Small and microcap investor Adam Wilk on coal $NRP, furniture $LEFUF and fire systems $APG | S07 E38
Summary
Coal Royalties: Natural Resource Partners (NRP) pitched as a high-margin coal royalty MLP with minimal capex, long-dated leases, and significant free cash flow potential as debt approaches net-cash.
Met Coal Outlook: Emphasis on met coal’s structural demand for steelmaking versus declining thermal coal, with disciplined producer behavior and constrained supply underpinning pricing and downside resilience.
NRP Valuation: Case for rerating once capital returns commence, with potential mix of distributions and buybacks and stress-tested minimum royalties supporting durability across price cycles.
Fire Safety: API Group (APG) highlighted as a leader in fire/life safety services with statutorily mandated inspections, recurring revenue, and a service-led model that drives higher-margin follow-on work.
Furniture Retail: Leon’s Furniture (LNF) presented as Canada’s scaled furniture retailer with strong market share, disciplined capital allocation, underfollowed status, and real estate monetization optionality.
Canada Demand Drivers: LNF benefits from household formation and immigration tailwinds, stable margins from scale, and potential REIT/real estate value unlocks in addition to ongoing buybacks.
US Small Caps: View that small caps are broadly undervalued versus large caps, with active, bottom-up selection preferred over indices; focus on owner-operators and self-help catalysts like buybacks and disciplined M&A.
Transcript
I think we're live. >> It's always a question. >> This is Value After Hours. I'm Tobias Carile, joined as always by my co-host Jake Taylor. Our special guest today is Adam Wilk. He's a small and micro investor at Greystone Value. Welcome, Adam. How are you? >> Thanks a lot. Thanks for having me. Doing great. So tell us a little bit about Greystone Value, [clears throat] your investment strategy there, what you're looking for. >> Sure. Yeah. The uh the highle pitch is I I formed Greystone Capital uh as a separate accounts business about five years ago with just myself as the uh CIO and PM and now have some outsourced back office partners. And uh my background includes time spent in the NBA working for the Spurs and Rockets as a scout and analytics employee in the front office. And then I have a few years of credit experience as a senior commercial lender for a large bank. And uh I launched Greystone. We just passed the five-year mark and we've done about 25% 24% net during that time outpacing both the Russell Russell micro cap S&P and the a chunk of the the firm is my capital uh which we've now transition to a fund structure after five years of running separate accounts and my and all of my family's net worth is invested in the strategy and as you mentioned we are long only micro cap to midcap focused I would say at this point and really looking for good businesses, good management teams, and cheap valuations. And that setup is what ideally what I'm trying to find is that setup with businesses in transition and not not so much turnarounds, but situations where normalized earnings power is not being recognized or valued appropriately. And typically when I find those situations, uh, we concentrate into larger positions with our top five holdings making up somewhere between 65 70% of the portfolio. And the opportunity set, as we were talking about before we started, is uh, very good for the strategy right now. And I think there's some really interesting situations that attract valuations that I'm seeing almost on a weekly basis. Can you walk us through uh if not a name then just a a sort of a case study maybe something that you've closed out? >> Something that I closed out. >> Either something that you hold if you're happy to talk about that or something that you've closed out if you prefer not to talk about stuff you hold. >> Yeah, sure. Um I'm happy to talk about something we own. Um one of our largest position a couple of our largest positions I think fit the bill there. One of which I I can't talk about because I'm still actively buying, but I think fits the bill perfectly, but another one is a company called Natural Resource Partners. The ticker is NRP and uh they're a coal royalty business and they own 13 million acres of mineral rights in various parts of the US and they lease out that acreage to various coal producers. Um, they also own a soda ash mine in another part of the US that is also leased out to operators and they do some carbon capture work on their land as well. And uh, NRP is interesting because they have no because they're a royalty business, they don't actually mine the coal themselves. So they have very limited ongoing operating expenses and no capital expenditures. So the business does about 90% free cash flow margins. And uh it's very easy to understand as mentioned the company just leases out their acreage to producers under long-term leases between five and 40 years uh with minimum royalty payments uh guaranteed and they are paid on a price per per ton of coal mined and they have two types of coal that's being mined on their properties. Thermal coal which is used for electricity generation and met coal which is used in the process of steel making. It's pretty widely known that thermal coal is in decline, especially in the US, as a source of power generation or electricity generation. Um, NRP is a big exporter for thermal coal outside of the US, but the majority of their volumes about 70% and revenues come from met coal, which has no replacement, and is used in the process of making virgin steel, which is used for roads and construction and bridges and infrastructure. Um, and over time I'd imagine that percentage creeps up as thermal coal is phased out. Um, but what makes NRP interesting, not only the sort of fundamental profile, but where it fits that sort of business and transition is that leading up to 2017, uh, the prior management team had a difficult time, I think, just kind of sitting on their butt and collecting cash from the royalty business. And so they [clears throat] went out and made a number of acquisitions that both bloated the asset base and didn't contribute to profitability and they took on a lot of debt to do so. And then during 201516, excuse me, when the price of coal declined significantly, NRP got themselves into some trouble and they were bailed out by some distressed debt firms and they had to take on some ownerous preferred stock and warrants and they replaced the the CEO at the time. And ever since that time period, they've been ra maniacally focused on paying down debt. And by my calculations, they have about 12 months or less, maybe one year worth of free cash flow of debt on their balance sheet, at which point they'll have a net cash balance sheet. And they're going to take all of the cash flow that the business generates and return it back to shareholders. And at today's price, you're getting that cash flow amounts to somewhere between a 15 to 16% return or yield on the current valuation. NRP is a 1.2 1.3 billion market cap. normalized cash flow is somewhere between 200 and 250 million. Um, and you know, coal, they also have the distinction of operating in an industry that is hated by uh investors and uh and capital markets alike. And so um you're purchasing NRP today at a at a singledigit multiple of cash flow and sort of getting that return profile back in 12 months or less. And I think what happens is twofold. One, the stock will likely rerate once the distribution becomes sort of set in stone and likely rerate to maybe where traditional or typical MLPS uh trade where which is somewhere between I would say a 7 to 10% dividend yield maybe a little bit lower because the business is higher quality. And then you're also getting you have the optionality to get or sorry you're also getting the cash flow back and uh recovering your cost basis within five to seven years with an optionality on everything they earn after that. Um and the sort of industry dynamic the uh the fact that the capital hasn't started being distributed yet and it could also come in the form of buybacks and then the fact that NRP is an MLP so it's a master limited partnership. I think has deterred a lot of investors. But um to me the interesting part of the investment thesis is when you stress test NRP which uh the company has undergone significant stress over the last decade plus and has remained free cash flow positive throughout that entire period. So in a variety of coal price environments. And what makes that interesting today is that because their interest expense is lower because they've been paying down debt, their unlevered [clears throat] free cash flow profile is way higher. And so even in we're we're probably we're probably at a um around a floor price for met coal today and and thermal. You can make the argument in either direction, but um and we can get into the specifics of that. Uh but even in the event that coal prices decline, NRP will still be able to generate significant amounts of free cash flow. And so it's a very sort of durable, resilient, asymmetric setup that I think is being sort of that is unloved by the market and sort of being overlooked just given the industry and some of the things we discussed that I think if you look out if you're able to look out the next three, five, seven years, it gets very very interesting. kind of it's not apples to apples, but kind of along the lines of a Texas specific land sort of situation. >> So, Adam, if uh what would NRP if it was an NBA player, who what would it be? Who would it be? >> Oh, man, that's uh putting me on the spot here. That's a great question. [laughter] Um >> maybe uh maybe um uh Robert Aie or uh Udonis Hasslam. And I'm I'm saying that because of the >> Yeah. >> Lot of capability. you know, there's multiple things they can do. Um, going to last a really long time. Um, sort of a veteran in the industry. So, that's my that's my lame take on on answering that question. >> Getting [snorts] rehabbing from a knee injury. >> Sure. Yeah, exactly. >> Hey, uh, walk us through the valuation, the like the expected pricing of metal and thermal coal. I'm kind of I'm just interested to to hear how you think about it. >> Yeah, sure. So what's interesting about NRP in my view is that you're taking as little price risk as possible. And pardon me, if you own a producer, obviously there's significant operating leverage there that can work both work against you or work for you. Um you know, if if uh coal prices decline and and the top line goes down with a producer, you have nasty operating leverage that can hit the bottom line pretty significantly. NRP is not exposed to any of that because as mentioned they're a royalty business and when you're trying to invest in the commodity space at least what I've learned is you want to try to take as little price risk as possible by investing in trophy assets and uh the way that you can determine what when you have a trophy asset is by looking at two things among some others. One is the what is the break even cost of the commodity for that business. So, uh, in the example of coal, at what point are you able to at what price point are you able to break even, uh, as as a producer, that part of the trophy asset description doesn't fit NRP because they're not a producer. So, they don't have to worry about price risk there. But the other part of that is what's the reserve life index? And that is you take your current production levels and you divide it by the amount of reserves that you have in the ground. And in NRP's case, the reserve life index is between 30 and 40 years, if not longer. And so you have a significantly long runway for them to continue to lease out their properties to various operators and where they can collect royalties on the cash on the uh coal mine. And even if the price of coal goes down, they they are guaranteed if it goes down significantly. Like I've I've stress tested this business to the point of looking at you know 50 40 50% draw downs in the price of coal which setting aside the unknown effects of that uh industrywide would have the effect of you know shutting down basically the entire industry. Um NRP is still guaranteed somewhere between 60 65 million in minimum royalty payments per year. these payments are have been stress tested stress tested through leie bankruptcies and all kinds of adverse business scenarios. And so um that $60 million on the current market cap I think amounts to somewhere between like a four to 5% free cash flow yield and again that's in a scenario that I view as very very low probability. Um and so you can kind of just see how you're taking very limited price risk here. Um, having said that, uh, we are probably at trough levels for at least met coal pricing moving forward. And there's a really good case to be made that prices could increase significantly as we head toward the latter half of the decade. And after COVID, uh, most producers costs went up due to labor, inflation, and some other factors. And so that kind of naturally puts a floor on metal prices. And I guess economics 101 would tell us that uh uh mining below the marginal cost of production is uneconomical and it's better to just shut a mine down in that situation. And we are getting very clo we've already seen uh not so much a wave but some with industrywide we've seen some bankruptcies and shutdowns and that sort of thing on the smaller mine side. Um but because the everybody's cost structure has gone up and because the supply demand imbalance in the industry is so severe there's a really good case to be made that at you know using the PLV index as as a measure this sort of 185 190 price that we're at today is sort of a trough for the industry and uh the the other interesting part about just looking industrywide if you study some commodity industries today I feel this way about oil and gas a bit, Canadian oil sands, coal, etc. These guys have obviously long histories of booms and busts. So they when prices are high, they spend a ton of money, they take on debt to do so, and they just, you know, drill, baby drill is the uh is the phrase. And it's happened in oil and gas. It's happened in coal. >> Oh, sorry. I thought you were talking about computer chips there for a second. >> Yeah. [laughter] Yeah. Um but yeah, so for the past, you know, decade plus, um there's been obviously a shift toward there's been a political shift toward cleaner sources of energy and removing carbon emissions from the environment, rightfully so. I think we all want sort of a greener, cleaner planet moving forward. But what that's done is that's reduced investment in both oil and gas and in the coal industry, coal specifically. And so these producers, the ones that are scaled and left over, have have realized that they no longer can rely on capital markets or external funding. They basically have to control their own destiny. And what that's done is that's caused them to develop a sort of extreme financial discipline that we have never seen before in the industry. And if you read the annual reports or the investor presentations and you listen to a lot of the producers speak these days, all of their commentary is around, you know, sort of a lack of spending, but just generating cash flow, growing free free cash flow per share, returns on capital, returning capital to shareholders. It's like unheard of. It's like, am I, you know, am I reading about the coal industry or is this, you know, something else? And again, I I feel that way with oil and gas, too. I think, you know, one of the reasons Buffett bought Oxy, if I'm not mistaken, is because they basically said, "We're not going to spend a ton of money drilling for new wells and we're just going to take the majority of our cash flow and we're going to return it to shareholders." And I think it amounts to almost a double- digit yield between dividends and buybacks. And it's very similar in the coal industry. You can find a lot of these producers saying and doing the same things. Alpha Metallergical Resources, a very large uh metal business, has retired like 30 40% of their share count in the last 5 years. They went crazy after COVID with the buybacks. And so um the industry has changed a lot and that's caused the producers to just kind of manage the current supply or capacity that they have knowing that there's, you know, you can't get a permit for a new mine, especially in the US. Um there's no new uh coal plants being built. um on the medical side, we're really kind of probably just depleting the current capacity. So all of those things put together I think make it so that because of that supply demand imbalance um there's a really good case to be made that prices will go up from here and if they don't I think you know the investment still fares fairly well. Like I said the downside is is quite protected. So um I think it's a very interesting and kind of asymmetric bet here and um the industry has changed a lot which I think will aid in the sort of investment case moving forward. if you're small and micro and value these days, it's sort of inevitable that you have some exposure to to coal. Um, and I guess the and and met coal is probably the is obviously the better place to be. But is the metal price depressed because there's because of cheap steel, do you think? Is that why like China's able to produce steel very cheaply? All the steel producers in the US are trading really cheaply as well. Also, is that is it like a demand issue for the for steel that's driving the met coal price? >> Yeah, it's that and there's a bit of over supply now um just because demand is down and stockpiles are a little bit higher than than they have been in the last few years. Um the biggest drivers of the biggest countries that drive demand across the world are China and India. India's demand has been fairly stable. Um, and the world has actually used record amounts of coal in 2023, 2024, and now we're on pace for a record in 2025 as well. So, number one, the narrative that coal is going away is is simply not true or at least not proven out yet. But number two, um, China's economy is a big driver of both steel demand and coal demand. And so um with the sort of setbacks that they've had both in the property sector and real estate um that I think drives a lot of activity broadly speaking and has a big effect on the price. Um and so that's those are probably the main explanations now. And then you know there's always other little things that happen throughout the year whether it's um some new m some new countries emerge as some you know incremental suppliers or or with incremental capacity or you know there's natural disasters and that sort of thing. So I think the scale of pricing and supply and demand can kind of go up and down on a yearly basis but broadly speaking I think the world will continue to use more and more coal over the next three five 10 years etc. Um and yeah, so it's I think it's driven by a couple of things. >> It is interesting to think that uh China's cars are effectively coal powered just you have a you know EV battery in between there. >> Yeah, very interesting. Um, and I think there's um, you know, just the the narratives out there surround I'm not an expert, you know, I'm a generalist. Do your own work and don't take what I say verbatim, but uh, the sort of narratives out there about um, energy and coal usage and trying to get to zero carbon emissions by 2050 um, I think are just that at this point. their narratives and they're not really based in uh in reality uh given what I've I've discovered and you know to reach a point where we eliminate all fossil fuels within two decades is uh unfortunately a pipe dream um and would would constitute probably the largest and most expensive project ever undertaken by our civilization uh to do it that quickly and so um given the way politics moves and the steps we've taken so far it doesn't seem likely um and so you know I think there's Um, sometimes those narratives get a hold of sort of investment themes or certain industries and they stick around for a while. And I'm not saying coal businesses are the greatest business in the world. But when you do have an industry shift and a misperception and you know a lot of value there. I think if you just look across the sector that's very interesting to somebody like myself. I certainly wouldn't start my search for companies in in commodities or in energy but this is a new space for me. I spent a lot of time on it the last year and a half and so um and I like learning about new businesses and sometimes you get an insight here or there uh that I think leads to something good and so yeah it's I you know trying to work through the narrative has been interesting about where we are and I think it's opened up some opportunities to be honest. >> Um what what other things do you hold besides uh do you have any exposure to things outside of commodities? [clears throat] >> Yeah, the portfolio is really unique today. It's made up of very uh individually bottomed up sort of opportunities and companies that I find interesting and that I like etc. And um I have exposure to some retail on the e-commerce side and I own a furniture retailer which we can discuss. Um there's a fire safety and life safety business. So like kind of a niche industrial although that's a larger company. There's a company in the portfolio that operates a portfolio of hospitals. I've got nonprofit software uh you know HVAC maintenance and repair. So, a lot of different industries and companies and I think again the strategy is very bottom up and so there there are some themes I think you you know at a high level I'm really looking for I love service businesses and I'm really looking for kind of like recurring service businesses with operating leverage sometimes pricing power companies that um have long runways for growth and that operate in some durable or stable industry or niche where they can kind of grow along with their end market over time. Um, but broadly speaking, the the portfolio is pretty unique today. >> Uh, can you walk us through the uh furniture? >> That's the [snorts] one you pick. >> Absolutely. [laughter] Yeah. No, it's interesting. It's it's interesting. >> I'll tell I'll tell you why I'm interested in furniture just just because I think because I think that it's there's a broader theme. there's a housing and uh and I I just want to hear in in that context but but I I don't >> people like to sit so >> I don't I don't want to get in front of your face >> everybody needs furniture so we have you know um so I wrote I wrote this company up it's called Leon's furniture they're the largest furniture retailer in Canada I wrote the company up a few quarters ago or last year I can't remember in one of my letters and I compared it to Nebraska Furniture Mart >> it's definitely not apples to apples NFM is is significant. I think they do like a billion dollars out of their one store in Omaha and um which is insane. But um Leon's is is very scaled and they're um the largest furniture retailer in Canada. They have 300 stores across the country and they uh they also have an e-commerce business. And the furniture business is 100 years old. It was founded by an immigrant in the early 1900s. and it's, you know, gone through a few iterations as a business, but um they acquired their largest competitor in 2013, which was kind of like, I don't want to say discount furniture, but sort of on the lower end. And Leon's is in kind of the mid-market, I guess, range for furniture and pricing. And since then, they've grown their revenues and and earnings per share pretty significantly. And if you look back over the last 10 and 20 years, Leon's is about as durable of a business, especially for a retailer, that you could that you could find. uh they've had zero years of unprofitability through all economic environments over the past 10 and 20 years. Uh and they're have just been excellent stewards of capital and really good operators. The company's owned 70% owned by the Leyon family who was a founding family obviously. Um and they the profile is basically they can grow somewhere between like 3 to 5% uh every single year. They they have the largest market share in Canada. They're they're basically known as a big box store. They're at about 15% or 17% market share. They dwarf their next largest competitor in terms of size. Well, IKEA's their next largest competitor. So, they don't dwarf IKEA, but outside of them and IKEA, their next largest competitor is multiples smaller than they are. And in Canada, if you study the history of big box retail like Loblaws, Canadian Tire, etc., these guys basically gobble up all the market share over time. And I think Leon's is headed in that direction. And what makes it interesting is that in 2023, for the first time ever, they hired a non-family member CEO. And that that guy that guy since that time period has uh has um repurchased 10% of shares outstanding. He has uh uh paid out a significant amount of capital. um he has uh grown the business significantly um and they just started instituting an IR presence and so I think Leons is you know despite being a $1.8 billion Canadian business they're fairly underfollowed and overlooked. Um and I think it's because they haven't really spent a lot of time communicating with investors which is about to change. In fact, for Q3, they're hosting their first conference call uh I don't think ever, but in a very long time. And I think it will start to be a regular thing moving forward. Um, but today on that $ 1.8 billion market value, you're getting a normalized 300 or so million of IBITA and probably 200 to 225 in free cash flow. And that free cash flow can grow over time, especially because as LEON scales or as they grow their revenues and get bigger, there's opportunities for margin expansion, just doing some internal initiative things and just getting larger. And there's also the opportunity for some M&A. And the furniture industry is going through some, you know, difficulties both in the US and in Canada. And I think as their competitors go out of business, they can absorb that incremental market share, which will again strengthen the business over time. And the scale that Leon's brings to the business means that they have some some version of pricing power with their business. They are by far the largest advertiser in the country. They spend by my estimate I think over hund00 million in advertising expense. They're they're all over the place. And when times when things happen like COVID or supply chain issues or something like that, their scale still allows them to get inventory into the stores. And uh as an example, they are the largest importer of shipping containers into the country of Canada. And their mar if you look at their margin profile over the last and they have some boots on the ground in China, etc. And so they're um their cogs are are remarkably dur durable and they can kind of work through even adverse economic scenarios just given their scale. And if you look at their margin history over a long period of time, you can see the stability of that as well. And so, um, I'm interested in the furniture business. Um, you know, one of their comps, a large furniture retailer called Sleep Country was sold in 2024 for, I think, around eight or eight and a half times IBIDA and 18 or 19 times earnings. Um, Sleep Country is the number one mattress retailer in Canada. They were bought by Fairfax. Leon's trade Leon's trades at a a mid singledigit multiple of Ibita and like 10 or 11 times earnings. It's two times the size of Sleep Country. It's a number two mattress retailer in um in Canada. They weren't quite growing as fast, but their scale and market share dwarfs where Sleep Country was on their store count. And so I think that's an interesting comp just as a single deal to look at. Um and so I'm interested in the furniture business. I think it's cheap. I think it has opportunities for growth. I think capital allocation has been excellent. I think it's very durable. Uh but there's also this other angle where Lyon's through the decades has amassed this really valuable portfolio of real estate including on their headquarters where they have a 40 acre lot that's right off of the 41 or 410 highway downtown Toronto. And I estimate this lot is alone is probably worth a few hundred million. and their plan is to partner with a developer and build houses like vertical homes on the lot. That's going to be a longerterm project, but I still think it's interesting and not being captured in the value today. And then they also have a significant amount of store and distribution space that they're in the process of IPOing which will serve to unlock that value. And this is kind of a wellformed playbook that some of the larger retailers in Canada have undergone before like Canadian Tire I believe is the most recent example where they IPOed or spun off their real estate into a REIT and then they obviously were given a significant cash pile for dividends or a special dividend or buybacks and then they basically could add or remove properties from the REIT over time and it serves as another source of cash flow for the business. But most importantly, it serves to highlight the value of the real estate portfolio, which in Leon's case today is being held on their books for somewhere below 300 million. And so, um, between the retail business and the real estate, I think, however you slice it, you have an incredibly interesting and cheap asset that has opportunity for growth and really good capital allocation, but you get the upside of whatever happens with the real estate moving forward. And you know it's not going to happen tomorrow or six months from now but I think within the next 12 18 24 months the picture could be a little bit clearer and um that value will start to be highlighted and um you know in addition to just the the runway I think you know in 10 years Leons will have more market share and earnings will be higher etc. I think it's a really interesting setup. >> What's the top line of of uh furniture look like? Is it is it does it follow the property market or is it how does it there's always a household formation or what's it look like? >> Yeah, it's a good question. It's definitely tied to housing. Um [clears throat] you know Lance has I think responded well to any dips industrywide uh by again taking market share. Um and you can look back over the last couple of quarters industrywide things have gotten pretty rough and Lance has grown same store sales. Um, and I think that's absorbing incremental market share among some other things. And so they're fairly they're in a really good competitive position from that standpoint. But in Canada, it's it's driven by housing and um also immigration and there are some tailwinds there. I think you know uh family formation in Canada has has been fairly robust and um Leon's has a nice base of sort of furniture is not recurring revenue or recurring purchase but Lon's does have some form of a recurring customer in people who come back and purchase more furniture over time and the biggest thing that drives Lyon's revenues is not h home starts but it's household formation so people having children and moving to a bigger home or getting uh having more people in the house and remodeling and so that's been a big driver for them. I think they mentioned something like a base of like 16 million households where there's like a formation aspect there that can drive some repeat purchases over time. Um and then Canada is one of the most friendly uh immigration countries. I think they are I think they're letting in a net 500,000 people per year, something along those lines, uh for school and for work, etc. So that drives a lot of the activity as well. So, um I don't think Canada's house I don't have my numbers in front of me right now, but I don't think Canada's housing market is in particularly great shape. Um but between the market share gains, the immigration, and just kind of like catering to household formation, I think they're in a pretty good spot. And again, they they're there's a path to growing revenues at low kind of to mid-s single digits moving forward. >> Sorry, JT. I get a question. >> No, no, it's fine. I sure sound good. >> Let me do Let me do a quick shout out and then we'll do some veggies. [snorts] Uh Idaho, what's up? Toronto, Valpareo, Bologn, Bologna, Toronto, Dubai, Tombble, Texas, what's up, Tyler? Bethesda, Belleview, Lausanne, Switzerland. Hifa, Israel, Palestine, Salsburg, Austria. Breenidge Brandon Mississippi Peditfa Israel Montana [laughter] Charlotte Madira Island Portugal Milton Kees what's up Mayfair Tallahassee all right JT it's 3 minutes past the hour folks market here come the veggies >> all right well we're back with a fan favorite animal themed episode, and this time it's chipmunks. And I'm sure you're thinking, "Well, Alvin, Simon, and Theodore." Uh, no, not not quite. But, uh, we're after the squeaky kind that that chase each other around trees. Uh, so there's this small clearing on the Vermont, Quebec border where on summer mornings, the forest hums with the sounds of survival. And there's a fluttering of wings, there's a crackle of a twig, sometimes the sharp squeal of a chipmunk, and it's sounding the alarm. And in that clearing, behavior ecologist Charlene Kusho uh spent her days watching, listening, and recording and then decoding what these little mammals were saying to each other. And she began with distress calls. So these chipmunks will use categorical alarms, uh you know, one for hawks above, another for ground predators like snakes or foxes. And it's not just noise, like they're signals that are shaped by survival. Uh but the real discovery wasn't that chipmunks had this language. It was that each chipmunk used that language differently. Some were chatter boxes of fear, squealing at every little movement, broadcasting panic at the drop of a pine cone. Uh others were nearly silent. These stoic little philosophers of the forest who seem to be saying, "Well, we'll just see how things play out." Uh and and these weren't just moods either, by the way. They were consistent patterns of behavior, what we might even call personalities. Now, personality isn't a word that biologists use very lightly. um it suggests something stable and enduring and consistent and even maybe even intentional through time. But what Kusho found is that these temperaments what they what they classified their terminology were shy versus bold. So shy being the ones who get freaked out, they're skittish. Uh and then bold are the ones who will just stand there uh no matter what and not not squawk. Um they persisted over time and across situations. It even shaped the ship the chipmunk's relationships with each other. So in essence, the forest had kind of its introverts and its extroverts. Now once you you start to think about animals having personalities, the next question is what does that mean for the way they communicate and if a certain chipmunk screams at every passing breeze, others eventually stop listening to it. Uh and and Kusho tested this. She recorded distress calls from both shy and bold individuals and then played them back to the colony. And the chipmunks paid attention to the bold ones, the ones who who rarely cried wolf. the overreactors, they started to ignore them. And and this is quite fascinating because it's not just like an instinct, it's actually some rudimentary form of of reputation management amongst these chipmunks. Uh they track reliability. They remember who to trust. So over time, credibility becomes kind of its own currency. And the fewer times that you spend it, the more valuable it is. And of course, we too live in a soundsscape of alarms. Some real, most not. Uh, and like those chipmunks, we we learn to tune most of it out. And some, you know, there's always these market commentators that are calling for a market crash every 10 seconds. Uh, and you know, eventually we kind of start to ignore them, you know, and then of course there's there's Mr. Buffett and and he learned long ago that the more sparingly you speak about this, the more weight your words carry. And he's only made a handful of market predictions over the decades that he's been doing it, the best that anyone's ever done it. Of course, 1969, he folded up the partnership when he couldn't find investments that made sense. But he was back in 7374, an over sex man in a wh house to use his colorful language. It's not mine. Uh, you know, it was a simpler time in the 70s. Uh, then [clears throat] almost nothing until 1999 when he he damn near to top ticked the com bubble with that uh sounding an alarm uh in Fortune magazine. Then he's back in 2008 with Bi-American IM uh in New York Times OpEd. And then in 2021, it was more subtle, but he was warning new investors that the game wasn't as easy as they thought it was. So, clearly this guy knows what he's talking about. Um, we could draw some more analogies from our little chipmunks. From a purely evolutionary standpoint, uh, you might think that the bold chip chipmunks would win. So, they spend less time panicking and more time filling their bellies. And more food means more energy, which means more offspring, which equals more genetic success, right? like sort of all connects together. Well, not quite. Kusho's data revealed there's there's a trade-off. The chipmunks who squawkked a lot actually live longer. They may have had fewer offspring because of their conservatism. You know, they're squawking and running around and not eating, but they survived more seasons. And the bold ones, they reproduced quickly, but they also tended to die younger. So, you know, hawks and foxes were trimming this genetic line earlier. Uh, so we think back, this should probably, you know, think back to last week's conversation with Luca about the different ski racer types. Um, but this is what evolutionary biologists call a life history trade-off. It's a balancing act between risk and reward, reproduction and survival. And you know, it's it takes pace on kind of a fast versus slow continuum. The fast types mature quickly and they pour energy into reproduction and they also accept higher mortality. And the slow types invest in maintenance and vigilance and reproduce later and less and survive more of the bad years. So this variation persists because shifting environments periodically favor different points on that slow versus fast continuum. You the feast year the feasting years tend to reward speed and the famine years reward caution. So investors like we we face that same life history choice with capital. Some are bold foragers. Uh, you know, they run hotter, higher growth, uh, accelerating businesses. You know, they're always kind of on the come inflection of being profitable, crowded names, leverage at at every level that they can get it. Uh, and in the fat years, they eat like kings and they put up eyepopping numbers and they re reproduce quickly. You know, AUM pours in. Uh, new funds are spawn, the brand litters the forest with offspring. Uh, the catch is the survivorship. you know, a single hawk comes along, which might be, you know, in a liquid tape or a policy shock or some factor winner. Um, and that trims that lineage fast. So, they have great arithmetic returns, but poor geometric survival. Uh, so other investors are more like sentinels where they worry about everything, even the occasional bad thing that that does actually come to pass. Uh, they underbet every edge, they keep powder dry, they embrace boredom, stay well within within the edge. Uh, and they re reproduce much more slowly, often subsisting on meager returns for long stretches, but they live longer and their compounding engine requires a lot of time to ever approach anything that would be impressive. They're never quite top quartile in any given year, but somehow they managed to be at the top of the leaderboard after decades of applying their craft. Uh, so the question to really ask yourself isn't like which which chipmunk temperament is best. Um, but it's which temperament best matches the current environment with with your liabilities, with your clients, uh, and with your own personal psychology. So, it's okay to run hot if you can acknowledge it about yourself and maybe take some measures, uh, to mitigate, uh, and be a little bit more safe about how you're doing it. Um, but it but if if a perfectly ordinary, you know, minus 30% kind of draw down would trigger margin calls and redemptions and force you out of the game, you're likely that bold chickmunk that's, you know, gorging out in the open, uh, who's going to be easy lunch for a hawk at some point. So, the takeaway to remember is that the arithmetic heroes get the headlines, but the geometric survivors are the ones that own the track records. >> Good one, JT. Thanks. Um, Adam, small caps have had a rough run for the last like decade or so. How um, how do you assess the small cap uh, opportunity as it stands now? >> Yeah. Um, yeah, echoing what you said, I think it's been a rough stretch and up until very recently and maybe we've even revisited that, I think valuation spreads between small and large have been quite significant uh, relative to history. And I'm not sure what changes that at the moment. You know, we're in an environment where I think people have uh people are overly focused on large cap tech AI theme and even you know, international small cap businesses versus US small cap which is primarily where I focus. Um and that there have been multiple periods over the last couple of years that what I'll say is so relative to history I think valuations look good. Um, having said that, today it's given the change of the in the makeup of the index and the alternatives out there, the Russell 2000 is not the greatest vehicle for exposure to small caps. In my view, I think a majority of the businesses in the index are lowquality, unprofitable. There's a big focus on healthcare and finance. >> It's okay to say co on our uh on our show. >> Okay. All right. Good. Well, yeah. I after the stories you just told, I think I have permission to use bad language. Um yeah, and so I think um this is a bit self- serving to say this, but I think the active management approach is a better way to get exposure to small caps or even like the S&P 600, but that those companies are much larger than where I typically fish. And so, um, the opportunity set seems good in on one hand, but on the other hand, the options for exposure to small caps broadly are is not that great. And so, um, you know, I view my job, you know, similar to when I was working in basketball as a talent evaluator and professional. You obviously look at every player, but the you whittle your universe down to the select ones that you think will make it and can fit your team and are what you're looking for. And so, that's really what I do on the small cap side. And I'm trying to find high quality businesses with good management teams that we can purchase at cheap valuations, but that are somewhat uh it's somewhat uh outside of or different from what you can get broadly. And so um I don't spend a ton of time thinking about the market or macro and that sort of thing. But just having been in the space for over a decade, I think it's just become very clear that this group of companies is kind of viewed as just lower quality as a whole. And I'm not sure what changes that. I don't think we've seen persistent or consistent flows into small caps. Um, you know, this year has been okay, but um, just relative to what history has said. And, uh, there's also another interesting angle to that too, which is in the land of, you know, trillion dollar companies, uh, some of these market caps, some of their market caps in the Russell, even below, you know, $10 billion, that's a that's a small public company today. And that I think is a very different dynamic than what we've seen in the past as well. And sometimes you can have a midcap or you know approaching10 billion public company that is mispersceived or overlooked or underfollowed just given that it's again on the smaller end of things and and given the dominance of kind of passive investing and uh quantitative based strategies and and the needs for liquidity there. Um and so when that happens, I think um the one billion, two billion, three billion dollar businesses can be pushed even further down the spectrum. Um and uh and so I think the um the industry as a whole and the dynamics surrounding small caps have been a difficult kind of stream to swim up uh recently. Um, but what I've kind of prioritized too, especially as people kind of lean toward the same themes and companies recently, are companies that are kind of helping themselves close that valuation catalyst or valuation gap. Um, and so I I love a cheap business that's quality that's that the market is not recognizing as much as the next guy. And I think earnings growth and uh good capital allocation, etc. will will close all valuation gaps over time. I I still I hope it's still true that stock prices follow you know earnings per share or returns on invested capital. I'll I'll hang my hat on that. But um I think it's also helpful when you have a management team who is aggressive in realizing value for the business but also wanting to close that gap whether it's in in instituting a significant buyback program or uh doing M&A maybe when uh when they when they have the opportunity to do so. um or just acting in the interest of shareholders. Uh one because they are I like to invest in owner operators and people with skin in the game, but two because that's a path to realize value even if the market is not or you're not getting flows or multiple expansion. So there's a there's a few companies in the portfolio today that represent that sort of theme. And it's almost like what David Einhorn said, not quite that extreme, but in the past when you invested in small caps and there was more there was a he more heavy active manage universe, you could buy a company for eight times earnings and you could sell it to a Fidelity long only for 13 times and you make a decent spread on that and maybe you get some earnings growth in between, etc. But now he's looking for things that trade at four to five times earnings that are buying back stock handover fist or paying a dividend or whatever the case may be. And I I don't go that far out on the extreme in terms of like the entire portfolio, but I do sort of stand by that point about how it's very attractive to have companies that are again helping themselves close that valuation gap. So not relying on flows and multiple expansion is important, but um you know there's also some companies in the portfolio that are growing pretty significantly that I think the market has noticed or will continue to notice. And so I I think you know maybe two ways about it. Like I stated the opportunity set, excuse me, [clears throat] for somebody like myself is very good, but at the same time I do understand why maybe the universe generally speaking is is hated at this at this stage. Adam, what uh what else did you learn from scouting that you that helps you now as an investor? >> Yeah. >> Well, tell us a little bit about scouting. What's that like? >> Um, it it was a blast. I mean, one of those jobs I think that never felt like work for one day that I did it. And one of the things that I I got an incredible amount of exposure to was just the sort of human side of evaluating a person and sitting in interviews with people >> and you know hundreds or you know probably didn't reach thousands but hundreds of interviews over the years and >> cross referencing those with everything else that I was doing and trying to pull some pattern recognition out of that I think set the stage in a very helpful way for what I'm doing now. and you know being in a meeting and knowing something about a player because you've done a channel check or something and then watching them lie to your face about something like you know they don't do drugs or they don't you know have a bunch of girlfriends or whatever the case is >> it it colored my view a little bit. Yeah. Yeah. It um opened my eyes to the maybe um naive way that I approached it initially. And so I have a I I like to say I have a good BS detector these days and that part of it is very helpful. Um just getting that again sort of human side and understanding that people will be dishonest and do what's in their best interest. And that sort of opened up the the other biggest thing I learned was the power of incentives and >> how that sort of opens the door for what results you'll see over time is what people are incentivized to do whether it's a coach, a general manager, a player. Um, and just getting exposure to like the very human element that is a part of sports was just really really interesting and again helped set the stage for what I'm doing today. So I can get into more specifics but there we again we would probably need another hour to get through all of that. >> Just uh tell us a little bit about maybe the most interesting business that you have. um not necessarily the most undervalued, just the most interesting. Like I think commodity businesses are I find them they're sort of less interesting and then there are other businesses that like there's some unusual niche that they're exploiting. Do you have any do you have anything like that? >> Yeah, I think I think API Group the ticker is APG. I think it fits that bill and was one of the more fun companies that I got to know uh early on which I knew nothing about. And if you think about um going inside of a commercial build, any commercial building in any city, there are a significant amount of fire safety systems inside of that building. And you know, my entire life, I didn't pay any attention to those. And even, you know, during fire drills in school or any exposure I had to that this industry or that this was a business or something was just non-existent. So, I think that's a very interesting niche and a very durable one too um that API operates in. And just to give a high level, cut cut me off if you need to, but they're a fire safety and life safety business that provides fire safety inspections and equipment and maintenance of and equipment maintenance of fire safety systems. And you know, like your sprinklers, extinguishers, valves, water pumps. Um they have they went public in 2020 2020 I believe. uh so about five years ago via spa and they have around 15% market share today. They're the leading player in a really fragmented industry and what I came to realize was that this is an excellent business. It's recession resistant. Uh it's mostly because the maintenance activity that they do and the inspection activity is statutoily mandated by the National Fire Protection Association on all commercial buildings. So if you own a commercial building, you are required by the government to have your fire safety systems inspected and maintained at least once per year, but sometimes twice per year. So that lends itself to recurring revenue. It's a cyclical. There's a [clears throat] really high variable cost structure. And if you think about the life of a fire safety system, it starts at building construction where contractors will subcontract out the work to install all of the sprinklers, the alarms, the pumps, etc. And most businesses in API's industry, they sort of chase that installation work because it's higher dollar value and it's easier to manage. So you have one or two projects per year for, you know, a million bucks or whatever the case is. But it's a little bit risky. It's a lot riskier because the projects are longer in duration and they're cyclical because they're tied mostly to new building construction. But API's approach is very different because they lead with the inspection work first. So they'll sell a sprinkler inspection, for example, for, you know, $2,000 or $5,000 twice a year. and they believe that that inspection related work leads to three to four dollars of additional service work. So you go in to inspect uh you inspect a sprinkler and you find a corroded pipe for example and then you can fix that and do additional service work. And this part of the industry is higher margin and it's less risky and it leads to sort of faster turnaround time. So cash collection is better but it's more complex. So there's more projects to more smaller dollar projects to manage and it's lower cost and it requires a lot of infrastructure that mom and pops who they compete with don't have and there there's also this smaller portion of the business called specialty services which there's some construction related and HVAC related stuff there. Um, but the history of the business is really interesting, which we can talk about kind of on top of the fire safety services, but they also acquire it's it's like a hundred-y old business that was acquired from a founder who grew the business from his father and um executed it really well. And he didn't want the company to be kind of carved up by private equity. So, he sold to a group that basically takes companies public and keeps them together and just grows them through organic growth and M&A. and they also acquire a lot of smaller and medium-sized businesses in fire safety which they can purchase for really significant multiples and so um I just enjoyed getting to know that business and like I said it wasn't something that was ever on my radar and when I found it it looked you know I think it was around a billion market cap or so something and I thought they could do maybe like a billion in IATA which they're going to do uh I believe this year and um I I spent a lot of time with fire departments so I went out and visited with fire teams and talk to people in the industry and just got a sense of like how you do these inspections and what matters and where the value prop lies and is if there's pricing power there and you know that sort of thing. So it was just I think of all the businesses in the portfolio that was one of the most fun to do diligence and there was like a real tangible aspect of that process and so um I think that that fits the bill as maybe the most or one of the most interesting businesses in the portfolio. >> Can you just walk us through the valuation a little bit? Uh yeah, sure. I think today so API um API group is the share price has increased I believe 5x in five years. So we've done well on the investment but I think there's still a significant runway for growth. Um I can underwrite I think a 15 to 25% return per year from here over the next three to five years. Um, you know, there's a I don't have my numbers in front of me, but I believe there's a 6% free cash flow yield today that's growing 15% per year. And, uh, on the back of mid singledigit growth, organic growth, and some M&A, I think they can do around 1.3 1.5 billion in free cash flow within three years or so. And the market cap today is 12 billion or 12 a.5 billion. Um and I think these businesses just given their growth profile, their recession resistance, their durability, um uh the um management team, capital allocation, the margin profile. I think these businesses deserve to trade between you know 15 20 times or so. Um and at 20 times it's a 25 26 billion company. Um and so I think there's a path to get there with just simple block blocking and tackling. But then there's some upside on further M&A and uh if organic growth goes higher. They've been kind of pruning some business in some of their segments right now which has caused the top line to look a little bit slowed down but they're also underlevered I think. So any increases there they can go up to I think three three and a half times and do some more deals. So they can probably acquire 50 60 million in Ibita per year um in addition to the organic. So, um, yeah, there's there's lots of levers to to win here and management is has a lot of skin in the game and the chairman has, uh, run multiple public companies before with great success and I think they're incentivized to create a lot of value. So, it's one of the companies that feels like a kind of a never sell sort of business. I think earning, you know, revenues and earnings will be higher five 10 years from now and I'm excited about what the future holds. What do you think about that spa process going public via spa? What's the uh reason for doing that because the because the founder was looking to step out and and that was I understand that part but why not just go public? >> Yeah. So it's not my favorite um it's not my favorite way to do it and in this case you know I think the group that brought the company public has been and will be well compensated for doing it that way. Um but a speed to mark I think the environment was one thing a speed to going public like a speed to market and a lack of kind of um a lack of kind of road show means that there's you know that there's an interesting kind of story to tell for growth and margin sometimes like in the IPO process and with a company like this you say you're going public at a certain valuation and certain margin targets there's maybe only downside from there and so I think the lack of that formal process was helpful to API in that case. Um but yeah, I mean I think it also helps you know despite the fact that the group that brought the company public uh has been paid well. I think it also helps align interest and incentivize them to create value. You know there's a compensation structure in place that basically states that as the shares increase in value management is paid a little bit more compensation and so it it kind of direct is kind of directly tied to creating value in that way without dilution. Um, and you know, they've been I think it was a hurdle to get over initially, but the track record of the people bringing the company public gave me a lot of comfort. And um, I thought that the playbook could be very similar to some of the prior companies that they operated. Uh, the the I I don't have to speak as vaguely, I guess. The um chairman of the business is Martin Franklin, who has a long history in public markets, and he was a CEO and chairman of a company called Jardan. And that business I think did 30% per year for two decades or something along those lines. I can't remember the exact timeline but some phenomenal return there. Then he's done some other things as well. Both that have worked and not worked. So I got comfort comfortable with him and his track record and um you know the the founders of the business and the way that they were approaching it. But it's not my favorite uh way to do things. And I think for every successful spa um there's a hundred unsuccessful ones or with sleazy promoters or really bad compensation structures or evidence of things that have not worked out. Um but I'm happy to say actually that within the portfolio I believe I own the mo in addition to API the most successful spa of all time in Limbach which is an HVAC uh maintenance and electrical system uh maintenance business among other things. Um, if I can if I can humble rag for a minute, so it's not always bad. Uh, but yeah, it's not my favorite way to do things and I don't don't typically go I think the mispricing was so great that it it sort of fed on itself, but again, it's not my favorite way for companies to go public. >> Well, I was going to say five times is probably pretty good evidence that that it worked out. But, um, we're we're kind of coming up on time, Adam. So, if folks want to follow along with what you're doing or get in contact, what's the best way of doing that? Yeah, sure. Uh, this the website our website greystonevalue.com. Greystone is spelled gry. I'm on Twitter as well. Uh, and uh, yeah, I'm easy to find if you Google or just Greystone Capital and uh, I'm out there Substack Pound the Rock Investing. So, any of those avenues work great. >> Uh, very quickly, what's Pound the Rock? Uh that's just a name for my blog uh where I write about investment related topics, thoughts, I post research etc. Pound the Rock is the Spurs motto which I shamelessly stole from them and it references a poem by a uh photographer Jacob Reese which I highly suggest your listeners and you guys to check out. Um, and it's just about kind of continuous incremental effort and what leads to with uh, you know, if you have a hammer and you blow a rock, you uh, do a thousand blows on a rock and the, you know, it might not break, but on the thousandst or the 101st, the rock breaks and that's a result of all the effort that went before it. And so I think that's a great metaphor for compounding and um, kind of corny maybe, but uh, that's the name of my blog. >> That's good stuff. JT, any final words? No, sir. >> Check out Journalytic, folks. I got a new book, Soldier of Fortune. It's available now. Uh we'll be back next week. I'll talk about it more. Yes, I I
Small and microcap investor Adam Wilk on coal $NRP, furniture $LEFUF and fire systems $APG | S07 E38
Summary
Transcript
I think we're live. >> It's always a question. >> This is Value After Hours. I'm Tobias Carile, joined as always by my co-host Jake Taylor. Our special guest today is Adam Wilk. He's a small and micro investor at Greystone Value. Welcome, Adam. How are you? >> Thanks a lot. Thanks for having me. Doing great. So tell us a little bit about Greystone Value, [clears throat] your investment strategy there, what you're looking for. >> Sure. Yeah. The uh the highle pitch is I I formed Greystone Capital uh as a separate accounts business about five years ago with just myself as the uh CIO and PM and now have some outsourced back office partners. And uh my background includes time spent in the NBA working for the Spurs and Rockets as a scout and analytics employee in the front office. And then I have a few years of credit experience as a senior commercial lender for a large bank. And uh I launched Greystone. We just passed the five-year mark and we've done about 25% 24% net during that time outpacing both the Russell Russell micro cap S&P and the a chunk of the the firm is my capital uh which we've now transition to a fund structure after five years of running separate accounts and my and all of my family's net worth is invested in the strategy and as you mentioned we are long only micro cap to midcap focused I would say at this point and really looking for good businesses, good management teams, and cheap valuations. And that setup is what ideally what I'm trying to find is that setup with businesses in transition and not not so much turnarounds, but situations where normalized earnings power is not being recognized or valued appropriately. And typically when I find those situations, uh, we concentrate into larger positions with our top five holdings making up somewhere between 65 70% of the portfolio. And the opportunity set, as we were talking about before we started, is uh, very good for the strategy right now. And I think there's some really interesting situations that attract valuations that I'm seeing almost on a weekly basis. Can you walk us through uh if not a name then just a a sort of a case study maybe something that you've closed out? >> Something that I closed out. >> Either something that you hold if you're happy to talk about that or something that you've closed out if you prefer not to talk about stuff you hold. >> Yeah, sure. Um I'm happy to talk about something we own. Um one of our largest position a couple of our largest positions I think fit the bill there. One of which I I can't talk about because I'm still actively buying, but I think fits the bill perfectly, but another one is a company called Natural Resource Partners. The ticker is NRP and uh they're a coal royalty business and they own 13 million acres of mineral rights in various parts of the US and they lease out that acreage to various coal producers. Um, they also own a soda ash mine in another part of the US that is also leased out to operators and they do some carbon capture work on their land as well. And uh, NRP is interesting because they have no because they're a royalty business, they don't actually mine the coal themselves. So they have very limited ongoing operating expenses and no capital expenditures. So the business does about 90% free cash flow margins. And uh it's very easy to understand as mentioned the company just leases out their acreage to producers under long-term leases between five and 40 years uh with minimum royalty payments uh guaranteed and they are paid on a price per per ton of coal mined and they have two types of coal that's being mined on their properties. Thermal coal which is used for electricity generation and met coal which is used in the process of steel making. It's pretty widely known that thermal coal is in decline, especially in the US, as a source of power generation or electricity generation. Um, NRP is a big exporter for thermal coal outside of the US, but the majority of their volumes about 70% and revenues come from met coal, which has no replacement, and is used in the process of making virgin steel, which is used for roads and construction and bridges and infrastructure. Um, and over time I'd imagine that percentage creeps up as thermal coal is phased out. Um, but what makes NRP interesting, not only the sort of fundamental profile, but where it fits that sort of business and transition is that leading up to 2017, uh, the prior management team had a difficult time, I think, just kind of sitting on their butt and collecting cash from the royalty business. And so they [clears throat] went out and made a number of acquisitions that both bloated the asset base and didn't contribute to profitability and they took on a lot of debt to do so. And then during 201516, excuse me, when the price of coal declined significantly, NRP got themselves into some trouble and they were bailed out by some distressed debt firms and they had to take on some ownerous preferred stock and warrants and they replaced the the CEO at the time. And ever since that time period, they've been ra maniacally focused on paying down debt. And by my calculations, they have about 12 months or less, maybe one year worth of free cash flow of debt on their balance sheet, at which point they'll have a net cash balance sheet. And they're going to take all of the cash flow that the business generates and return it back to shareholders. And at today's price, you're getting that cash flow amounts to somewhere between a 15 to 16% return or yield on the current valuation. NRP is a 1.2 1.3 billion market cap. normalized cash flow is somewhere between 200 and 250 million. Um, and you know, coal, they also have the distinction of operating in an industry that is hated by uh investors and uh and capital markets alike. And so um you're purchasing NRP today at a at a singledigit multiple of cash flow and sort of getting that return profile back in 12 months or less. And I think what happens is twofold. One, the stock will likely rerate once the distribution becomes sort of set in stone and likely rerate to maybe where traditional or typical MLPS uh trade where which is somewhere between I would say a 7 to 10% dividend yield maybe a little bit lower because the business is higher quality. And then you're also getting you have the optionality to get or sorry you're also getting the cash flow back and uh recovering your cost basis within five to seven years with an optionality on everything they earn after that. Um and the sort of industry dynamic the uh the fact that the capital hasn't started being distributed yet and it could also come in the form of buybacks and then the fact that NRP is an MLP so it's a master limited partnership. I think has deterred a lot of investors. But um to me the interesting part of the investment thesis is when you stress test NRP which uh the company has undergone significant stress over the last decade plus and has remained free cash flow positive throughout that entire period. So in a variety of coal price environments. And what makes that interesting today is that because their interest expense is lower because they've been paying down debt, their unlevered [clears throat] free cash flow profile is way higher. And so even in we're we're probably we're probably at a um around a floor price for met coal today and and thermal. You can make the argument in either direction, but um and we can get into the specifics of that. Uh but even in the event that coal prices decline, NRP will still be able to generate significant amounts of free cash flow. And so it's a very sort of durable, resilient, asymmetric setup that I think is being sort of that is unloved by the market and sort of being overlooked just given the industry and some of the things we discussed that I think if you look out if you're able to look out the next three, five, seven years, it gets very very interesting. kind of it's not apples to apples, but kind of along the lines of a Texas specific land sort of situation. >> So, Adam, if uh what would NRP if it was an NBA player, who what would it be? Who would it be? >> Oh, man, that's uh putting me on the spot here. That's a great question. [laughter] Um >> maybe uh maybe um uh Robert Aie or uh Udonis Hasslam. And I'm I'm saying that because of the >> Yeah. >> Lot of capability. you know, there's multiple things they can do. Um, going to last a really long time. Um, sort of a veteran in the industry. So, that's my that's my lame take on on answering that question. >> Getting [snorts] rehabbing from a knee injury. >> Sure. Yeah, exactly. >> Hey, uh, walk us through the valuation, the like the expected pricing of metal and thermal coal. I'm kind of I'm just interested to to hear how you think about it. >> Yeah, sure. So what's interesting about NRP in my view is that you're taking as little price risk as possible. And pardon me, if you own a producer, obviously there's significant operating leverage there that can work both work against you or work for you. Um you know, if if uh coal prices decline and and the top line goes down with a producer, you have nasty operating leverage that can hit the bottom line pretty significantly. NRP is not exposed to any of that because as mentioned they're a royalty business and when you're trying to invest in the commodity space at least what I've learned is you want to try to take as little price risk as possible by investing in trophy assets and uh the way that you can determine what when you have a trophy asset is by looking at two things among some others. One is the what is the break even cost of the commodity for that business. So, uh, in the example of coal, at what point are you able to at what price point are you able to break even, uh, as as a producer, that part of the trophy asset description doesn't fit NRP because they're not a producer. So, they don't have to worry about price risk there. But the other part of that is what's the reserve life index? And that is you take your current production levels and you divide it by the amount of reserves that you have in the ground. And in NRP's case, the reserve life index is between 30 and 40 years, if not longer. And so you have a significantly long runway for them to continue to lease out their properties to various operators and where they can collect royalties on the cash on the uh coal mine. And even if the price of coal goes down, they they are guaranteed if it goes down significantly. Like I've I've stress tested this business to the point of looking at you know 50 40 50% draw downs in the price of coal which setting aside the unknown effects of that uh industrywide would have the effect of you know shutting down basically the entire industry. Um NRP is still guaranteed somewhere between 60 65 million in minimum royalty payments per year. these payments are have been stress tested stress tested through leie bankruptcies and all kinds of adverse business scenarios. And so um that $60 million on the current market cap I think amounts to somewhere between like a four to 5% free cash flow yield and again that's in a scenario that I view as very very low probability. Um and so you can kind of just see how you're taking very limited price risk here. Um, having said that, uh, we are probably at trough levels for at least met coal pricing moving forward. And there's a really good case to be made that prices could increase significantly as we head toward the latter half of the decade. And after COVID, uh, most producers costs went up due to labor, inflation, and some other factors. And so that kind of naturally puts a floor on metal prices. And I guess economics 101 would tell us that uh uh mining below the marginal cost of production is uneconomical and it's better to just shut a mine down in that situation. And we are getting very clo we've already seen uh not so much a wave but some with industrywide we've seen some bankruptcies and shutdowns and that sort of thing on the smaller mine side. Um but because the everybody's cost structure has gone up and because the supply demand imbalance in the industry is so severe there's a really good case to be made that at you know using the PLV index as as a measure this sort of 185 190 price that we're at today is sort of a trough for the industry and uh the the other interesting part about just looking industrywide if you study some commodity industries today I feel this way about oil and gas a bit, Canadian oil sands, coal, etc. These guys have obviously long histories of booms and busts. So they when prices are high, they spend a ton of money, they take on debt to do so, and they just, you know, drill, baby drill is the uh is the phrase. And it's happened in oil and gas. It's happened in coal. >> Oh, sorry. I thought you were talking about computer chips there for a second. >> Yeah. [laughter] Yeah. Um but yeah, so for the past, you know, decade plus, um there's been obviously a shift toward there's been a political shift toward cleaner sources of energy and removing carbon emissions from the environment, rightfully so. I think we all want sort of a greener, cleaner planet moving forward. But what that's done is that's reduced investment in both oil and gas and in the coal industry, coal specifically. And so these producers, the ones that are scaled and left over, have have realized that they no longer can rely on capital markets or external funding. They basically have to control their own destiny. And what that's done is that's caused them to develop a sort of extreme financial discipline that we have never seen before in the industry. And if you read the annual reports or the investor presentations and you listen to a lot of the producers speak these days, all of their commentary is around, you know, sort of a lack of spending, but just generating cash flow, growing free free cash flow per share, returns on capital, returning capital to shareholders. It's like unheard of. It's like, am I, you know, am I reading about the coal industry or is this, you know, something else? And again, I I feel that way with oil and gas, too. I think, you know, one of the reasons Buffett bought Oxy, if I'm not mistaken, is because they basically said, "We're not going to spend a ton of money drilling for new wells and we're just going to take the majority of our cash flow and we're going to return it to shareholders." And I think it amounts to almost a double- digit yield between dividends and buybacks. And it's very similar in the coal industry. You can find a lot of these producers saying and doing the same things. Alpha Metallergical Resources, a very large uh metal business, has retired like 30 40% of their share count in the last 5 years. They went crazy after COVID with the buybacks. And so um the industry has changed a lot and that's caused the producers to just kind of manage the current supply or capacity that they have knowing that there's, you know, you can't get a permit for a new mine, especially in the US. Um there's no new uh coal plants being built. um on the medical side, we're really kind of probably just depleting the current capacity. So all of those things put together I think make it so that because of that supply demand imbalance um there's a really good case to be made that prices will go up from here and if they don't I think you know the investment still fares fairly well. Like I said the downside is is quite protected. So um I think it's a very interesting and kind of asymmetric bet here and um the industry has changed a lot which I think will aid in the sort of investment case moving forward. if you're small and micro and value these days, it's sort of inevitable that you have some exposure to to coal. Um, and I guess the and and met coal is probably the is obviously the better place to be. But is the metal price depressed because there's because of cheap steel, do you think? Is that why like China's able to produce steel very cheaply? All the steel producers in the US are trading really cheaply as well. Also, is that is it like a demand issue for the for steel that's driving the met coal price? >> Yeah, it's that and there's a bit of over supply now um just because demand is down and stockpiles are a little bit higher than than they have been in the last few years. Um the biggest drivers of the biggest countries that drive demand across the world are China and India. India's demand has been fairly stable. Um, and the world has actually used record amounts of coal in 2023, 2024, and now we're on pace for a record in 2025 as well. So, number one, the narrative that coal is going away is is simply not true or at least not proven out yet. But number two, um, China's economy is a big driver of both steel demand and coal demand. And so um with the sort of setbacks that they've had both in the property sector and real estate um that I think drives a lot of activity broadly speaking and has a big effect on the price. Um and so that's those are probably the main explanations now. And then you know there's always other little things that happen throughout the year whether it's um some new m some new countries emerge as some you know incremental suppliers or or with incremental capacity or you know there's natural disasters and that sort of thing. So I think the scale of pricing and supply and demand can kind of go up and down on a yearly basis but broadly speaking I think the world will continue to use more and more coal over the next three five 10 years etc. Um and yeah, so it's I think it's driven by a couple of things. >> It is interesting to think that uh China's cars are effectively coal powered just you have a you know EV battery in between there. >> Yeah, very interesting. Um, and I think there's um, you know, just the the narratives out there surround I'm not an expert, you know, I'm a generalist. Do your own work and don't take what I say verbatim, but uh, the sort of narratives out there about um, energy and coal usage and trying to get to zero carbon emissions by 2050 um, I think are just that at this point. their narratives and they're not really based in uh in reality uh given what I've I've discovered and you know to reach a point where we eliminate all fossil fuels within two decades is uh unfortunately a pipe dream um and would would constitute probably the largest and most expensive project ever undertaken by our civilization uh to do it that quickly and so um given the way politics moves and the steps we've taken so far it doesn't seem likely um and so you know I think there's Um, sometimes those narratives get a hold of sort of investment themes or certain industries and they stick around for a while. And I'm not saying coal businesses are the greatest business in the world. But when you do have an industry shift and a misperception and you know a lot of value there. I think if you just look across the sector that's very interesting to somebody like myself. I certainly wouldn't start my search for companies in in commodities or in energy but this is a new space for me. I spent a lot of time on it the last year and a half and so um and I like learning about new businesses and sometimes you get an insight here or there uh that I think leads to something good and so yeah it's I you know trying to work through the narrative has been interesting about where we are and I think it's opened up some opportunities to be honest. >> Um what what other things do you hold besides uh do you have any exposure to things outside of commodities? [clears throat] >> Yeah, the portfolio is really unique today. It's made up of very uh individually bottomed up sort of opportunities and companies that I find interesting and that I like etc. And um I have exposure to some retail on the e-commerce side and I own a furniture retailer which we can discuss. Um there's a fire safety and life safety business. So like kind of a niche industrial although that's a larger company. There's a company in the portfolio that operates a portfolio of hospitals. I've got nonprofit software uh you know HVAC maintenance and repair. So, a lot of different industries and companies and I think again the strategy is very bottom up and so there there are some themes I think you you know at a high level I'm really looking for I love service businesses and I'm really looking for kind of like recurring service businesses with operating leverage sometimes pricing power companies that um have long runways for growth and that operate in some durable or stable industry or niche where they can kind of grow along with their end market over time. Um, but broadly speaking, the the portfolio is pretty unique today. >> Uh, can you walk us through the uh furniture? >> That's the [snorts] one you pick. >> Absolutely. [laughter] Yeah. No, it's interesting. It's it's interesting. >> I'll tell I'll tell you why I'm interested in furniture just just because I think because I think that it's there's a broader theme. there's a housing and uh and I I just want to hear in in that context but but I I don't >> people like to sit so >> I don't I don't want to get in front of your face >> everybody needs furniture so we have you know um so I wrote I wrote this company up it's called Leon's furniture they're the largest furniture retailer in Canada I wrote the company up a few quarters ago or last year I can't remember in one of my letters and I compared it to Nebraska Furniture Mart >> it's definitely not apples to apples NFM is is significant. I think they do like a billion dollars out of their one store in Omaha and um which is insane. But um Leon's is is very scaled and they're um the largest furniture retailer in Canada. They have 300 stores across the country and they uh they also have an e-commerce business. And the furniture business is 100 years old. It was founded by an immigrant in the early 1900s. and it's, you know, gone through a few iterations as a business, but um they acquired their largest competitor in 2013, which was kind of like, I don't want to say discount furniture, but sort of on the lower end. And Leon's is in kind of the mid-market, I guess, range for furniture and pricing. And since then, they've grown their revenues and and earnings per share pretty significantly. And if you look back over the last 10 and 20 years, Leon's is about as durable of a business, especially for a retailer, that you could that you could find. uh they've had zero years of unprofitability through all economic environments over the past 10 and 20 years. Uh and they're have just been excellent stewards of capital and really good operators. The company's owned 70% owned by the Leyon family who was a founding family obviously. Um and they the profile is basically they can grow somewhere between like 3 to 5% uh every single year. They they have the largest market share in Canada. They're they're basically known as a big box store. They're at about 15% or 17% market share. They dwarf their next largest competitor in terms of size. Well, IKEA's their next largest competitor. So, they don't dwarf IKEA, but outside of them and IKEA, their next largest competitor is multiples smaller than they are. And in Canada, if you study the history of big box retail like Loblaws, Canadian Tire, etc., these guys basically gobble up all the market share over time. And I think Leon's is headed in that direction. And what makes it interesting is that in 2023, for the first time ever, they hired a non-family member CEO. And that that guy that guy since that time period has uh has um repurchased 10% of shares outstanding. He has uh uh paid out a significant amount of capital. um he has uh grown the business significantly um and they just started instituting an IR presence and so I think Leons is you know despite being a $1.8 billion Canadian business they're fairly underfollowed and overlooked. Um and I think it's because they haven't really spent a lot of time communicating with investors which is about to change. In fact, for Q3, they're hosting their first conference call uh I don't think ever, but in a very long time. And I think it will start to be a regular thing moving forward. Um, but today on that $ 1.8 billion market value, you're getting a normalized 300 or so million of IBITA and probably 200 to 225 in free cash flow. And that free cash flow can grow over time, especially because as LEON scales or as they grow their revenues and get bigger, there's opportunities for margin expansion, just doing some internal initiative things and just getting larger. And there's also the opportunity for some M&A. And the furniture industry is going through some, you know, difficulties both in the US and in Canada. And I think as their competitors go out of business, they can absorb that incremental market share, which will again strengthen the business over time. And the scale that Leon's brings to the business means that they have some some version of pricing power with their business. They are by far the largest advertiser in the country. They spend by my estimate I think over hund00 million in advertising expense. They're they're all over the place. And when times when things happen like COVID or supply chain issues or something like that, their scale still allows them to get inventory into the stores. And uh as an example, they are the largest importer of shipping containers into the country of Canada. And their mar if you look at their margin profile over the last and they have some boots on the ground in China, etc. And so they're um their cogs are are remarkably dur durable and they can kind of work through even adverse economic scenarios just given their scale. And if you look at their margin history over a long period of time, you can see the stability of that as well. And so, um, I'm interested in the furniture business. Um, you know, one of their comps, a large furniture retailer called Sleep Country was sold in 2024 for, I think, around eight or eight and a half times IBIDA and 18 or 19 times earnings. Um, Sleep Country is the number one mattress retailer in Canada. They were bought by Fairfax. Leon's trade Leon's trades at a a mid singledigit multiple of Ibita and like 10 or 11 times earnings. It's two times the size of Sleep Country. It's a number two mattress retailer in um in Canada. They weren't quite growing as fast, but their scale and market share dwarfs where Sleep Country was on their store count. And so I think that's an interesting comp just as a single deal to look at. Um and so I'm interested in the furniture business. I think it's cheap. I think it has opportunities for growth. I think capital allocation has been excellent. I think it's very durable. Uh but there's also this other angle where Lyon's through the decades has amassed this really valuable portfolio of real estate including on their headquarters where they have a 40 acre lot that's right off of the 41 or 410 highway downtown Toronto. And I estimate this lot is alone is probably worth a few hundred million. and their plan is to partner with a developer and build houses like vertical homes on the lot. That's going to be a longerterm project, but I still think it's interesting and not being captured in the value today. And then they also have a significant amount of store and distribution space that they're in the process of IPOing which will serve to unlock that value. And this is kind of a wellformed playbook that some of the larger retailers in Canada have undergone before like Canadian Tire I believe is the most recent example where they IPOed or spun off their real estate into a REIT and then they obviously were given a significant cash pile for dividends or a special dividend or buybacks and then they basically could add or remove properties from the REIT over time and it serves as another source of cash flow for the business. But most importantly, it serves to highlight the value of the real estate portfolio, which in Leon's case today is being held on their books for somewhere below 300 million. And so, um, between the retail business and the real estate, I think, however you slice it, you have an incredibly interesting and cheap asset that has opportunity for growth and really good capital allocation, but you get the upside of whatever happens with the real estate moving forward. And you know it's not going to happen tomorrow or six months from now but I think within the next 12 18 24 months the picture could be a little bit clearer and um that value will start to be highlighted and um you know in addition to just the the runway I think you know in 10 years Leons will have more market share and earnings will be higher etc. I think it's a really interesting setup. >> What's the top line of of uh furniture look like? Is it is it does it follow the property market or is it how does it there's always a household formation or what's it look like? >> Yeah, it's a good question. It's definitely tied to housing. Um [clears throat] you know Lance has I think responded well to any dips industrywide uh by again taking market share. Um and you can look back over the last couple of quarters industrywide things have gotten pretty rough and Lance has grown same store sales. Um, and I think that's absorbing incremental market share among some other things. And so they're fairly they're in a really good competitive position from that standpoint. But in Canada, it's it's driven by housing and um also immigration and there are some tailwinds there. I think you know uh family formation in Canada has has been fairly robust and um Leon's has a nice base of sort of furniture is not recurring revenue or recurring purchase but Lon's does have some form of a recurring customer in people who come back and purchase more furniture over time and the biggest thing that drives Lyon's revenues is not h home starts but it's household formation so people having children and moving to a bigger home or getting uh having more people in the house and remodeling and so that's been a big driver for them. I think they mentioned something like a base of like 16 million households where there's like a formation aspect there that can drive some repeat purchases over time. Um and then Canada is one of the most friendly uh immigration countries. I think they are I think they're letting in a net 500,000 people per year, something along those lines, uh for school and for work, etc. So that drives a lot of the activity as well. So, um I don't think Canada's house I don't have my numbers in front of me right now, but I don't think Canada's housing market is in particularly great shape. Um but between the market share gains, the immigration, and just kind of like catering to household formation, I think they're in a pretty good spot. And again, they they're there's a path to growing revenues at low kind of to mid-s single digits moving forward. >> Sorry, JT. I get a question. >> No, no, it's fine. I sure sound good. >> Let me do Let me do a quick shout out and then we'll do some veggies. [snorts] Uh Idaho, what's up? Toronto, Valpareo, Bologn, Bologna, Toronto, Dubai, Tombble, Texas, what's up, Tyler? Bethesda, Belleview, Lausanne, Switzerland. Hifa, Israel, Palestine, Salsburg, Austria. Breenidge Brandon Mississippi Peditfa Israel Montana [laughter] Charlotte Madira Island Portugal Milton Kees what's up Mayfair Tallahassee all right JT it's 3 minutes past the hour folks market here come the veggies >> all right well we're back with a fan favorite animal themed episode, and this time it's chipmunks. And I'm sure you're thinking, "Well, Alvin, Simon, and Theodore." Uh, no, not not quite. But, uh, we're after the squeaky kind that that chase each other around trees. Uh, so there's this small clearing on the Vermont, Quebec border where on summer mornings, the forest hums with the sounds of survival. And there's a fluttering of wings, there's a crackle of a twig, sometimes the sharp squeal of a chipmunk, and it's sounding the alarm. And in that clearing, behavior ecologist Charlene Kusho uh spent her days watching, listening, and recording and then decoding what these little mammals were saying to each other. And she began with distress calls. So these chipmunks will use categorical alarms, uh you know, one for hawks above, another for ground predators like snakes or foxes. And it's not just noise, like they're signals that are shaped by survival. Uh but the real discovery wasn't that chipmunks had this language. It was that each chipmunk used that language differently. Some were chatter boxes of fear, squealing at every little movement, broadcasting panic at the drop of a pine cone. Uh others were nearly silent. These stoic little philosophers of the forest who seem to be saying, "Well, we'll just see how things play out." Uh and and these weren't just moods either, by the way. They were consistent patterns of behavior, what we might even call personalities. Now, personality isn't a word that biologists use very lightly. um it suggests something stable and enduring and consistent and even maybe even intentional through time. But what Kusho found is that these temperaments what they what they classified their terminology were shy versus bold. So shy being the ones who get freaked out, they're skittish. Uh and then bold are the ones who will just stand there uh no matter what and not not squawk. Um they persisted over time and across situations. It even shaped the ship the chipmunk's relationships with each other. So in essence, the forest had kind of its introverts and its extroverts. Now once you you start to think about animals having personalities, the next question is what does that mean for the way they communicate and if a certain chipmunk screams at every passing breeze, others eventually stop listening to it. Uh and and Kusho tested this. She recorded distress calls from both shy and bold individuals and then played them back to the colony. And the chipmunks paid attention to the bold ones, the ones who who rarely cried wolf. the overreactors, they started to ignore them. And and this is quite fascinating because it's not just like an instinct, it's actually some rudimentary form of of reputation management amongst these chipmunks. Uh they track reliability. They remember who to trust. So over time, credibility becomes kind of its own currency. And the fewer times that you spend it, the more valuable it is. And of course, we too live in a soundsscape of alarms. Some real, most not. Uh, and like those chipmunks, we we learn to tune most of it out. And some, you know, there's always these market commentators that are calling for a market crash every 10 seconds. Uh, and you know, eventually we kind of start to ignore them, you know, and then of course there's there's Mr. Buffett and and he learned long ago that the more sparingly you speak about this, the more weight your words carry. And he's only made a handful of market predictions over the decades that he's been doing it, the best that anyone's ever done it. Of course, 1969, he folded up the partnership when he couldn't find investments that made sense. But he was back in 7374, an over sex man in a wh house to use his colorful language. It's not mine. Uh, you know, it was a simpler time in the 70s. Uh, then [clears throat] almost nothing until 1999 when he he damn near to top ticked the com bubble with that uh sounding an alarm uh in Fortune magazine. Then he's back in 2008 with Bi-American IM uh in New York Times OpEd. And then in 2021, it was more subtle, but he was warning new investors that the game wasn't as easy as they thought it was. So, clearly this guy knows what he's talking about. Um, we could draw some more analogies from our little chipmunks. From a purely evolutionary standpoint, uh, you might think that the bold chip chipmunks would win. So, they spend less time panicking and more time filling their bellies. And more food means more energy, which means more offspring, which equals more genetic success, right? like sort of all connects together. Well, not quite. Kusho's data revealed there's there's a trade-off. The chipmunks who squawkked a lot actually live longer. They may have had fewer offspring because of their conservatism. You know, they're squawking and running around and not eating, but they survived more seasons. And the bold ones, they reproduced quickly, but they also tended to die younger. So, you know, hawks and foxes were trimming this genetic line earlier. Uh, so we think back, this should probably, you know, think back to last week's conversation with Luca about the different ski racer types. Um, but this is what evolutionary biologists call a life history trade-off. It's a balancing act between risk and reward, reproduction and survival. And you know, it's it takes pace on kind of a fast versus slow continuum. The fast types mature quickly and they pour energy into reproduction and they also accept higher mortality. And the slow types invest in maintenance and vigilance and reproduce later and less and survive more of the bad years. So this variation persists because shifting environments periodically favor different points on that slow versus fast continuum. You the feast year the feasting years tend to reward speed and the famine years reward caution. So investors like we we face that same life history choice with capital. Some are bold foragers. Uh, you know, they run hotter, higher growth, uh, accelerating businesses. You know, they're always kind of on the come inflection of being profitable, crowded names, leverage at at every level that they can get it. Uh, and in the fat years, they eat like kings and they put up eyepopping numbers and they re reproduce quickly. You know, AUM pours in. Uh, new funds are spawn, the brand litters the forest with offspring. Uh, the catch is the survivorship. you know, a single hawk comes along, which might be, you know, in a liquid tape or a policy shock or some factor winner. Um, and that trims that lineage fast. So, they have great arithmetic returns, but poor geometric survival. Uh, so other investors are more like sentinels where they worry about everything, even the occasional bad thing that that does actually come to pass. Uh, they underbet every edge, they keep powder dry, they embrace boredom, stay well within within the edge. Uh, and they re reproduce much more slowly, often subsisting on meager returns for long stretches, but they live longer and their compounding engine requires a lot of time to ever approach anything that would be impressive. They're never quite top quartile in any given year, but somehow they managed to be at the top of the leaderboard after decades of applying their craft. Uh, so the question to really ask yourself isn't like which which chipmunk temperament is best. Um, but it's which temperament best matches the current environment with with your liabilities, with your clients, uh, and with your own personal psychology. So, it's okay to run hot if you can acknowledge it about yourself and maybe take some measures, uh, to mitigate, uh, and be a little bit more safe about how you're doing it. Um, but it but if if a perfectly ordinary, you know, minus 30% kind of draw down would trigger margin calls and redemptions and force you out of the game, you're likely that bold chickmunk that's, you know, gorging out in the open, uh, who's going to be easy lunch for a hawk at some point. So, the takeaway to remember is that the arithmetic heroes get the headlines, but the geometric survivors are the ones that own the track records. >> Good one, JT. Thanks. Um, Adam, small caps have had a rough run for the last like decade or so. How um, how do you assess the small cap uh, opportunity as it stands now? >> Yeah. Um, yeah, echoing what you said, I think it's been a rough stretch and up until very recently and maybe we've even revisited that, I think valuation spreads between small and large have been quite significant uh, relative to history. And I'm not sure what changes that at the moment. You know, we're in an environment where I think people have uh people are overly focused on large cap tech AI theme and even you know, international small cap businesses versus US small cap which is primarily where I focus. Um and that there have been multiple periods over the last couple of years that what I'll say is so relative to history I think valuations look good. Um, having said that, today it's given the change of the in the makeup of the index and the alternatives out there, the Russell 2000 is not the greatest vehicle for exposure to small caps. In my view, I think a majority of the businesses in the index are lowquality, unprofitable. There's a big focus on healthcare and finance. >> It's okay to say co on our uh on our show. >> Okay. All right. Good. Well, yeah. I after the stories you just told, I think I have permission to use bad language. Um yeah, and so I think um this is a bit self- serving to say this, but I think the active management approach is a better way to get exposure to small caps or even like the S&P 600, but that those companies are much larger than where I typically fish. And so, um, the opportunity set seems good in on one hand, but on the other hand, the options for exposure to small caps broadly are is not that great. And so, um, you know, I view my job, you know, similar to when I was working in basketball as a talent evaluator and professional. You obviously look at every player, but the you whittle your universe down to the select ones that you think will make it and can fit your team and are what you're looking for. And so, that's really what I do on the small cap side. And I'm trying to find high quality businesses with good management teams that we can purchase at cheap valuations, but that are somewhat uh it's somewhat uh outside of or different from what you can get broadly. And so um I don't spend a ton of time thinking about the market or macro and that sort of thing. But just having been in the space for over a decade, I think it's just become very clear that this group of companies is kind of viewed as just lower quality as a whole. And I'm not sure what changes that. I don't think we've seen persistent or consistent flows into small caps. Um, you know, this year has been okay, but um, just relative to what history has said. And, uh, there's also another interesting angle to that too, which is in the land of, you know, trillion dollar companies, uh, some of these market caps, some of their market caps in the Russell, even below, you know, $10 billion, that's a that's a small public company today. And that I think is a very different dynamic than what we've seen in the past as well. And sometimes you can have a midcap or you know approaching10 billion public company that is mispersceived or overlooked or underfollowed just given that it's again on the smaller end of things and and given the dominance of kind of passive investing and uh quantitative based strategies and and the needs for liquidity there. Um and so when that happens, I think um the one billion, two billion, three billion dollar businesses can be pushed even further down the spectrum. Um and uh and so I think the um the industry as a whole and the dynamics surrounding small caps have been a difficult kind of stream to swim up uh recently. Um, but what I've kind of prioritized too, especially as people kind of lean toward the same themes and companies recently, are companies that are kind of helping themselves close that valuation catalyst or valuation gap. Um, and so I I love a cheap business that's quality that's that the market is not recognizing as much as the next guy. And I think earnings growth and uh good capital allocation, etc. will will close all valuation gaps over time. I I still I hope it's still true that stock prices follow you know earnings per share or returns on invested capital. I'll I'll hang my hat on that. But um I think it's also helpful when you have a management team who is aggressive in realizing value for the business but also wanting to close that gap whether it's in in instituting a significant buyback program or uh doing M&A maybe when uh when they when they have the opportunity to do so. um or just acting in the interest of shareholders. Uh one because they are I like to invest in owner operators and people with skin in the game, but two because that's a path to realize value even if the market is not or you're not getting flows or multiple expansion. So there's a there's a few companies in the portfolio today that represent that sort of theme. And it's almost like what David Einhorn said, not quite that extreme, but in the past when you invested in small caps and there was more there was a he more heavy active manage universe, you could buy a company for eight times earnings and you could sell it to a Fidelity long only for 13 times and you make a decent spread on that and maybe you get some earnings growth in between, etc. But now he's looking for things that trade at four to five times earnings that are buying back stock handover fist or paying a dividend or whatever the case may be. And I I don't go that far out on the extreme in terms of like the entire portfolio, but I do sort of stand by that point about how it's very attractive to have companies that are again helping themselves close that valuation gap. So not relying on flows and multiple expansion is important, but um you know there's also some companies in the portfolio that are growing pretty significantly that I think the market has noticed or will continue to notice. And so I I think you know maybe two ways about it. Like I stated the opportunity set, excuse me, [clears throat] for somebody like myself is very good, but at the same time I do understand why maybe the universe generally speaking is is hated at this at this stage. Adam, what uh what else did you learn from scouting that you that helps you now as an investor? >> Yeah. >> Well, tell us a little bit about scouting. What's that like? >> Um, it it was a blast. I mean, one of those jobs I think that never felt like work for one day that I did it. And one of the things that I I got an incredible amount of exposure to was just the sort of human side of evaluating a person and sitting in interviews with people >> and you know hundreds or you know probably didn't reach thousands but hundreds of interviews over the years and >> cross referencing those with everything else that I was doing and trying to pull some pattern recognition out of that I think set the stage in a very helpful way for what I'm doing now. and you know being in a meeting and knowing something about a player because you've done a channel check or something and then watching them lie to your face about something like you know they don't do drugs or they don't you know have a bunch of girlfriends or whatever the case is >> it it colored my view a little bit. Yeah. Yeah. It um opened my eyes to the maybe um naive way that I approached it initially. And so I have a I I like to say I have a good BS detector these days and that part of it is very helpful. Um just getting that again sort of human side and understanding that people will be dishonest and do what's in their best interest. And that sort of opened up the the other biggest thing I learned was the power of incentives and >> how that sort of opens the door for what results you'll see over time is what people are incentivized to do whether it's a coach, a general manager, a player. Um, and just getting exposure to like the very human element that is a part of sports was just really really interesting and again helped set the stage for what I'm doing today. So I can get into more specifics but there we again we would probably need another hour to get through all of that. >> Just uh tell us a little bit about maybe the most interesting business that you have. um not necessarily the most undervalued, just the most interesting. Like I think commodity businesses are I find them they're sort of less interesting and then there are other businesses that like there's some unusual niche that they're exploiting. Do you have any do you have anything like that? >> Yeah, I think I think API Group the ticker is APG. I think it fits that bill and was one of the more fun companies that I got to know uh early on which I knew nothing about. And if you think about um going inside of a commercial build, any commercial building in any city, there are a significant amount of fire safety systems inside of that building. And you know, my entire life, I didn't pay any attention to those. And even, you know, during fire drills in school or any exposure I had to that this industry or that this was a business or something was just non-existent. So, I think that's a very interesting niche and a very durable one too um that API operates in. And just to give a high level, cut cut me off if you need to, but they're a fire safety and life safety business that provides fire safety inspections and equipment and maintenance of and equipment maintenance of fire safety systems. And you know, like your sprinklers, extinguishers, valves, water pumps. Um they have they went public in 2020 2020 I believe. uh so about five years ago via spa and they have around 15% market share today. They're the leading player in a really fragmented industry and what I came to realize was that this is an excellent business. It's recession resistant. Uh it's mostly because the maintenance activity that they do and the inspection activity is statutoily mandated by the National Fire Protection Association on all commercial buildings. So if you own a commercial building, you are required by the government to have your fire safety systems inspected and maintained at least once per year, but sometimes twice per year. So that lends itself to recurring revenue. It's a cyclical. There's a [clears throat] really high variable cost structure. And if you think about the life of a fire safety system, it starts at building construction where contractors will subcontract out the work to install all of the sprinklers, the alarms, the pumps, etc. And most businesses in API's industry, they sort of chase that installation work because it's higher dollar value and it's easier to manage. So you have one or two projects per year for, you know, a million bucks or whatever the case is. But it's a little bit risky. It's a lot riskier because the projects are longer in duration and they're cyclical because they're tied mostly to new building construction. But API's approach is very different because they lead with the inspection work first. So they'll sell a sprinkler inspection, for example, for, you know, $2,000 or $5,000 twice a year. and they believe that that inspection related work leads to three to four dollars of additional service work. So you go in to inspect uh you inspect a sprinkler and you find a corroded pipe for example and then you can fix that and do additional service work. And this part of the industry is higher margin and it's less risky and it leads to sort of faster turnaround time. So cash collection is better but it's more complex. So there's more projects to more smaller dollar projects to manage and it's lower cost and it requires a lot of infrastructure that mom and pops who they compete with don't have and there there's also this smaller portion of the business called specialty services which there's some construction related and HVAC related stuff there. Um, but the history of the business is really interesting, which we can talk about kind of on top of the fire safety services, but they also acquire it's it's like a hundred-y old business that was acquired from a founder who grew the business from his father and um executed it really well. And he didn't want the company to be kind of carved up by private equity. So, he sold to a group that basically takes companies public and keeps them together and just grows them through organic growth and M&A. and they also acquire a lot of smaller and medium-sized businesses in fire safety which they can purchase for really significant multiples and so um I just enjoyed getting to know that business and like I said it wasn't something that was ever on my radar and when I found it it looked you know I think it was around a billion market cap or so something and I thought they could do maybe like a billion in IATA which they're going to do uh I believe this year and um I I spent a lot of time with fire departments so I went out and visited with fire teams and talk to people in the industry and just got a sense of like how you do these inspections and what matters and where the value prop lies and is if there's pricing power there and you know that sort of thing. So it was just I think of all the businesses in the portfolio that was one of the most fun to do diligence and there was like a real tangible aspect of that process and so um I think that that fits the bill as maybe the most or one of the most interesting businesses in the portfolio. >> Can you just walk us through the valuation a little bit? Uh yeah, sure. I think today so API um API group is the share price has increased I believe 5x in five years. So we've done well on the investment but I think there's still a significant runway for growth. Um I can underwrite I think a 15 to 25% return per year from here over the next three to five years. Um, you know, there's a I don't have my numbers in front of me, but I believe there's a 6% free cash flow yield today that's growing 15% per year. And, uh, on the back of mid singledigit growth, organic growth, and some M&A, I think they can do around 1.3 1.5 billion in free cash flow within three years or so. And the market cap today is 12 billion or 12 a.5 billion. Um and I think these businesses just given their growth profile, their recession resistance, their durability, um uh the um management team, capital allocation, the margin profile. I think these businesses deserve to trade between you know 15 20 times or so. Um and at 20 times it's a 25 26 billion company. Um and so I think there's a path to get there with just simple block blocking and tackling. But then there's some upside on further M&A and uh if organic growth goes higher. They've been kind of pruning some business in some of their segments right now which has caused the top line to look a little bit slowed down but they're also underlevered I think. So any increases there they can go up to I think three three and a half times and do some more deals. So they can probably acquire 50 60 million in Ibita per year um in addition to the organic. So, um, yeah, there's there's lots of levers to to win here and management is has a lot of skin in the game and the chairman has, uh, run multiple public companies before with great success and I think they're incentivized to create a lot of value. So, it's one of the companies that feels like a kind of a never sell sort of business. I think earning, you know, revenues and earnings will be higher five 10 years from now and I'm excited about what the future holds. What do you think about that spa process going public via spa? What's the uh reason for doing that because the because the founder was looking to step out and and that was I understand that part but why not just go public? >> Yeah. So it's not my favorite um it's not my favorite way to do it and in this case you know I think the group that brought the company public has been and will be well compensated for doing it that way. Um but a speed to mark I think the environment was one thing a speed to going public like a speed to market and a lack of kind of um a lack of kind of road show means that there's you know that there's an interesting kind of story to tell for growth and margin sometimes like in the IPO process and with a company like this you say you're going public at a certain valuation and certain margin targets there's maybe only downside from there and so I think the lack of that formal process was helpful to API in that case. Um but yeah, I mean I think it also helps you know despite the fact that the group that brought the company public uh has been paid well. I think it also helps align interest and incentivize them to create value. You know there's a compensation structure in place that basically states that as the shares increase in value management is paid a little bit more compensation and so it it kind of direct is kind of directly tied to creating value in that way without dilution. Um, and you know, they've been I think it was a hurdle to get over initially, but the track record of the people bringing the company public gave me a lot of comfort. And um, I thought that the playbook could be very similar to some of the prior companies that they operated. Uh, the the I I don't have to speak as vaguely, I guess. The um chairman of the business is Martin Franklin, who has a long history in public markets, and he was a CEO and chairman of a company called Jardan. And that business I think did 30% per year for two decades or something along those lines. I can't remember the exact timeline but some phenomenal return there. Then he's done some other things as well. Both that have worked and not worked. So I got comfort comfortable with him and his track record and um you know the the founders of the business and the way that they were approaching it. But it's not my favorite uh way to do things. And I think for every successful spa um there's a hundred unsuccessful ones or with sleazy promoters or really bad compensation structures or evidence of things that have not worked out. Um but I'm happy to say actually that within the portfolio I believe I own the mo in addition to API the most successful spa of all time in Limbach which is an HVAC uh maintenance and electrical system uh maintenance business among other things. Um, if I can if I can humble rag for a minute, so it's not always bad. Uh, but yeah, it's not my favorite way to do things and I don't don't typically go I think the mispricing was so great that it it sort of fed on itself, but again, it's not my favorite way for companies to go public. >> Well, I was going to say five times is probably pretty good evidence that that it worked out. But, um, we're we're kind of coming up on time, Adam. So, if folks want to follow along with what you're doing or get in contact, what's the best way of doing that? Yeah, sure. Uh, this the website our website greystonevalue.com. Greystone is spelled gry. I'm on Twitter as well. Uh, and uh, yeah, I'm easy to find if you Google or just Greystone Capital and uh, I'm out there Substack Pound the Rock Investing. So, any of those avenues work great. >> Uh, very quickly, what's Pound the Rock? Uh that's just a name for my blog uh where I write about investment related topics, thoughts, I post research etc. Pound the Rock is the Spurs motto which I shamelessly stole from them and it references a poem by a uh photographer Jacob Reese which I highly suggest your listeners and you guys to check out. Um, and it's just about kind of continuous incremental effort and what leads to with uh, you know, if you have a hammer and you blow a rock, you uh, do a thousand blows on a rock and the, you know, it might not break, but on the thousandst or the 101st, the rock breaks and that's a result of all the effort that went before it. And so I think that's a great metaphor for compounding and um, kind of corny maybe, but uh, that's the name of my blog. >> That's good stuff. JT, any final words? No, sir. >> Check out Journalytic, folks. I got a new book, Soldier of Fortune. It's available now. Uh we'll be back next week. I'll talk about it more. Yes, I I