 arms will get down to below 5.5, maybe 5%. And I think that'll improve some activity. I think we have a lot of regional differences, like you mentioned, Austin and LA. I think any of the COVID boom markets, Central Florida, Nashville, Boise, Phoenix, all boom during COVID. And I think they're all pulling back here. So I think the inventories are increasing. I think prices at the margin are down a tick.

29:34I think they'll continue to tick lower because there's a lot of supply. A lot of people have to move back to work in the office. They can't remote in to work anymore. And then we see New England, the inventory in New England is almost non-existent as far as homes. And so it's, you know, that's super interesting to me. Like for a long time, New England, people were leaving New England and now it's, it's hard to find a home in New England. And so I don't know how that gets resolved. I don't know if there's going to be a lot of building in New England or how that gets resolved. But I think some of those COVID boom markets will continue to trend a little bit lower.

30:06Hopefully they'll get saved by lower rates and there'll be more activity, but it's hard to tell how things will move. But I think that it's a likelihood prices are lower. Maybe they don't go as low with lower rates. Robert Leonard Jumping back to your recent performance, you're one of the few managers I've chatted with who has been pretty successful with shorting stocks. At the end of 2024, you had some fairly significant short positions relative to the overall portfolio. And during that year, both your longs and your shorts outperformed one of your benchmarks, the financials index. What were some of the key reasons for your shorts doing so well in a market that's going up?

30:47Shorting's hard. I think shorting's been an iterative improvement over the years. And so trying to respect momentum is when shorts are going against me. As a value investor, you want to short expensive stocks, but those can also be stocks that have momentum. It's trying to find a mix of stocks that are just not good values and stocks that have headwinds against them. And so just trying to constantly improve. I think the shorting environment's been hard for most of the history of the fund. A lot of the bad financial companies got wiped out during the financial crisis. And so any company that survived the financial crisis had some staying power, right?

31:28And so there weren't a ton of shorts there. But during the SPAC craze of 2021, there was a lot of new financial companies that came public, a lot of mortgage companies, some fintechs that came public that were bad values. And so that improved the opportunity set. And other than utilizing shorts, one of the more contrarian parts of your strategy is that you're able to get comfortable with some holdings in the portfolio using some leverage on the balance sheet. In the good times, this can look really good. But if we ever come across a major crisis, then that's when these highly leveraged businesses can find themselves into trouble.

32:03So how do you think about managing leverage at the company level so you don't get caught on the wrong side of things when the crisis inevitably hits? I've made money investing in highly leveraged companies. It's not super easy. I guess I'm comfortable investing in a stock and not being guaranteed I'm going to make money. I feel like I have a higher tolerance to own losers than other managers, maybe. So I don't know how things are going to turn out. and leverage losing control of leverage or having an adverse outcome due to leverage is certainly a way to lose money and i just i've been comfortable with that risk reward of the upside that the leverage presents versus you know the potential downside but you know they don't all work out and they can quickly unravel but it also keeps management focused and so like when they have high leverage they tend not to do dumb things because they know their margin of safety is low So I don't recommend that for everyone, but that can be a benefit of investing in companies with higher leverage.

33:04An example right now is some of the fintech companies. They've bought back stock and levered up to do it. And so they've stopped making acquisitions to pay down the debt. So hopefully that works out for them. And as a financials fund, do you benchmark yourself against the S &P 1500 financials as well as the S &P 500? So when I look at the top holdings in the financials index, this includes companies like Berkshire Hathaway, Visa, MasterCard, and the big banks. And I was actually surprised to see that this index was up nearly 30 % in 2024, given the backdrop of higher interest rates. I would expect that you sort of highlighted the difficult environment for the smaller banks of an inverted yield curve.

33:46So I would expect generally higher interest rates would lead to slower loan growth for companies like JP Morgan, Bank of America, but the big banks seem to have done quite well the past 12 to 18 months. So talk about some of the dynamics that play here in the industry. Yeah. So the big banks got a huge gift from Silicon Valley and First Republic failing. There was a flight to quality in the biggest banks because of their regulatory position that they're too big to fail. And so the people, depositors are moving deposits and accounts to the big banks. So they've had this tailwind of the low cost deposit growth, which is a big win.

34:23And then there was a little bit of watering down of the Basel III capital rules. So there was a set of capital standards that were proposed for the big banks that were onerous and the stocks were priced because that capital rule was going to get implemented. And then it got reduced. And so the banks rallied when that capital rule got reduced. And then they also had the benefit bit of identity last year. I think they responded well to incoming Republican administration, thinking that there'll be a deregulatory environment and more M &A. And so I think some of the stories I hear from bankers about how the regulators act during the previous administration.

35:01I think that a lot of those behind the scenes pressures get lifted with the current administration. So I think the banks reacted favorably that they can focus more on business. You're right about long growth, like long growth with higher rates has been lackluster. And hopefully that's one of the things that we'll see going forward is accelerated loan growth. But when rates went up, borrowers are just like, I'm used to paying 5%. Now you're asking me to pay 8%. I just don't want the loan. And plus, a lot of borrowers had liquidity from the COVID boom. And so they just use their own internal liquidity rather than borrowing at high rates from the banks.

35:34But you're right, the loan growth has been not that exciting. But the capital rules and the potential deregulation have helped the big banks. Yeah, it's interesting that you highlight the flights of quality and this capital and some of these deposits going towards the big banks, because you've highlighted that you're overweight, the regional banks. And I sort of think of regional banks as these mid-sized banks. They're bigger than the smaller community banks, but smaller than the largest national banks like J.B. Morgan, Bank of America. So one of your top holdings is First Citizens Bank shares, which we discussed back on episode 669.

36:08They're one of the larger regional banks, family-run, very good company and very good compounder. So talk more about what makes the regional banks an attractive hunting ground for you in light of the comments you've just made of this flight of deposits to the bigger banks. Yeah, I think regional banks are interesting because the valuations are so much lower than the big banks. So normally the big banks are the cheapest and followed by mid caps and then small caps are the most expensive due to M &A potential better growth prospects. But right now we're inverted, right? So the big banks are the most expensive, mid caps are in the middle, and the small banks are the cheapest.

36:46And so I think that gets fixed with the change in the slope of the yield curve. I think a steeper yield curve will make the smaller banks more profitable because they have a higher percentage of the revenue from spread income, where the big banks have more fee income. And so I think that increase in spread income, there's not a cost associated with it. So if their margins expand, they don't pay their people more, they may pay the executives bigger bonuses, but for the most part, most of that revenue drops to the bottom line and it'll have a bigger effect on the small banks. And then I also expect the valuation differentials to go back to normal where the smaller banks have higher valuations than the big banks.

37:23But there's definitely economies of scale in banking. So we really need more M &A. We still have 4 ,000 banks in the country. When I first got in the business, we had 13 ,000 banks. We're down to 4 ,000. We're the only economy in the world that has many financial institutions like most of the Canada has a dozen or you know five large ones but you know a dozen at most banks and so we'll see more consolidation and JP Morgan's a remarkable company like they're the biggest bank and they're taking market share so they entered Boston Philadelphia and DC without buying any banks in those cities they just started opening branches and they're just taking share they I think they even opened a branch in North Dakota so now they They have a branch in all 50 states.

38:06Their tech platform, their tech, they can spend more money and they have the best apps and they're just taking share. They're easy to do business with. And so B of A is taking share. Some of that's from Wells Fargo. Wells Fargo has had this asset cap, so they couldn't grow. But they're also taking the big banks. The big two are taking share from the small mid-cap banks. If we don't have more consolidation, it's just we're going to get consolidation through organic growth of JP Morgan and B of A. And so we need the Metcalf banks to get together to have real competitors to those companies. Robert Leonard It's interesting you highlighted that some of the big banks are still opening branches.

38:42I think back to my dad, he loves stopping by his small community bank. I don't know how often, probably at least once a week, he's stopping by just to say hi to his banker and whatnot. And I'll occasionally go to a bank just to pick up cash, the physical location, it's convenient, not too far from me. People that just are getting out of college, I'd imagine a lot of them either haven't been to a physical branch by their own will, or they just use the online banking and whatnot. How do you see the online banking market developing? I know there's a lot of online banks being launched. It seems like every year I see a new one come out.

39:17So talk more about how that space is developing. Yeah. I mean, you're right. Branch traffic has declined every year since 2010. So less people are going to branches. Even though the big banks are opening branches, they're in new geographies. I think if you look at DC, I think JP Morgan has about 20, 25 branches across the whole city of DC. It's in Virginia, Maryland, DC. And I would guess 20 years ago, if they entered DC, they'd probably have to have 80 branches. And so now you don't need to go to a branch within two miles because you only go to the branch a few times a year. You could drive 10 miles to drive to the JP Morgan branch because you only do it twice a year.

39:57So you can cover more geographies with fewer. And so that increases the competitive intensity of the industry. We used to have interstate branching laws where JP Morgan couldn't just enter Virginia. When those interstate branching laws went down, banks could enter new geographies without buying banks or just letting them go into any geography at all. So the competitive intensity is increasing in banking. I mean, online banks are, I guess, they're real threats to profitability of banking. Like they're paying higher rates. They're easy to do business with. There's ways that, you know, they give you credit on your deposits faster than the legacy banks.

40:33The online banks are just going to take share. So it's another way to increase the competitive intensity of banking. And when I say increase competitive intensity, that means margins going down, returns going down. So, I mean, I think the long-term trajectory for banking is lower returns. that's why banks aren't the greatest thing like i run a financials fund but i would never just say hey let's go invest in the kre together for the next 20 years like that's not a great strategy like there's some banks that are well run we can invest in them we can invest in banks when they're cheap we can't just invest in the average bank for the next 20 years like that's just it's not software it's not semiconductors it's an average to below average industry that where returns are going down.

41:14So I'm just aware of that. I'm not a permeable on banks. There's times to own them. I think right now is the time to own them, but it's not always the case. I almost wonder if you're not giving the banking sector enough credit. I know you find a lot of good banks that are out there and you look at the large banks, the midsize and the small ones, and you say, hey, there's quality banks within all these segments, but I'm going to buy the cheap ones. That's what I also appreciate about your strategy is looking for potential and opportunities for multiple expansion and generating returns for your investors.

41:48It seems that within your fund, you'll have, say, the really high quality businesses, like the first citizens of the world that are bound to grow for a really long time, might not be the cheapest company either. And then you also have, we've mentioned plenty of stocks today that are just too cheap. Once they reach a certain valuation, you're happy to part ways with them. What do you think that sort of mix looks like in your portfolio of some of these high quality names you can see yourself owning five, 10 years from now and other names that you'd be happy to part ways with if the valuation reached a certain level.

42:20I mean, I think it's like 30 or 40 % names that I kind of think of as like enduring, I'm going to hold them for a long time. And then 60 or 70%, it's like their first sale at the right price. And keep that turnover, the portfolio, moving on to the next cheap stock or cheap sector within financials going. Yeah, I think that's probably the mix. before I started my fund, I worked at GCM. And the PM that I worked for is a guy named Herb Ellers. And he used to preach, if you ever own a stock in a great company, never sell it. And so very much a Charlie Munger investment style. So I do keep some of my portfolio in stocks that I'm like, I just want to own the stock for a long time.

42:59So let's talk about Robinhood. So I feel that only a true master of their craft can make money shorting a stock, and then turn around not too long after and go long before it becomes a multi-bagger. So that's exactly what you did with Robinhood. This is a stock you bought in November of 2023. And you actually still hold a smaller position today, not as big as it once was. But since November of 23, the stock is up over 14 times in less than two years. It's just not very common. You see a stock go up that much, let alone own a stock that goes up that much. So let's walk through this story. It was in 2021, Robinhood went public.

43:38And at some point after that, you ended up going short the stock. So talk about what you were seeing at that time. Yeah. I mean, I think it was a response to the environment. There was a lot of speculation. The SPACs were coming public. There was a lot of junkie companies coming public and a lot of inflated valuations and just a speculative frenzy in 2021. And so shorting Robinhood, I thought the valuation compared to where they were in their business was high. And they were losing a ton of money and the valuation was high. And I thought the speculative bubble was going to recede. And so it was an easy way for me to participate in the downside there.

44:16And I knew they had$8 a share in cash and I shorted it from$25 down to$10. And then at$10, with$8 a share in cash, I was like, the short's done. But I continued to follow the company. I like brokerage businesses, and I was impressed with the changes they were making to the business. They put up a couple of profitable quarters by reducing costs, introducing some new products. I really liked their product roadmap for introducing new products. I was like, they could accelerate customer growth with all these new products. And then I just got an opportunity. They reported the Q3 of 23 earnings, and there were two environmental reasons why they missed the quarter.

44:53and I just thought they were temporary and it traded down to the$8 where I bought it. And they still had that$8 of sharing cash. So it was just being flexible and understanding the business. Also, technically, it had built a big base. It had covered in March of 22. And from March of 22 to November of 23, the stock kind of was flattish and it had built that long base. So I got fortunate that it took off soon after I bought it. And that was just good timing, good luck. It had built that base, didn't think there was much downside. had it kind of treaded water, put in its, sparked its time to make it move higher.

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47:211-800-CONTACTS. You know, what really stands out to me here in your approach, and I think a lot of, you know, the alpha you're generating in the fund is just being aware of sentiment, right? You can have a great company that isn't a great stock to buy, and you can have an average company that can be a great buy because the sentiment is just so bad. So in 2021, sentiment overall across any technology stock was just too much. And it was assuming you believe that markets are rational in the long run, then it can make for a good short in your case. And on the other side, when a good company just gets way too far beaten down, it's trading near a tangible book value that can make for a lot of asymmetry because the sentiment is just so bad.

48:08So talk more about you buying it in November of 23, near tangible book value, and then how the company developed since then and became a huge multi-bagger. A couple of weeks after I bought the stock, the SEC approved the Bitcoin ETF. So the crypto market started taking off. And so Robinhood is one of the few ways to participate in the crypto market without owning Bitcoin directly. And so they got some benefit there. And then their product innovations, they had customer growth accelerate. Customer deposits went from 18 % of assets to 40 % of assets during 2024, it was. And so that really got growth going and they continued to introduce new products and activity ramped up and then crypto trading exploded after the election.

48:55They've continued to introduce new products. And some of the products are a little bit shocking that until the fall of 2024, you couldn't open up a joint account with your spouse. Each had to have individual accounts. So some of the products were not rocket science. They're just getting around to all the things you need to offer as a brokerage firm. But they introduced futures trading. I think they're just introducing short selling in the coming days. And then this goes back to, I held onto the stock for a long time. I started hedging it late last year and through this year, and I'm almost completely out of position.

49:27I still have a tag end piece if it becomes a meme stock and I'll benefit a little bit, but you could argue it already has become a meme stock to some extent. But it's just avoiding that value investor mistake of selling too early. Hit my price target, I'm out. The market can take stocks a lot higher than you think. And then also the stock got up to, I think it was like$30 late last year. I think earnings estimates were about$1.50. And I looked at the models and I could get the$3 in 2026. And so I was like, okay, the stock's way up at 30 bucks, but I can see in two years, it can earn three bucks, 10 times earnings that even though it's made a big move, there's still a lot of upside here.

50:09So my three bucks estimate for 2026 had some pretty bullish assumptions about customer growth and training activity. And so I'm not saying$3 is the base case, but I'm just saying like, okay, well, what are other people seeing? What's the potential upside? And just being comfortable of like, okay, ignore where the stock's been, where could it go? What are people looking at it? People who are buying the stock at these highs, what are they thinking? And just being comfortable with momentum and stocks that are moving higher probably continue to move higher. That's an uncomfortable position for a value investor, right?

50:42Just letting stocks go up. But that's what you have to do to keep your returns intact. Yeah. And the past couple of years, I think one of the lessons for me is just understanding how powerful operating leverage can be. So a few examples that come to mind of some businesses that maybe don't care about profitability since they're early on in their life cycle. And then once they built up their customer base, then they can start to pull these profit levers. So a few that come to mind are Uber, Spotify, and Robinhood. So looking at Robinhood's financials, for example, if we just look at the net income line, 2021, they were losing over$3 billion.

51:192022, they're losing a billion. But in the last 12 months, net income is 1.7 billion. So as revenue is growing, the profit side can really ramp up significantly since they can have a low cost base, right? Since it's very much a tech platform. So that's one of the lessons I think that I get from looking at a stock like Robinhood when the market doesn't appreciate the level of operating leverage and just being patient with letting that profitability come through the bottom line. I think that's well put. There's another stock that I have that has a lot of operating leverage and a lot of financial leverage is Anywhere Real Estate.

51:54And this is the old Realogy. They own Caldwell Banker and they run it as a fixed cost business. And then the commissions are variable based on volumes of real estate transactions. So this stock is way down from where it was a few years ago when the housing market was booming. And I think people are just coming around to the fact of like, okay, you have financial leverage on top of operating leverage, and the EBITDA numbers could explode here if we get back to 5 million units of existing home sales. I agree with you, operating leverage is a lot of times underlooked as a potential upside. I also wanted to be sure to mention Interactive Brokers.

52:31I'm a very happy customer of Interactive Brokers. They're in the discount broker business, in the broker business just like Robinhood is. and they are founder led and their founder owns a significant part of this business. And I believe that's one of the concerns with this business, I think, is what's going to happen with a lot of the shares he owns. But I've been a bit disappointed not to participate in this stock's spectacular run over the past couple of years. They've been organically growing their customer counts over the years and the market's finally taken notice. I'd be curious to get your thoughts on interactive brokers?

53:07I don't believe you've owned it, but you have looked at it based on what you've said off air. Yeah, I do own a few shares in the mutual fund that I manage, but I don't own it in the hedge fund. Unfortunately, it just was a little bit too disciplined on the price I was willing to pay and it ran away from me. I was looking at it December of 23 after I bought Robinhood and it's been a phenomenal stock and it's a great business. I've been a customer too. I use it as a prime broker. They've been super helpful in helping me with my business. I think they keep costs low. I think the fixed cost nature of their platform gives them a lot of operating leverage.

53:40I think it's a conservative balance sheet. I think their credit rating is higher than Morgan Stanley's. And so I think that's super interesting as far as a safe place to custody assets. I think it's very efficient and it's a great business. I wanted to also be sure to touch on WEX Inc. So in your most recent letter, you highlighted your thesis on this company. And so talk a little bit about Wex Inc. What's this company do? And what's your thesis on adding it to the portfolio? Yeah. So Wex is a financial technology company. They issue fuel cards. So they have three businesses. 50 % of the business is fuel cards.

54:18You own a fleet of trucks with your service business. You give all your drivers a Wex fuel card. They have to type in a password and the car mileage or the truck mileage when they get gas and just reduces waste or shrinkage on your part as owning a small company fleet. They're not filling up their personal car with the gas guard. And they give you a lot of data of how to evaluate your drivers. And so that's been a good business. They've used some of the cash from that business. They bought two other businesses. They have a health savings account business, which is a high multiple business that provides low-cost deposits.

54:52They actually have a bank where the low cost deposits from the health savings accounts fund the receivables from the fuel card business. So there's nice integration there. And then they have a corporate payments business, which has had some struggles. The corporate payments is about 20 % of the business and half of that 20 % is servicing online travel agents. And both Expedia and Booking.com have brought some business in-house. And so that's been a little bit of struggle. But the stock has not done anything for eight years. And so the valuations come way in. it's trading for eight times even. They did a tender offer at$154 a share earlier this year.

55:28They've publicly stated they're not making any more acquisitions because they're going to focus their free cash flow on paying down this debt that they took out, the buyback shares. The CEO bought some shares. There's been an activist involved for about three years. And so I feel like the activist is watching management and the management's aware of the activist. So they're not going to do anything that is non-shareholder friendly. And I think valuations come back up. And so it was weird, like they closed the tender at the end of March. And then with Liberation Day, the stock traded through the tender price.

55:56And so it traded down to$120 a share, which was kind of crazy to me, given that the company just bought back 10 % of the shares at 154. So it's up from that. The stock's trading around 170, 175 right now. It's still eight times EBITDA. I think we just need some more time. I think management's also doing a good thing of reinvesting a little bit in the business. they've started spending some more marketing dollars in the shield card business and have also hired some salespeople in the other two businesses. I think revenue growth is going to accelerate here, not in a huge fashion, but I think at the margin, it's going to be positive.

56:29I just think the valuation's too low. A year ago, the stock was at$240. We could easily get back there with no problem. Yeah. I think some of the things that stands out to me about this company, I just think being in the financial space, you sort of benefit from having the opportunity to just look at a lot of boring businesses that aren't doing a lot right. I mean, WEX, it's not a high revenue grower. You're not seeing exploding earnings like you are at Robinhood, but you are seeing some things happening under the hood where an activist is getting involved. You're seeing this catalyst of more share repurchases and whatnot.

57:03Like you mentioned, the stock trading down to 120. Sometimes the market just does some silly things just on short-term concerns, whether it's the economy, concerns around fuel prices dropping, fuel volumes dropping and whatnot. And someone like you coming in and taking advantage of those unique opportunities. Yeah. I mean, it's a$4 billion market cap company. It's not the largest company. People don't talk about it, right? I mean, the stock hasn't done anything. It's flat for seven years. There's a lot of investor apathy about it. And so I think the tender offer for me was really what sparked taking another look of like, okay, that's a special situation type event of buying back that much in stock and really kind of putting the handcuffs on themselves.

57:48You can't do anything with your cash except pay down debt at that point. And so that's a real stake in the ground. So I think that's the catalyst. And a lot of people don't respond to events like tender offers that are clear signals that there's value there. Tender offers are something, to my knowledge, don't happen all too often. For those in the audience that might not be familiar. Could you just explain sort of how this works and what a tender offer is? Yeah. So the stock was$170 and management wanted to buy back a bunch of stock. And so instead of going to a brokerage firm and buying shares every day in the market, they said, okay, we're going to make a tender offer.

58:28They make a filing with the SEC and they say, okay, a month from now, we're going to buy 10 % of the company, this many shares, and we're going to buy somewhere in the price between$150 and$170. And investors can go to their broker and say, I would be willing to tender my shares at$160 or$150 or$170. And then you look at what price is the clearing price to buy all 10 % of the company's shares. And in this situation, it was 154. So relatively hit the low end of the range. So investors, shareholders were willing to give up their shares at relatively low price. So it just shows that management and the shareholders had different views of the value of the company.

59:09But I think that to buy back that much of the stock in one swoop, the management had to be super confident that they weren't overpaying. And I think that was a pretty strong signal that they thought in that range of 150 to 170, they were getting a good deal of buying in those shares. Buying back that much stock helps EPS growth because you have fewer shares of the same net income. The valuation was low enough that the cost of the debt to fund the tender offer makes the transaction was low enough that it was accretive to earnings growth. But there aren't that many tender offers out there. There's a handful each year, but it's a good source of ideas because companies don't tend to buy back that much stock unless they think the stock's undervalued.

59:51That's not always the case. Not all tender offers work as far as owning the stock, but a lot of times they do. In fact, I think I first learned about tender offers when General Dynamics in the early 90s did a tender offer and Buffett bought the stock because of the tender offer. He thought that was such a strong signal that General Dynamics stock was cheap. When they announced the tender offer, he bought the stock. Preston Pyshko It seems that part of the dynamic of a tender offer is the company wants to buy such a significant portion of the shares. It's more efficient for them to do going the tender route rather than just going out and buying shares in the open market, saying they're buying 1 % or 2 % or whatnot.

1:00:31So that's sort of the dynamic of the tender is they're buying a significant portion of the shares back. Is that right? Yeah, that is exactly right. You can get a lot more shares in a faster amount of time. And what's also sort of interesting to me about this, your investment thesis here, is part of the thesis is that one reason why the company's at such a discounted valuation is because of the leverage on the balance sheet. And if management's going to be paying off some of this debt over the coming years, then you would expect some multiple expansion naturally from that. So that's one of the catalysts you're looking for re-rating.

1:01:07Robert Leonard A lot of times there's deleveraging. One of the things that made private equity so profitable or have high returns is the use of leverage. And we've talked about leverage a few times, but this is another example of, there's a company with leverage, and this is almost like a publicly traded LBO. The leverage isn't as high as what private equity uses. It's only three and a half times. It's not five or six times, but three and a half times is plenty of leverage to get leveraged returns from the stock as investors will discount the stock while it runs with high leverage. But then as the leverage gets paid down, they get a little bit of growth and the debt gets paid down, it deleverages naturally.

1:01:42And then investors will be more comfortable putting a higher valuation on the company. Excellent. Well, Derek, I really enjoyed this conversation again. Very informative for our listeners. Always enjoy bringing you on. Before I let you go, how about we give the audience a final handoff here? If they'd like to learn more about you and your firm, where should they go? Yeah. If you would come to gatorcapital.com and sign up for our newsletter, or you can send me an email, derrick at gatorcapital.com, I'd be happy to send you our investor letters. I won't spam you. Send out four letters a year with one stock idea in each letter.

1:02:17And just something that I'm doing in the portfolio or some insight that I think I have that hopefully will be additive to your investment process. But I appreciate you having me on the show again. You're super generous with your time and your questions. I appreciate you, Clay. Well, thank you, Derek. I really appreciate it as well and hope we can do it again eventually in the future. Your team just added its 67th AI tool and also your 67th security blind spot. The good news? The Vanta agent works like a GRC engineer in the background, finding every app your team uses, scoring the risk, and drafting fixes for you.

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