Tim Travis on Private Credit $OWL $OBDC and $MSDL; Energy $DVN, $OXY and $EPD; and $AGO | S08 E10
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Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …
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We're live. This is Value After Hours. I'm Tobias Carl. Jake is on vacation. So, it's just Tim Travis, special guest, and me will be co-host, special guest. How are you, Tim? Good to see you again. >> I'm doing well. So happy to be here, Toby. Thanks for having me. >> Tim is uh founder, manager of TNT Capital. He's got expertise in financials and private credit. And so that's what we're going to be talking about a lot today plus other things in value generally maybe some options discussion. That sound good? >> Sure. Sounds great. Yeah, it's a lot it's a crazy time. A lot of interesting and dire headlines. So it's a good good time to chat for sure. >> Well, let's let's start let's start with private credit because that's there's a lot of headlines about the how bad private credit is. What's your what's your view? >> So I think there's a lot of misunderstanding. So private credit is very broad. I mean basically what these funds are are they're basically bond funds. And so it's private loans to to companies of of different sizes different different of the BDC's have different size kind of requirements or size targets that they have. And they're for the most part most of these like publicly traded larger cap BDC's are are really um dealing with first lean loans. Okay. So like 90% uh or higher are are first lean adjustable rate loans. And um you know there's some confusion because you have the publicly traded business development companies like uh Blue Development Company, OBDC or Morgan Stanley Direct Lending or Blackstone uh secured lending. You have you have those where it's permanent capital. Okay. And so there's not the ability for investors to ask for their money back. it's just like a a public company where a lot of the controversy is are these private funds, these private BDC's that have been sold, you know, for many years. And one of the reasons why people buy those private privately traded ones is because they don't have kind of the marktomarket volatility as much. I've never sold one in my life. I don't I don't find it super attractive, but some people do. And and so what what's occurred is that last year there was a couple bankruptcies. There was first brands and there was and what's interesting Toby is there were bank syndicated loans. They were not private credit loans. And so and and there was fraud involved with both like with with first brands for instance it they it was factoring loans. So basically people u buying their receivables that were double or or maybe even triple pledged. M >> so there's fraud their bank their bank origin loans but that that impacted private credit stocks sold off in relation to that and then going into this year you have the AI hysteria and so it's like okay well you know AI is go growing so fast it it's such a big unknown of of what the final impact will be how is this going to impact all these software companies are you still going to need Salesforce are you still going to need Adobe uh HubSpot you know and then there's obviously there's so many smaller software companies that have kind of missionritical or not missionritical tasks that are associated with them. So a lot of as software stock sold off so did software loans. Uh you know the growth has been in technology. So there's been a lot of private equity buyouts of technological companies including software. And so if you look at some of these business development companies they might have like 20% or even 30% not not so much 30. there's one or two that might have that uh exposure to to software companies and a variety of different types of software companies of course. Now, what's interesting is historically, Toby, those have been the best performing loans in the portfolio. Uh but, you know, everything's kind of getting painted with the same brush. And um these privately traded business development companies that that um that you don't see stock tickers for, they have gating requirements about how much money can be taken out each quarter. And so because there's all these negative headlines, you have a situation where because you're seeing so many headlines, people are trying to rush out of these funds and these are not super liquid assets. And so you create this mismatch of liquidity and and that's really what the hysteria is is in a nutshell. Kind of went on a long time there. >> No in a nutshell. >> That was that was a good explanation. So private credit has this um issue with headline risk from first brands and trioint. And then Blue's in the in the news a lot, but that's their private fund. >> Yeah. Well, Blue's got a variety of different So, Blue itself, owl the ticker, they're an asset management company. Okay. So, so they're they're collecting fee income. The asset management company itself is not taking credit risk. And that what's unique about their model is that they have a a tremendous amount of of permanent capital. So, like 85% of their fees are from permanent capital. And so 300 billion is in locked up AUM. So their fees are very durable and but but you know people are worried about about one segment of the funds that they manage which is private credit but they're forgetting about all you know they're also financing the data centers. They're they're financing a myriad of uh they have they have asset assetbased lending. So there's all these things associated with them. But what's interesting is to see an asset manager trade down so radically. I mean, I think when they went public, they had something, don't quote me on the exact number, I think it was something like 65 billion under management. Now it's well over 300 billion. I think it's like 360, 370 or something like that. And the stock's actually cheaper than where it was when it went public. You know, these companies like a Blackstone, they trade on distributable earnings and it's trading at about 9.4 four times distributable earnings and it has a dividend yield of 10.3%. So really, really cheap. I think it's, you know, a a fantastic long-term investment opportunity. Uh you don't really get this type of quality. Like this is a much higher quality business than like a bank, right? I mean, where you're taking a lot of credit risk, it's more heavily regulated. All of these things. the margins on on Blue Owl are are are you know four four to five times higher than most banks have. Uh so uh it's an interesting environment for sure. >> So there's some sort of bank run then going on in Blue Al's private credit fund >> in the private credit fund. Yes. So, so what happened was on these private funds where it's not permanent capital, they might have like a uh something written in the perspectus where it's like, okay, in 10 years we're either going to liquidate the fund or we're going to merge it. And so their initial plan was they were going to merge it with their publicly traded BDC, which is ticker symbol OBDC. And at the time when they came up with this idea, OBDC was trading around book value. So it's like, okay, not a big deal. you know, when when these private uh funds redeem its net asset value uh historically. And so it's like, okay, we'll merge it with that. We're going to cut some costs associated with it. It it it'll be a good thing. Similar portfolios, just different size, that sort of thing. But then what happened was with the bankruptcies that occurred last year and the bank syndicated, which is different, the uh the the valuation sold off on OBDC and it's like, okay, now I'm going to take a 20% haircut if we do this merger. That's not going to work. So, Blue Owl was working on solutions. Some of these people wanted money more quickly than others. And so, basically what they did was they sold 1.4 billion of loans uh from the private uh REIT or private BDC and then also the publicly traded BDC's because they have similar portfolios. And they sold it for 99.7% of par which is, you know, phenomenal phenomenal result. And so they basically said, "Okay, we're going to accelerate. We're going to give you back 30% of your money now. So, you're going to get that check, but then um we're going to stop the normal gaining process and and we're going to unwind this portfolio over time and pay you out, you know, over the next, you know, months and year year or so. And the media just kind of picked up on, oh well, look, they're they're restricting redemptions now. They've always restricted redemptions because there's a liquidity mismatch. you know that you're getting a higher yield because there's because this money is not as liquid. Okay. And and so it's just really kind of taken on a life of its own. And then there's other elements to it, Toby. It's this is private debt. So like like these software loans for instance that everyone's so worried about, they're written at 30% loan to value. So guess what? There's 70% cushion before you know we're losing any money on on these loans. But what about private equity? You know, I mean, I mean, what about the stock market? So, if all of these were to come into trouble, there's obviously way bigger issues at hand. And I think when you think about it, these are very sophisticated people. Like if Blackstone has a private equity company that runs into trouble. Let's say a software company that runs into trouble. What they're probably going to do is maybe inject some equity into it, maybe negotiate with with the lenders, including the BDC's for maybe a lower interest rate or something like that. But these aren't, you know, loans that are going to zero. They're first lane loans where they would take the keys over for the business. So, it's just I I think that the hysteria does not match up with the reality whatsoever. I think it's a huge difference. >> So the names that you like out of that Al which is the owner the manager of of uh of all of the funds and OBDC which is the publicly traded BDC of AL >> and Morgan Stanley direct lending. >> Yeah. Yeah. So so AL is the asset manager and I love that as like a long-term play. I remember when Blackstone went public and I I that it was I think it was like right before the financial crisis and then everyone was like oh well that was the top or something like that. I mean it's almost 20 years ago now. So forgive me if I don't get everything right there but and then they kind of ran into hard times and the stock sold off quite a bit and it was like oh man you know Blackstone they went public at peak dollar amount and then really since the stock got hit a while hit hit pretty hard it's been a phenomenal performer. I mean, it's it's rallied dramatically until very recently. And I think you could see a similar thing with with Blue Al where they've grown really rapidly and they have a really nice footprint in a lot of different niches, good relationships and like with advisors that help distribute their funds and I think when people actually see the quality of the earnings, the quality of the cash flows, uh the company was going into the year was expecting to grow revenues by a a faster rate than they grew last year which was 20%. So you're getting that at 10 times, you know, distributable earnings, 10% dividend yield. That's very bizarre, honestly. It's very bizarre. So, >> so I like that. But then you go to the business development company. So, so think bond funds and OBDC, we'll start there. It, you know, it's it's trading at around 30% of a discount to its net asset value. So 30% discount. We're talking about a 13% dividend yield. A lot of these have 12 to 13% dividend yields. And what Oh, excuse me. I I apologize. It's about 25% discount to its net asset value. It's about 30% below its 52- week high. Um, and so what we're doing is we're buying a loan portfolio at a very, very, very large discount to its net asset value. Yes, there's some management fees associated with these funds. You can make assumptions that their marks aren't going to be perfect from time to time and credit could weaken a little bit, but you can make some pretty dire assumptions in relation to defaults and recoveries that are made up for the fact that you're buying this thing at such a large discount. If you're buying it at 65 to 75% of net asset value, you know, that's really attractive. And the thing that I'm watching, Toby, and and I think the thing that other investors should really advocate for if if they're in this space whatsoever is these management teams need to think long term and not short term. Buy back your damn stock. You know, buy back the stock of both the the BDC's and your asset management company if you're Blue Owl. And they are doing this. Insiders are buying as well. So, they're eating their own cooking. But I think the more of that you see, the better it'll be. And even if the losses get a little bit of worse, a little bit worse with with the private credit loans, you're going to offset a lot of that by buying the whole portfolio at 70 cents on the dollar. Uh, you know, I mean, think about it. Just if you have if you have 10% defaults and you have 50% recoveries, that's, you know, 5%, right? So, but you're buying the portfolio at 65%. Now there is a little bit of leverage. There is a little bit but not that much. These are not banks. These are not 10 to one, 5:1. It's like leverage is one to well some of them like blueout technology is like 75 to maybe like 1.25 on the high side. Not heavily livered uh investment vehicles. >> So uh a lot of those asset managers have sold off over the course of the last six months. Uh like I think Colbert Kravis has sold off and a lot of them have sold off. Is that associated with the private credit? Is that the >> Yes. Yeah. It So, they all have pretty pretty much. So, Blackstone sold off uh KKR, Aries, um and then Blue Owl of course and there's others as well. And so, I think it's an interesting opportunity in a lot of the space like we've we've sold some cash to secure puts on uh on KKR, on Blackstone, on Aries. uh because you're getting you're able with the volatility as high as it is, you're getting to get some you're getting to manufacture some pretty low valuations for high quality managers. And once again, these these are way better business than business, excuse me, businesses than banks. like banks. I've been, you know, me, I've been advocate for Croup for a long time when when everyone was saying how terrible it was as an investment and when you could buy it at 60% of tangible book value and it's like, well, you know, if they get to 10% return on tangible capital, it gets to book value again and it's at 100. Now we're at 110 on Cityroup. These are nothing like the banks. These are way better businesses, way higher margins, way better growth prospects. And it's interesting because these are so cheap. And I'm not talking about the BDC's by the way. I'm talking about the asset managers. The manager of the BDC are way better business. BDC is a loan portfolio. It's a bond fund. Um but uh these are way better businesses, way better growth prospects, way higher margins, and the banks aren't are trading pretty expensively. So you'd think that if there's credit issues on first lean loans in private capital, you'd think you'd see some of these banks trading at discounts to book value or or at least low multiples. And that's not the case at all. And I'll grant you a good environment for banking with M&A and with the yield curve and and I think the administration's pretty bit, you know, favorable towards banking. Uh but I I think that there is a disconnect there. >> Let's come back to the yield curve in a moment, but just um walk us through the mechanics of the cash secured put sale. So, for folks who don't know, that's a that's a bullish bet on the stock, but it sounds when when people hear put they probably think that that's you're buying protection, but you're selling the protection. And so, just walk us through the math of that transaction the way you think about it >> just in broad terms. You don't >> I'll do Yeah, I'll do a an analogy. So, like let's say you have a a stock that's trading at $13 per share and you like the stock. You think it's attractive, but maybe maybe you're conservative. You're retired and and you you want to be conservative. You're kind of bearish on the overall market. And so, you say, "Okay, I'd like to target double digits, but but I want less risk than just owning the stock outright." What you could do is you could sell a put option at, let's say, $10 per share. And in this example, and this is, believe me, we have stocks that meet these pretty much exact criteria. Uh, we're going to collect a dollar, a dollar per contract. Every contract's 100 shares. And so, basically, you're collecting $100 upfront for a maximum risk of 900 because it's a $10 strike price. And remember, we're talking about >> that's if it goes to zero. >> That's if it goes to zero. That's what you'd lose is $900 because you collect a h 100red bucks up front. Now, keep in mind, we're talking about a $13 stock that you're bullish on. You're bullish on for fundamental reasons. And so, you get this situation where and it's to get that type of premium, you're probably going to go like about a year out. So, we're in March right now. I'm going to say this is a January 2027 option. And there's two things that can happen. If the stock's above 13, then you make 100 divided by 900. So, you're making nice, you know, whatever that is, almost 12% return uh on on your on your money. Uh, and you don't even end up having to own the stock. Uh, tails, if if the stock's below 10, you're going to end up owning this stock that was trading at 13 at a break even of nine. And now you have all the upside or downside associated with that, but you've just endured more than a bare market in the stock before your break even point. Uh, so it's it's a really really powerful tool for long-term investors. For short-term traders and stuff like that, it's not as good because, you know, what really matters is just the next couple of days. We're not trying to necessarily time it except for, you know, maybe 9 months out on the options and we're happy to own it anyways. So, I don't recommend doing that unless a it's cash secured or b you're willing to own the stock uh which which we are in all circumstances. And so the outcome is that it's trading at 13 and you're underwriting to buy it at nine. >> Correct. >> And then you pay a dollar for the for the risk that you take it out at nine >> and you want to buy and but you're bullish on it at 13 anyway. >> Exactly. Exactly. And so and so right now, you know, with all this volatility in the space with stocks like Blackstone, like Blue Owl, uh like KKR tanking, you're able to get really attractive premiums way below the current the current stock price. Um you're catching a falling knife to some extent, but that's what value investors do. And and this is actually it's a nice kind of protective element for a value investor because as you know Toby, >> you know, our ilk uh tend to be too early, right? >> Yeah. >> Uh and and maybe sell too early too. Yeah. >> And so it it provides kind of a discipline to to take your time and it also provides some diversification in that in that these are strategies that can work well even if the market's relatively flat. uh which is, you know, I mean, unless unless the market does anything close to what it's done in the last 10 years, which I don't believe will happen, I think that having those types of uh variety uh of strategies in your portfolio can make a big difference. >> Good stuff. Um let's go back. Let's talk about the yield curve a little bit. Uh the yield curve was inverted for a very long period of time from 22 uh until I think late last year. That might be the longest one. the the data doesn't go back that far on the on the uh on the Alfred website. It might be to the 60s or something like that. And when I raised this with somebody else, they said I there's there are longer inversions if you go back further in the history, but I haven't been able to to to find the data series for that. But it's a very long one going back to the 60s anyway. And I don't think there's been one deeper. And there has been this theory in the past that those yield curves inversions preede uh recessions and so on. And I don't know if it's a mechanics of the the Fed lifting the front rates and creating things like it makes it difficult for the banks to to make a lot of money because they tend to uh make their money on that spread. Right. So the normalization is great for banks and has been better for the banks. Are you seeing that sort of flow through? >> Yeah. Yeah. I think that I think that it's a really good environment for for the banks, but I think that the stock valuations for the most part, especially of the larger banks are not I don't think there's a huge margin of safety there. Like I I love, you know, I love Bank of America. I love JP Morgan. You know, I I love Morgan Stanley, you know, Croup. I don't think it's a great company, but it was a great stock at a low valuation. I think where there is some value on on the banking side is some of the smaller ones or or like like I feel like Ally uh you know around $35 is is pretty cheap. Uh obviously people are getting worried about higher oil prices and and you know hindering people's ability to pay their car loans. So that's probably why the stock sold off a bit. That's valid. I mean, this is not uh you you and I were talking earlier about about the economy and you have you have good good capex with all these data centers and stuff like that, but you have for the average person, it's not a great economy. It's really hard. It's such an expensive uh economy. Even if you're making pretty good money, the cost of living is super high and that's before oil prices have rocketed higher. So, I could see why, you know, something like an Ally would sell off. I think that that's rational. I think there will be an opportunity there. Um but uh yeah that's what's interesting also about the one other comment I wanted to make about the uh BDC's is that remember during the financial crisis it was kind of a one-way bet on an asset class which was housing you know what I mean it was it was like it was housing you had fraudul frauduly fraudulently underwritten mortgages so that I mean that was huge a huge part of that that doesn't really get properly explained is how much how large of a percentage of the losses were due to fraud, but it was all kind of related to to housing mortgages. And then there were like synthetic bets on it. Yeah. CDO, CDO Square, that sort of thing where it was all the same way bet like these BDC portfolios, these are different companies and the average portfolio, the average uh portfolio position size is like 40 basis points. So 4%. So, it's like, you know, I mean, and and so you have it's not a systemic issue. It's not, you know, they're not all going to be zeros. They're going to be kind of non-correlated oneoff type issues for the most part is how I would imagine. Uh but yeah, I could see I could see areas like a one main financial, which is subprime lender, uh even though they're they've done some pretty good things over the years, uh as far as uh from a business perspective. And then like you know some of the car lenders, they're going to be pressured from the higher oil prices. I would say >> I put this little chart up this morning on Twitter from Nick Gurley who's reenture. He tracks the uh let me let me just forget what exactly what that chart was cuz I it's just escaped my mind at the moment. But basically he's looking at um pending home sales hit the lowest level in history in February. And it's all there's been this series since probably 22 23 maybe and they're all tracking beneath the global financial crisis lows. So since 22 23 we've been home sales have been below the global financial crisis lows. I find that kind of it's an extraordinary statistic because the we're almost 20 years later. The economies should be substantially bigger. There should be more people. There should be more home sales, shouldn't there? There's no way. >> As someone I I I I agree with you. I as someone that's bought and sold in the last year, uh I can I can explain it. It's it's affordability is is terrible for buying a home. It's a terrible time to sell your home because you're you're giving away an interest rate that's way lower >> than than what you had. and then and and the the gap between buying a home and renting. Renting is so much more affordable than buying right now. And sellers are just realizing that there's not there's not the demand for their home at the current prices. There has to be some type of correction whether it's on listing prices or mortgage rates for you to see more transactions. So, it's just a stagnant stagnant market and these higher oil prices are not going to help. But I don't think it's anything just beyond that. I think it's more just affordability, you know, from both housing prices and from and from uh interest rates. It's just not a convenient time to sell. There's not the demand to meet the supply. A lot of people want to sell, but they they list their house and then they take them off market. I've had several houses in my in my direct neighborhood that have done just that. >> Yeah. I think that's why the consumer sentiment figures seem to be so in the toilet just extended. So for they've been crushed for a very long period of time now, years now. >> Oh yeah. Yeah. And the gas prices, I mean, you're already seeing people post about it and stuff like that. I mean, that's just like another nail in the coffin of of just how expensive this economy is. And and as you and I were also mentioning, you have you have tremendous tremendously exciting things happening with AI, but you also have the negative human side of this where companies are are laying off significant numbers. We talked about Meta, we talked about Block. And I I I have friends of mine that are really successful salespeople and basically their companies are recording their workflow >> and it's very likely that that that you know they're they're going to you know at some point use AI to to replace them in some way. Sales you're probably more protected than you are in maybe as like an engineer or something like that. So it's it's scary. It's a it's a scary time um for a lot of for a lot of people. uh like I think it always is to some extent but but I think there are you know a lot of negatives that aren't really reflected in the overall market valuation. >> I think that has a knock on for the consumer. The consumer cyclicals have been really smashed up. anything that's like massige or I think the top end of the market is doing fine and that very expensive goods seem to be all those businesses seem to be doing okay but it's the mastig uh like Lululemon like that kind of level of brand that's really struggling through this period because I've I've got a a host of these names in my portfolio that they're just they're trough trough earnings on I mean the earnings are doing fine it's just that the the sentiment around the stocks are terrible >> Lulu is interesting Cuz I mean, if you go to the gy, I go to the gym every day as I believe you do too. And and it's interesting cuz you it used to all be like women in Lululemon and now there are some real competitors there. Uh but that you actually start to see some men wearing that. Um so you know that's >> that's the big opportunity. >> Yeah, that's that's the upside. I guess >> what's the what's the what's the competitor of Lulu? It's like >> Alo is big. >> Alo that's right. >> And then for men it's like Vori uh is is big. But but yeah, I mean look at Walmart though. Like it's like Walmart's at I think like 45 times earnings. Costco's at 55 times earnings and then Amazon's at 26, you know? I mean there's and then you look like I said I mean I'm a huge bank. I've been big in the banks for 15 years but I'm barely own any right now. Uh because the valuations really aren't that compelling. Uh and yeah, I mean I think that a lot of people a lot of people that are have money they're they're delivering groceries from Walmart. they're they're, you know, they might be they're not spending as much at like a Whole Foods or something like that that's more upscale. Uh, you know, for for basic necessities. They're they're trying to economize and and uh yeah, so it's an interesting it's an interesting economy. Very topend, you know, K Kshap uh economy >> for sure. It's why the Uber pickups are always done in very nice cars, I've noticed recently. >> That's true. That's true. Uh, let me give a quick shout out and then let's talk inflation when I come back. Come back. Valareso, what's up? Oh, Cleveland, Tennessee, first in the house. Vareso, Kenna, Georgia, Boisey, Idaho, San Diego, what's up? New London, Snowomish, Bethesda, Peditikva, Israel, what's up? Orlando, Florida. Madira Island, Portugal. I think you've won there. I think I might have to come to Madira Island at some point. Tallahassee, Prague. Good one. Tampa, Mterrey, Mexico, Toronto. Amazing. Appreciate it. >> Great mix. >> Thanks for thanks for calling in. Uh inflation, brother. What are you seeing? >> Uh it's worrisome. I mean, I I I wasn't as optimistic about the inflationary environment as the president was or or I felt like a lot of economists were. And you know, I mean, obviously the situation is so bad right now. I mean, this war is is crushing the the energy market. I mean, as far as those prices are are so much higher, it's going to be so inflationary. It's going to impact other areas of shipping. I mean, they're talking about it even impacting uh chips chips uh shipping because a lot of those do go through uh the straight of Hormuse and and so I mean how long you I mean a year ago we thought tariff the the the tariff thing was going to be a huge massive issue for the market. We were in a bare market right around this time last year and and it kind of reversed quick. I'm not saying that there wasn't an impact, but you know, right now this war looks really bad, but but maybe there's a reversal that that it comes sooner than later, but I really hope so because otherwise it's going to be really hard to uh you know get the cuts that that are needed to boost housing for instance, to boost the mortgage market. Uh because how do you cut into a $100 oil? I don't I don't know how that works. >> Yeah. Do you do you track any of those like shadow stats or any of those other um trueflation or anything like that? What do you think their records like in >> I feel like it's decent from what I've what I've understood. I don't follow them closely enough to be able to commentate intelligently though. But but I I feel like those predictive markets have been have been reasonably good. It's there's a there's a weird reflex of the Feds when oil spikes that they seem to read that as inflation and jack up rates into an oil spike, which I find, you know, they read that as being higher inflation. And the way that they combat higher inflation is with higher rates, which just seems to me like that would be disastrous if we if we move in that direction. Well, you could understand what what they're, you know, reacting to, but I think you're alluding to the secondary impacts, which are, you know, how does it impact the consumer and jobs and and that's it. I mean, if if unemployment spikes, then then that will, you know, necessitate Fed cuts >> really irrespectively of where oil is. Uh, but we haven't seen that in the data yet. It's not an amazing job market, but it's not it's not a bad one. It's not a terrible one either. So that that'll be another, you know, thing to watch. I think I think that >> absolutely should be the first and foremost thing on the Fed's mind is what happens with unemployment. >> I've tracked that. I track that I check in on it occasionally, that long-term unemployment chart. And it's been you can certainly see around every recession there's a big spike. Like that's really the thing that stands out. Although I understand that that's towards the end of the the the cycle. Like it's not the it's not a leading indicator. So I I I just check in to see where it's at, but it's been running a little bit negative for I mean in terms of that means there's more unemployment for a few years now, but it's only been running slightly negative. It hasn't had that massive spike that sort of defines the other ones. And it could easily just be getting back to normalization from the the pandemic whipsaw that went through >> that whole. >> You also have the multiple jobs phenomenon nowadays where where people are working multiple jobs. Uh I don't I don't know how the immigration enforcement impacts that number either. You know, there's there's some different >> different things there that but but yeah, I mean those that's the key data point that that would break the economy if if unemployment were to were to skyrocket. I think there's enough positive things going that if this war is relatively short in nature, you know, as difficult as it is to envision, I I think you could see, you know, a relatively positive economic backdrop. And I think that that is kind of why like the banks trade at high valuations and and the the market trades at high valuations. Uh I definitely do think that that you know this could be the the the straw that breaks the camel's back as far as the consumer if these energy prices stay this high for a long time though. >> Let's talk energy producers though on the other side of that. They seem to be the beneficiaries of of slightly higher energy prices here and they've all had a pretty good run since the start of the year. >> They really have. Yeah. Yeah. Absolutely. I I mean I know you posted a lot of stuff on on energy and and the undervaluation relative to oil and I you know I thought you were right on and and we've got decent exposure to energy. Uh we we've been big in Devon for quite some time. Devon energy. I really like the management team there. >> Yeah. >> I feel like >> I like that they focus on >> intrinsic value per share. So they look at that. Okay. You know what's the the valuation of the stock trading at? Is it better to buy back debt or to to buy buy the stock back dividend you know uh and they on the mergers too so like when they do these acquisitions so that's a management team that I think has built a lot of trust over the years and it's nice seeing the stock being rewarded again obviously you know bolstered by the war u accidental which was Buffett's big pick and it kind of languished for quite some time and then it was interesting last year when Berkshire had the deal for the chemicals company I don't think the love that for accidental necessarily, but uh that stock's had a really great run. And then another area where I've been uh we've been heavy in is I like the the MLPS and the infrastructure plays. I feel like those were really cheap uh going into this. So like uh EPD uh ET energy transfer uh ONIO is not an NLP, it's actually an LLC kind of like Kinder Morgan is. Uh so you're which is nice. You don't have to file like a K1 or anything like that, but along with that you have a slightly higher a lower dividend yield. Uh but that one's had a really nice run. And those are great because even if uh commodity prices dip pretty substantially if you do get some um peace deal or something like that, uh the the the pipeline company should still do quite well. And I think it just reinforces more than anything. I mean, how do you argue against developing our our our uh local energy infrastructure when you see the crappy situation that Europe's in, right? I mean, I mean, look at Europe. They are they are they are >> backs against the wall uh because of some of the political choices that they've made in in relation to energy. >> Yeah. It's it's to America's great fortune that we have that huge uh shale in the middle of the country that that's been and and I think they describe America as the Saudi Arabia of gas as well. >> Yeah. Yeah. No, we're we're super lucky for so many so many reasons and I mean there's a lot of stuff beyond that. I mean there's a lot of oil off California. There's uh if they ever wanted to tap into that stuff that that they could. So but but energy security I think just has to be the key takeaway. I mean you cannot be reliant on on you know these these nations that that are uh you know a lot more it's a lot more dangerous environment uh shipping through the straight of Hormuse than you know your own pipelines in in your country. >> What do you make of that merger that Devon has going on? >> I think they've done good smart acquisitions over time. I I feel like I I think that they prioritize reducing their debt loads after them. Uh and like I said, they're one of the few companies that really is vocal and has a long-term history of looking at intrinsic value per share and what creates the most value uh for shareholders. So, there's a logical basis there. A lot of these other companies, you know, don't don't do that. They're they're kind of empire builders and I think that that's where you know the biggest mistakes occurred. So I think that a stock like Devon, a company like Devon, a management team like that you can invest a lot more confidently than you can with some of those. I mean, remember remember Exxon? I mean, Exxon's a wonderful company, but remember when they bought XTO, you know, at the peak of of gas prices and they've done that a couple of times and and there's so many so many uh transactions like even even accidental uh that that acquisition that they made right before oil collapsed that that caused Buffett to step in with the preferred stock investments uh because they had screwed up their balance sheet so royally. Uh, I mean that's a that's a mistake that has cost so much to shareholders and taken years to to try to rectify and clean up. I do sometimes worry that the oil and gas guys are a little bit like, you know, precious metals in the sense that when the prices are low, they all get religion and they they all make these really great capital allocation decisions and then prices get high and they all lose their minds and start doing all the silly stuff again. >> That's why I like them when they're cheap and I don't like them when they're expensive. Yeah, that's been the history for sure. So, I think it was a while ago, but I I liked uh we invested over the last five, six years quite a bit in like uh Trans Ocean bonds. Uh so, they're high yield bonds a lot. For a while, they were going for like 12, 13% and then like 10%. And those have worked out just fantastically well because they had they have a capital structure problem, not a business problem. And uh you know, they've had a good backlog. They just had a lot of debt. uh relative and and and it wasn't an environment for offshore drilling where they could use all of their rigs, so they had to cold stack some of them. And they just uh combined with with one of their largest competitors uh and and the balance sheets looks a lot better after this uh acquisition. And so that those bonds have done really well. And it'll be interesting to see if now the equity uh could be a play. It's it's run up quite a bit now. I think it's doubled uh from not too long ago, but uh yeah, it'll be interesting to see how some of that stuff uh p works out. >> Uh do you want to talk about EPD and you'll they're they're utility like in that, you know, they can invest a few billion dollars each year at a a a solid rate of return. And so, you know, when you combine that with like a six or seven or 8% dividend, depending on when and where you buy these things at, you get a little bit of growth on top of that, uh, you know, it's a it's a nice low double-digit type returning investment with a lot less risk than the overall market. So, I mean, if you think that the market's going to do what it's done over the last 15 years, you're going to lag behind in something like that. But if you're like me and I would imagine you where you think that the next 10 years might be more like you know 2000 to 2013 type thing where you know you get a few bare markets big bare markets and you you get basically a lost decade. You know those types of of investments can do really really well. >> Yeah. I mean I I I don't hope for the bare markets but I I do hope for a better market for value. >> Oh for sure for a little while through here. >> Before I forget I wanted to mention something. So, you just kind of talked about capital allocation and so we're kind of going back to the BDC's, but I wanted to give an example of of just how stupid some management teams can be. So, there's a company, it's it's FSK. So, KKR kind of uh took over the management of this really badly performing BDC a while ago, and they've kind of reshaped the portfolio a little bit. Uh but but basically the the the stock is trading at about 50% of its net asset value. 50%. And every year what people also need to realize is these loan portfolios are returning hundreds of millions or billions of dollars of cash depending on the size of the BDC. So they're returning all this money. And so analysts rightfully in the last conference call, the quarterly conference call, they said, "Well, why aren't you buying back your stock at at 50 cents on the dollar?" Like, how does that not make sense? And the answers were horrendous. It's like, well, we have bought a lot of our stock in the past and it's like just nothing applicable to the current environment whatsoever. And one of the reasons why some of these companies don't want to do that is because they're earning management fees on based on the asset size of the BDC's. And so if they were to buy back uh stock, that's going to reduce the management fee a little bit. But that is just such short-term thinking because the market is going to reward the best performing managers and the best performing companies. And so if you're if you're buying your stock back at 50 cents on the dollar and and showing that you have your shareholders best interest, that's going to go a long way. And so I think that, you know, mark my words, I think that that will be uh a major catalyst once that starts uh full-fledged in whatever asset class, but but especially in that private capital space. >> Um while I've got you, one stock we have to talk about is assured guarantee >> ago. That's one that uh I know you've been tracking for at least a decade. More than a decade because we we've been talking about this since 2016. >> Oh yeah. I think I started investing in it maybe the end of 2008 or beginning of 2009. So it's almost been a 20 years 20 year journey there. Um and yeah, so that's that's another case of just phenomenal management. So you have a bond insurance company. So they're the number one bond insurer in in the world and not a great business. It's not an amazing business by any stretch of the imagination. There's it's decent um but but demand hasn't been tremendous. They kind of benefit more in a in a you know higher rate environment for their investment portfolio, but lower rates you get more bond issuance. It it's just not been a a great environment. Uh but what management has done >> well it's got terrible headline risk. You should >> terrible headline risk. Headline risk a little bit. You had Puerto Rico. You had COS during the financial crisis. You had all this stuff. >> Anytime there's some big financial crisis blow up there in the paper as being somewhere. It looks like >> they're not in private capital yet. I haven't heard them named in that yet. But but what's so good is they have a great CEO Dominic Fred Rico who's been he's been with the company since they IPOed in like 2004 or 2005. and or even before that, but he's been the CEO and uh and he's bought back stock. So, they buy back about $500 million of common stock each year on average, I think, over like the last seven years. The current market cap something like 3.7 billion. So, they're retiring 12 to 13% of their shares each year. And every single dollar of these stock buybacks over the last decade has been at a large discount to, you know, their their book values and and adjusted book values. Right now, the stock's trading at at something like 45% their their um adjusted book value, 66% of of their book value. Uh so it's really cheap. And if you look at the actual uh portfolio, the the the the troublesome credits are kind of like water utilities in the UK for instance, you know, water even even with Puerto Rico, the the water company paid its debt. Uh you know, the UK is very sophisticated economy. You know, they're they're doing all right. And and just like I talked about with the private uh with the BDC's, if you're buying back your stock at 66 66% of of uh net asset value, you can make up for some of these added credit losses in the future. So good good capital management can really reduce some of those mistakes on the underwriting side as well. So, so yeah. So, I do think it's a a buy at these levels and I actually bought some today uh just because I think the valuation's cheap enough where you can. >> So, the it's they they publish these figures too. Adjusted book value is one of the book value and adjusted book value are figures that they publish in their uh reports. So, you can track those numbers and you can see how they've done uh over >> the growth has been extraordinary. I mean, it's it's you got to look at it. It's it's it's so interesting to see. It's there's very few insurance companies that have grown their uh booked value like AGO has, but AGO has a way lower return on equity than some of the other ones that that you know would come up in that type of screen. It's not the best business in the world, but I would say he's as good of a capital allocator as any that and he's got that kind of bulldog personality where it's like screw screw it. If you're going to give me my stock at this at this price, I'm just going to buy it back. And he does it consistently. And I I give him a lot of credit for that. I think that's so rare. >> How much of the business does he own, though? >> I don't think a ton. I mean, cuz he's getting older and so so he's he he he has bought at times, but he's kind of in that, you know, systematic offload, but they do pay a decent amount in stock in in compensation to their management team. Uh, but overall, I think he's done really really well. And it's one of those where it's like, look, it it might not be the best company in the world, just like Croup, but if you're buying at the right valuation, it's super attractive. And once again, BDC's, I'm not Mr. BDC. I didn't own any of these things for a long time. But if you're buying them at 20 to 35% discounts to the liquidation value of their loan portfolios, a lot has to go wrong before you lose money. I if if you're a long-term investor, >> uh I think I I heard him say once that he wanted to be the last shareholder, he was going to have the last share. >> Yes. He used to I used to talk to him and and we joke about that. Absolutely. Um, yeah. I mean, I mean, he told me >> Yeah. Yeah, I probably did. Uh, but but yeah, I love that. I love that attitude, you know. It's like it's like that's fine, you know? We we we know what the value of the company is. Uh, and so we're going to keep doing that. >> Um, let's talk about the market in general. How do you feel? >> I think I I feel like it would make a lot more sense if the market was down 10% from here, you know? I think that that would make a lot more sense. It's It's interesting because the Mag 7, they're all down on the year uh quite a bit, but really you've I mean, we've had oil up, what is it? It's like the the oil companies are up like 3540%. Energy companies, utilities are up. Uh I think some types of consumer staples are up. I know a lot that aren't up. Um so it's it's really just it's it's interesting. you it's hard to see where you know the indices are finding stabilization from especially with the mag 7 down. So I don't think the index is attractive at all but uh but I mean it's durable. I've thought that for a long time and it's done done really well. So we'll see the timing. >> Last year the argument was Mag 7 is really the only game in town. and the other 493 are sort of sucking wind and they're the only thing keeping the index up and then since magn 7 stubb stumbled in whatever Q4 last year it's been the other 493 that'd be holding the index up >> it's incredible it it really is incredible I mean it speaks to the power of index funds for sure but I I will just say you know as someone that my first job out of college was Vanguard uh in the early 2000s and that was right after the financial crisis and I I mean during that time people had just lost 50% in the tech bubble and you know they weren't feeling super optimistic about the indices even though the 90s and 80s were fantastic and then you had 2008 when the market went down 50% again and it was like okay buy and hold's dead uh you know let's talk about gold coins which probably would have done pretty well in hindsight you know or annuities or blah blah blah and and and so you the people that are advocating for index funds and and you know saying how great they are, did they did they go through those times and and were they as bullish on them during those times? I think that that kind of stuff matters because a lot of people aren't going to feel the same way. If they get kind of a lost decade, they might not have that, you know, really long-term mentality. And if you're retired, can you afford a lost decade? That that goes unnoticed a lot. We, you and I both know that index funds can be phenomenal. If you're 20 years old and and the market's relatively cheap, index funds are a great way to go and then just focus on your job and your family. If you're 70 years old and you're depending on your investment portfolio to to to finance your retirement, how does a lost decade look? How much, you know, what allocation? A lot of clients that we see, a lot of portfolios we review, Toby, are like 90% equities for people even in retirement. So, I think that that's a big risk that's out there. Yeah, there was that period from 2000 to 2015 something like that where even the best companies in the market Microsoft and Walmart all those sort of companies were >> by the time 2015 rolled around the underlying and I looked at these and I looked at them with leaps at that period in time because there was so little volatility in the equity that the LEAPS was super cheap too >> and the stock had done nothing and the underlying businesses were still like there wasn't much of a difference between the runup to 2000 000 and the period from 2000 to 2015 that was sort of they had the business was were comparably good through that period. The only thing that Microsoft had that like the one year where they had the step back in revenue in like 2010 or 2011 something like that and they had Steve Balmer was the CE. >> Steve Balmer I was going to say that you had the Steve Balmer risk when he was making some of those acquisitions. I mean those were scary for all shareholders but I I remember the time well. I I agree. That was an amazing time uh when you could buy some of those. But you know what? They didn't all work out great cuz like Intel was really cheap, too. >> GE was another one. >> Well, GE ended up working out, but it took 15 years, you know, after that when when they finally, you know, did all the divevestaturures and everything like that. But like yeah, I mean Microsoft paid off. Aer uh you know, their their cloud platform, you know, really did it. And you had kind of a similar scare, right? Like right now people are worried about software in relation to AI but the cloud was a big risk for a lot of those software companies too. Uh remember I mean when they were flipping their business models uh from selling actual physical software where you own something to um you know the subscription model there was a lot of risk there. >> Wow. and and you know this I remember the stocks did have some blips during that time but it actually ended up being a big profit driver uh for those companies for like the Adobe's of the world. So we'll see. I I do think that I think that it looks like a lot of these AI tools are going to be leveraging you know the software as tools uh you know but but I'm not Elon Musk. I I don't have the brain capacity to figure that one out for sure. >> What do you think about do you follow something like constellation? Do you have a view on you the Canadian software? >> The software one? >> Yeah. >> Yeah. Yeah, I've looked at that one. Uh I think it's I mean it's not super cheap, but I I like you know kind of the management strategy there. I think that a lot of their you know softwares seem to be missionritical. Um so actually I have bought a tiny tiny bit of that. Uh but it's not something I'm I'm big into yet. It's not something that that I feel you know I I think I'm still learning about how that's going to be impacted by by some of the transition in there. I do look at Adobe. I do own some Adobe and like they had a really nice quarter actually, but the CEO stepped down and so the stock kind of sold off in unison. Sold some puts actually on like Salesforce.com uh when when that had a big sell-off uh just because it's g it's all it's going to take time for this displacement to occur. If you're if you're a big company, it's really hard to just say tell your whole Salesforce, hey, we're going to get off salesforce.com and we're going to try this, you know, vibecoded option. You know, that's not going to be attractive. That's how these people are paying their bills. They're paying their mortgages through their sales and stuff like that. So, uh yeah, I I think that that's opened up smart and those stocks have started to rally. Uh it's really kind of the private credit worries that that has spooked the market, but some of those software companies have had a nice little stealth rally. Salesforce included. What about something like PayPal? Do you attract PayPal? >> I do. I do. I I think PayPal's attractive. Look, the business is not amazing. There's a lot of competition there. But, but I think that payments are are pretty cheap right now. So, PayPal, there's Fiserve, there's global uh global payments uh that that you know are all pretty cheap. I I could see someone coming in and buying PayPal out. I wouldn't I wouldn't be shocked by that at all. A lot of these are cheap, but then you look at the stockbased compensation stuff and and that's like the depressing element of it is that, you know, it's not like an AGO where or a Devon where you can really trust, you know, the management teams to act in the best interest of of shareholders. PayPal's had a big buyback, but some of it's to buy back, you know, the the shares that they issue. Uh just like I mean, look at what Nvidia does with that. That's crazy. Um so, but yeah, I I do I do like the payment space and I'm actually in that. Um, it's cheap. It's really cheap. And I I think, you know, it's got a good chance of working out well, especially if a a buyer does uh step in there. >> What about something like Intel? Have you tracked Intel? >> It's too I I don't love I I've tracked it a lot over the years. And I've just too many misfires. Uh, and now then you have the government ownership element of it. So, so for me, it's not my cup of tea. I I'd rather in I'd rather buy Nvidia than I would Intel personally. I think Nvidia, you know, I don't I don't know that those margins are sustainable. I I think not, but like I think you could make an argument for it, uh, a credible argument for it, you know, even at these levels. Uh, whereas Intel is just kind of in the too hard pile for me right now. It's they have a lot of hurdles to overcome. >> What else haven't we discussed? What are we missing? >> I think that's been, you know, a pretty good uh, comprehensive discussion. One other thing I'd say is is one area that's kind of been left for dead a little bit is our real estate investment trusts. Uh you know in this AIdriven world uh real assets are going to have real value. And so I'm not talking about office like properties but but you know some of these some of these attractive companies like Avichi properties for instance that's that owns a lot of the Las Vegas casinos. They own a lot of regional casinos as well. uh 100% of their rent was paid during the lockdowns of 2020 and you you can get it at, you know, 6 and a.5% dividend. They're growing that dividend over time. That that could be really attractive. So, you've got, you know, two 3% growth over time plus a 6 and a half% dividend. You know, some of those real estate investment trusts are are really cheap. Uh I got burned last year on on Alexandria. Uh it's a a biotech lab and adjacent office space uh company that that you know it it has a really great history. The stock traded over 220. It got down below like 90 and it started looking really interesting at really cheap valuations. But that that market has just been overs supplied and the administration's policies have have just kind of spooked a lot of these biotech companies from wanting to grow their their office and lab footprint. Uh, so it got hit pretty hard, but I think that's really cheap here. So, I think that there's some opportunities in the real estate space. It's a great way to add yield and diversification to your portfolio if you're really heavily in more traditional equities or tech. >> Um, Tim, tell us a little bit about TNT Capital Management. >> Yeah, so we're based in in Arizona. Uh, we were in California for a long time, too. Uh, but we managed close to $200 million of assets. Uh, and we combine our deep value investing strategies with conservative income generating option strategies like the covered calls, like the cash secured puts. You know, they're strategies that that your advisor at Morgan Stanley or Meil Lynch is probably not going to do for you and they can really be beneficial uh in more adverse market conditions or rangebound market conditions. Uh, so yeah, you can reach us at uh ttvalueinvesting.com and uh my Twitter's uh Tim Travis Value. >> Good stuff. Uh well, that's uh that's all we have for this week, folks. We'll uh see everybody back next week. Jake will be back uh from vacation and uh we'll be here same bat time, same bat channel. Tim, thanks so much for spending time with us. >> Appreciate it. >> Crushed it as always.
Tim Travis on Private Credit $OWL $OBDC and $MSDL; Energy $DVN, $OXY and $EPD; and $AGO | S08 E10
Summary
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …Transcript
We're live. This is Value After Hours. I'm Tobias Carl. Jake is on vacation. So, it's just Tim Travis, special guest, and me will be co-host, special guest. How are you, Tim? Good to see you again. >> I'm doing well. So happy to be here, Toby. Thanks for having me. >> Tim is uh founder, manager of TNT Capital. He's got expertise in financials and private credit. And so that's what we're going to be talking about a lot today plus other things in value generally maybe some options discussion. That sound good? >> Sure. Sounds great. Yeah, it's a lot it's a crazy time. A lot of interesting and dire headlines. So it's a good good time to chat for sure. >> Well, let's let's start let's start with private credit because that's there's a lot of headlines about the how bad private credit is. What's your what's your view? >> So I think there's a lot of misunderstanding. So private credit is very broad. I mean basically what these funds are are they're basically bond funds. And so it's private loans to to companies of of different sizes different different of the BDC's have different size kind of requirements or size targets that they have. And they're for the most part most of these like publicly traded larger cap BDC's are are really um dealing with first lean loans. Okay. So like 90% uh or higher are are first lean adjustable rate loans. And um you know there's some confusion because you have the publicly traded business development companies like uh Blue Development Company, OBDC or Morgan Stanley Direct Lending or Blackstone uh secured lending. You have you have those where it's permanent capital. Okay. And so there's not the ability for investors to ask for their money back. it's just like a a public company where a lot of the controversy is are these private funds, these private BDC's that have been sold, you know, for many years. And one of the reasons why people buy those private privately traded ones is because they don't have kind of the marktomarket volatility as much. I've never sold one in my life. I don't I don't find it super attractive, but some people do. And and so what what's occurred is that last year there was a couple bankruptcies. There was first brands and there was and what's interesting Toby is there were bank syndicated loans. They were not private credit loans. And so and and there was fraud involved with both like with with first brands for instance it they it was factoring loans. So basically people u buying their receivables that were double or or maybe even triple pledged. M >> so there's fraud their bank their bank origin loans but that that impacted private credit stocks sold off in relation to that and then going into this year you have the AI hysteria and so it's like okay well you know AI is go growing so fast it it's such a big unknown of of what the final impact will be how is this going to impact all these software companies are you still going to need Salesforce are you still going to need Adobe uh HubSpot you know and then there's obviously there's so many smaller software companies that have kind of missionritical or not missionritical tasks that are associated with them. So a lot of as software stock sold off so did software loans. Uh you know the growth has been in technology. So there's been a lot of private equity buyouts of technological companies including software. And so if you look at some of these business development companies they might have like 20% or even 30% not not so much 30. there's one or two that might have that uh exposure to to software companies and a variety of different types of software companies of course. Now, what's interesting is historically, Toby, those have been the best performing loans in the portfolio. Uh but, you know, everything's kind of getting painted with the same brush. And um these privately traded business development companies that that um that you don't see stock tickers for, they have gating requirements about how much money can be taken out each quarter. And so because there's all these negative headlines, you have a situation where because you're seeing so many headlines, people are trying to rush out of these funds and these are not super liquid assets. And so you create this mismatch of liquidity and and that's really what the hysteria is is in a nutshell. Kind of went on a long time there. >> No in a nutshell. >> That was that was a good explanation. So private credit has this um issue with headline risk from first brands and trioint. And then Blue's in the in the news a lot, but that's their private fund. >> Yeah. Well, Blue's got a variety of different So, Blue itself, owl the ticker, they're an asset management company. Okay. So, so they're they're collecting fee income. The asset management company itself is not taking credit risk. And that what's unique about their model is that they have a a tremendous amount of of permanent capital. So, like 85% of their fees are from permanent capital. And so 300 billion is in locked up AUM. So their fees are very durable and but but you know people are worried about about one segment of the funds that they manage which is private credit but they're forgetting about all you know they're also financing the data centers. They're they're financing a myriad of uh they have they have asset assetbased lending. So there's all these things associated with them. But what's interesting is to see an asset manager trade down so radically. I mean, I think when they went public, they had something, don't quote me on the exact number, I think it was something like 65 billion under management. Now it's well over 300 billion. I think it's like 360, 370 or something like that. And the stock's actually cheaper than where it was when it went public. You know, these companies like a Blackstone, they trade on distributable earnings and it's trading at about 9.4 four times distributable earnings and it has a dividend yield of 10.3%. So really, really cheap. I think it's, you know, a a fantastic long-term investment opportunity. Uh you don't really get this type of quality. Like this is a much higher quality business than like a bank, right? I mean, where you're taking a lot of credit risk, it's more heavily regulated. All of these things. the margins on on Blue Owl are are are you know four four to five times higher than most banks have. Uh so uh it's an interesting environment for sure. >> So there's some sort of bank run then going on in Blue Al's private credit fund >> in the private credit fund. Yes. So, so what happened was on these private funds where it's not permanent capital, they might have like a uh something written in the perspectus where it's like, okay, in 10 years we're either going to liquidate the fund or we're going to merge it. And so their initial plan was they were going to merge it with their publicly traded BDC, which is ticker symbol OBDC. And at the time when they came up with this idea, OBDC was trading around book value. So it's like, okay, not a big deal. you know, when when these private uh funds redeem its net asset value uh historically. And so it's like, okay, we'll merge it with that. We're going to cut some costs associated with it. It it it'll be a good thing. Similar portfolios, just different size, that sort of thing. But then what happened was with the bankruptcies that occurred last year and the bank syndicated, which is different, the uh the the valuation sold off on OBDC and it's like, okay, now I'm going to take a 20% haircut if we do this merger. That's not going to work. So, Blue Owl was working on solutions. Some of these people wanted money more quickly than others. And so, basically what they did was they sold 1.4 billion of loans uh from the private uh REIT or private BDC and then also the publicly traded BDC's because they have similar portfolios. And they sold it for 99.7% of par which is, you know, phenomenal phenomenal result. And so they basically said, "Okay, we're going to accelerate. We're going to give you back 30% of your money now. So, you're going to get that check, but then um we're going to stop the normal gaining process and and we're going to unwind this portfolio over time and pay you out, you know, over the next, you know, months and year year or so. And the media just kind of picked up on, oh well, look, they're they're restricting redemptions now. They've always restricted redemptions because there's a liquidity mismatch. you know that you're getting a higher yield because there's because this money is not as liquid. Okay. And and so it's just really kind of taken on a life of its own. And then there's other elements to it, Toby. It's this is private debt. So like like these software loans for instance that everyone's so worried about, they're written at 30% loan to value. So guess what? There's 70% cushion before you know we're losing any money on on these loans. But what about private equity? You know, I mean, I mean, what about the stock market? So, if all of these were to come into trouble, there's obviously way bigger issues at hand. And I think when you think about it, these are very sophisticated people. Like if Blackstone has a private equity company that runs into trouble. Let's say a software company that runs into trouble. What they're probably going to do is maybe inject some equity into it, maybe negotiate with with the lenders, including the BDC's for maybe a lower interest rate or something like that. But these aren't, you know, loans that are going to zero. They're first lane loans where they would take the keys over for the business. So, it's just I I think that the hysteria does not match up with the reality whatsoever. I think it's a huge difference. >> So the names that you like out of that Al which is the owner the manager of of uh of all of the funds and OBDC which is the publicly traded BDC of AL >> and Morgan Stanley direct lending. >> Yeah. Yeah. So so AL is the asset manager and I love that as like a long-term play. I remember when Blackstone went public and I I that it was I think it was like right before the financial crisis and then everyone was like oh well that was the top or something like that. I mean it's almost 20 years ago now. So forgive me if I don't get everything right there but and then they kind of ran into hard times and the stock sold off quite a bit and it was like oh man you know Blackstone they went public at peak dollar amount and then really since the stock got hit a while hit hit pretty hard it's been a phenomenal performer. I mean, it's it's rallied dramatically until very recently. And I think you could see a similar thing with with Blue Al where they've grown really rapidly and they have a really nice footprint in a lot of different niches, good relationships and like with advisors that help distribute their funds and I think when people actually see the quality of the earnings, the quality of the cash flows, uh the company was going into the year was expecting to grow revenues by a a faster rate than they grew last year which was 20%. So you're getting that at 10 times, you know, distributable earnings, 10% dividend yield. That's very bizarre, honestly. It's very bizarre. So, >> so I like that. But then you go to the business development company. So, so think bond funds and OBDC, we'll start there. It, you know, it's it's trading at around 30% of a discount to its net asset value. So 30% discount. We're talking about a 13% dividend yield. A lot of these have 12 to 13% dividend yields. And what Oh, excuse me. I I apologize. It's about 25% discount to its net asset value. It's about 30% below its 52- week high. Um, and so what we're doing is we're buying a loan portfolio at a very, very, very large discount to its net asset value. Yes, there's some management fees associated with these funds. You can make assumptions that their marks aren't going to be perfect from time to time and credit could weaken a little bit, but you can make some pretty dire assumptions in relation to defaults and recoveries that are made up for the fact that you're buying this thing at such a large discount. If you're buying it at 65 to 75% of net asset value, you know, that's really attractive. And the thing that I'm watching, Toby, and and I think the thing that other investors should really advocate for if if they're in this space whatsoever is these management teams need to think long term and not short term. Buy back your damn stock. You know, buy back the stock of both the the BDC's and your asset management company if you're Blue Owl. And they are doing this. Insiders are buying as well. So, they're eating their own cooking. But I think the more of that you see, the better it'll be. And even if the losses get a little bit of worse, a little bit worse with with the private credit loans, you're going to offset a lot of that by buying the whole portfolio at 70 cents on the dollar. Uh, you know, I mean, think about it. Just if you have if you have 10% defaults and you have 50% recoveries, that's, you know, 5%, right? So, but you're buying the portfolio at 65%. Now there is a little bit of leverage. There is a little bit but not that much. These are not banks. These are not 10 to one, 5:1. It's like leverage is one to well some of them like blueout technology is like 75 to maybe like 1.25 on the high side. Not heavily livered uh investment vehicles. >> So uh a lot of those asset managers have sold off over the course of the last six months. Uh like I think Colbert Kravis has sold off and a lot of them have sold off. Is that associated with the private credit? Is that the >> Yes. Yeah. It So, they all have pretty pretty much. So, Blackstone sold off uh KKR, Aries, um and then Blue Owl of course and there's others as well. And so, I think it's an interesting opportunity in a lot of the space like we've we've sold some cash to secure puts on uh on KKR, on Blackstone, on Aries. uh because you're getting you're able with the volatility as high as it is, you're getting to get some you're getting to manufacture some pretty low valuations for high quality managers. And once again, these these are way better business than business, excuse me, businesses than banks. like banks. I've been, you know, me, I've been advocate for Croup for a long time when when everyone was saying how terrible it was as an investment and when you could buy it at 60% of tangible book value and it's like, well, you know, if they get to 10% return on tangible capital, it gets to book value again and it's at 100. Now we're at 110 on Cityroup. These are nothing like the banks. These are way better businesses, way higher margins, way better growth prospects. And it's interesting because these are so cheap. And I'm not talking about the BDC's by the way. I'm talking about the asset managers. The manager of the BDC are way better business. BDC is a loan portfolio. It's a bond fund. Um but uh these are way better businesses, way better growth prospects, way higher margins, and the banks aren't are trading pretty expensively. So you'd think that if there's credit issues on first lean loans in private capital, you'd think you'd see some of these banks trading at discounts to book value or or at least low multiples. And that's not the case at all. And I'll grant you a good environment for banking with M&A and with the yield curve and and I think the administration's pretty bit, you know, favorable towards banking. Uh but I I think that there is a disconnect there. >> Let's come back to the yield curve in a moment, but just um walk us through the mechanics of the cash secured put sale. So, for folks who don't know, that's a that's a bullish bet on the stock, but it sounds when when people hear put they probably think that that's you're buying protection, but you're selling the protection. And so, just walk us through the math of that transaction the way you think about it >> just in broad terms. You don't >> I'll do Yeah, I'll do a an analogy. So, like let's say you have a a stock that's trading at $13 per share and you like the stock. You think it's attractive, but maybe maybe you're conservative. You're retired and and you you want to be conservative. You're kind of bearish on the overall market. And so, you say, "Okay, I'd like to target double digits, but but I want less risk than just owning the stock outright." What you could do is you could sell a put option at, let's say, $10 per share. And in this example, and this is, believe me, we have stocks that meet these pretty much exact criteria. Uh, we're going to collect a dollar, a dollar per contract. Every contract's 100 shares. And so, basically, you're collecting $100 upfront for a maximum risk of 900 because it's a $10 strike price. And remember, we're talking about >> that's if it goes to zero. >> That's if it goes to zero. That's what you'd lose is $900 because you collect a h 100red bucks up front. Now, keep in mind, we're talking about a $13 stock that you're bullish on. You're bullish on for fundamental reasons. And so, you get this situation where and it's to get that type of premium, you're probably going to go like about a year out. So, we're in March right now. I'm going to say this is a January 2027 option. And there's two things that can happen. If the stock's above 13, then you make 100 divided by 900. So, you're making nice, you know, whatever that is, almost 12% return uh on on your on your money. Uh, and you don't even end up having to own the stock. Uh, tails, if if the stock's below 10, you're going to end up owning this stock that was trading at 13 at a break even of nine. And now you have all the upside or downside associated with that, but you've just endured more than a bare market in the stock before your break even point. Uh, so it's it's a really really powerful tool for long-term investors. For short-term traders and stuff like that, it's not as good because, you know, what really matters is just the next couple of days. We're not trying to necessarily time it except for, you know, maybe 9 months out on the options and we're happy to own it anyways. So, I don't recommend doing that unless a it's cash secured or b you're willing to own the stock uh which which we are in all circumstances. And so the outcome is that it's trading at 13 and you're underwriting to buy it at nine. >> Correct. >> And then you pay a dollar for the for the risk that you take it out at nine >> and you want to buy and but you're bullish on it at 13 anyway. >> Exactly. Exactly. And so and so right now, you know, with all this volatility in the space with stocks like Blackstone, like Blue Owl, uh like KKR tanking, you're able to get really attractive premiums way below the current the current stock price. Um you're catching a falling knife to some extent, but that's what value investors do. And and this is actually it's a nice kind of protective element for a value investor because as you know Toby, >> you know, our ilk uh tend to be too early, right? >> Yeah. >> Uh and and maybe sell too early too. Yeah. >> And so it it provides kind of a discipline to to take your time and it also provides some diversification in that in that these are strategies that can work well even if the market's relatively flat. uh which is, you know, I mean, unless unless the market does anything close to what it's done in the last 10 years, which I don't believe will happen, I think that having those types of uh variety uh of strategies in your portfolio can make a big difference. >> Good stuff. Um let's go back. Let's talk about the yield curve a little bit. Uh the yield curve was inverted for a very long period of time from 22 uh until I think late last year. That might be the longest one. the the data doesn't go back that far on the on the uh on the Alfred website. It might be to the 60s or something like that. And when I raised this with somebody else, they said I there's there are longer inversions if you go back further in the history, but I haven't been able to to to find the data series for that. But it's a very long one going back to the 60s anyway. And I don't think there's been one deeper. And there has been this theory in the past that those yield curves inversions preede uh recessions and so on. And I don't know if it's a mechanics of the the Fed lifting the front rates and creating things like it makes it difficult for the banks to to make a lot of money because they tend to uh make their money on that spread. Right. So the normalization is great for banks and has been better for the banks. Are you seeing that sort of flow through? >> Yeah. Yeah. I think that I think that it's a really good environment for for the banks, but I think that the stock valuations for the most part, especially of the larger banks are not I don't think there's a huge margin of safety there. Like I I love, you know, I love Bank of America. I love JP Morgan. You know, I I love Morgan Stanley, you know, Croup. I don't think it's a great company, but it was a great stock at a low valuation. I think where there is some value on on the banking side is some of the smaller ones or or like like I feel like Ally uh you know around $35 is is pretty cheap. Uh obviously people are getting worried about higher oil prices and and you know hindering people's ability to pay their car loans. So that's probably why the stock sold off a bit. That's valid. I mean, this is not uh you you and I were talking earlier about about the economy and you have you have good good capex with all these data centers and stuff like that, but you have for the average person, it's not a great economy. It's really hard. It's such an expensive uh economy. Even if you're making pretty good money, the cost of living is super high and that's before oil prices have rocketed higher. So, I could see why, you know, something like an Ally would sell off. I think that that's rational. I think there will be an opportunity there. Um but uh yeah that's what's interesting also about the one other comment I wanted to make about the uh BDC's is that remember during the financial crisis it was kind of a one-way bet on an asset class which was housing you know what I mean it was it was like it was housing you had fraudul frauduly fraudulently underwritten mortgages so that I mean that was huge a huge part of that that doesn't really get properly explained is how much how large of a percentage of the losses were due to fraud, but it was all kind of related to to housing mortgages. And then there were like synthetic bets on it. Yeah. CDO, CDO Square, that sort of thing where it was all the same way bet like these BDC portfolios, these are different companies and the average portfolio, the average uh portfolio position size is like 40 basis points. So 4%. So, it's like, you know, I mean, and and so you have it's not a systemic issue. It's not, you know, they're not all going to be zeros. They're going to be kind of non-correlated oneoff type issues for the most part is how I would imagine. Uh but yeah, I could see I could see areas like a one main financial, which is subprime lender, uh even though they're they've done some pretty good things over the years, uh as far as uh from a business perspective. And then like you know some of the car lenders, they're going to be pressured from the higher oil prices. I would say >> I put this little chart up this morning on Twitter from Nick Gurley who's reenture. He tracks the uh let me let me just forget what exactly what that chart was cuz I it's just escaped my mind at the moment. But basically he's looking at um pending home sales hit the lowest level in history in February. And it's all there's been this series since probably 22 23 maybe and they're all tracking beneath the global financial crisis lows. So since 22 23 we've been home sales have been below the global financial crisis lows. I find that kind of it's an extraordinary statistic because the we're almost 20 years later. The economies should be substantially bigger. There should be more people. There should be more home sales, shouldn't there? There's no way. >> As someone I I I I agree with you. I as someone that's bought and sold in the last year, uh I can I can explain it. It's it's affordability is is terrible for buying a home. It's a terrible time to sell your home because you're you're giving away an interest rate that's way lower >> than than what you had. and then and and the the gap between buying a home and renting. Renting is so much more affordable than buying right now. And sellers are just realizing that there's not there's not the demand for their home at the current prices. There has to be some type of correction whether it's on listing prices or mortgage rates for you to see more transactions. So, it's just a stagnant stagnant market and these higher oil prices are not going to help. But I don't think it's anything just beyond that. I think it's more just affordability, you know, from both housing prices and from and from uh interest rates. It's just not a convenient time to sell. There's not the demand to meet the supply. A lot of people want to sell, but they they list their house and then they take them off market. I've had several houses in my in my direct neighborhood that have done just that. >> Yeah. I think that's why the consumer sentiment figures seem to be so in the toilet just extended. So for they've been crushed for a very long period of time now, years now. >> Oh yeah. Yeah. And the gas prices, I mean, you're already seeing people post about it and stuff like that. I mean, that's just like another nail in the coffin of of just how expensive this economy is. And and as you and I were also mentioning, you have you have tremendous tremendously exciting things happening with AI, but you also have the negative human side of this where companies are are laying off significant numbers. We talked about Meta, we talked about Block. And I I I have friends of mine that are really successful salespeople and basically their companies are recording their workflow >> and it's very likely that that that you know they're they're going to you know at some point use AI to to replace them in some way. Sales you're probably more protected than you are in maybe as like an engineer or something like that. So it's it's scary. It's a it's a scary time um for a lot of for a lot of people. uh like I think it always is to some extent but but I think there are you know a lot of negatives that aren't really reflected in the overall market valuation. >> I think that has a knock on for the consumer. The consumer cyclicals have been really smashed up. anything that's like massige or I think the top end of the market is doing fine and that very expensive goods seem to be all those businesses seem to be doing okay but it's the mastig uh like Lululemon like that kind of level of brand that's really struggling through this period because I've I've got a a host of these names in my portfolio that they're just they're trough trough earnings on I mean the earnings are doing fine it's just that the the sentiment around the stocks are terrible >> Lulu is interesting Cuz I mean, if you go to the gy, I go to the gym every day as I believe you do too. And and it's interesting cuz you it used to all be like women in Lululemon and now there are some real competitors there. Uh but that you actually start to see some men wearing that. Um so you know that's >> that's the big opportunity. >> Yeah, that's that's the upside. I guess >> what's the what's the what's the competitor of Lulu? It's like >> Alo is big. >> Alo that's right. >> And then for men it's like Vori uh is is big. But but yeah, I mean look at Walmart though. Like it's like Walmart's at I think like 45 times earnings. Costco's at 55 times earnings and then Amazon's at 26, you know? I mean there's and then you look like I said I mean I'm a huge bank. I've been big in the banks for 15 years but I'm barely own any right now. Uh because the valuations really aren't that compelling. Uh and yeah, I mean I think that a lot of people a lot of people that are have money they're they're delivering groceries from Walmart. they're they're, you know, they might be they're not spending as much at like a Whole Foods or something like that that's more upscale. Uh, you know, for for basic necessities. They're they're trying to economize and and uh yeah, so it's an interesting it's an interesting economy. Very topend, you know, K Kshap uh economy >> for sure. It's why the Uber pickups are always done in very nice cars, I've noticed recently. >> That's true. That's true. Uh, let me give a quick shout out and then let's talk inflation when I come back. Come back. Valareso, what's up? Oh, Cleveland, Tennessee, first in the house. Vareso, Kenna, Georgia, Boisey, Idaho, San Diego, what's up? New London, Snowomish, Bethesda, Peditikva, Israel, what's up? Orlando, Florida. Madira Island, Portugal. I think you've won there. I think I might have to come to Madira Island at some point. Tallahassee, Prague. Good one. Tampa, Mterrey, Mexico, Toronto. Amazing. Appreciate it. >> Great mix. >> Thanks for thanks for calling in. Uh inflation, brother. What are you seeing? >> Uh it's worrisome. I mean, I I I wasn't as optimistic about the inflationary environment as the president was or or I felt like a lot of economists were. And you know, I mean, obviously the situation is so bad right now. I mean, this war is is crushing the the energy market. I mean, as far as those prices are are so much higher, it's going to be so inflationary. It's going to impact other areas of shipping. I mean, they're talking about it even impacting uh chips chips uh shipping because a lot of those do go through uh the straight of Hormuse and and so I mean how long you I mean a year ago we thought tariff the the the tariff thing was going to be a huge massive issue for the market. We were in a bare market right around this time last year and and it kind of reversed quick. I'm not saying that there wasn't an impact, but you know, right now this war looks really bad, but but maybe there's a reversal that that it comes sooner than later, but I really hope so because otherwise it's going to be really hard to uh you know get the cuts that that are needed to boost housing for instance, to boost the mortgage market. Uh because how do you cut into a $100 oil? I don't I don't know how that works. >> Yeah. Do you do you track any of those like shadow stats or any of those other um trueflation or anything like that? What do you think their records like in >> I feel like it's decent from what I've what I've understood. I don't follow them closely enough to be able to commentate intelligently though. But but I I feel like those predictive markets have been have been reasonably good. It's there's a there's a weird reflex of the Feds when oil spikes that they seem to read that as inflation and jack up rates into an oil spike, which I find, you know, they read that as being higher inflation. And the way that they combat higher inflation is with higher rates, which just seems to me like that would be disastrous if we if we move in that direction. Well, you could understand what what they're, you know, reacting to, but I think you're alluding to the secondary impacts, which are, you know, how does it impact the consumer and jobs and and that's it. I mean, if if unemployment spikes, then then that will, you know, necessitate Fed cuts >> really irrespectively of where oil is. Uh, but we haven't seen that in the data yet. It's not an amazing job market, but it's not it's not a bad one. It's not a terrible one either. So that that'll be another, you know, thing to watch. I think I think that >> absolutely should be the first and foremost thing on the Fed's mind is what happens with unemployment. >> I've tracked that. I track that I check in on it occasionally, that long-term unemployment chart. And it's been you can certainly see around every recession there's a big spike. Like that's really the thing that stands out. Although I understand that that's towards the end of the the the cycle. Like it's not the it's not a leading indicator. So I I I just check in to see where it's at, but it's been running a little bit negative for I mean in terms of that means there's more unemployment for a few years now, but it's only been running slightly negative. It hasn't had that massive spike that sort of defines the other ones. And it could easily just be getting back to normalization from the the pandemic whipsaw that went through >> that whole. >> You also have the multiple jobs phenomenon nowadays where where people are working multiple jobs. Uh I don't I don't know how the immigration enforcement impacts that number either. You know, there's there's some different >> different things there that but but yeah, I mean those that's the key data point that that would break the economy if if unemployment were to were to skyrocket. I think there's enough positive things going that if this war is relatively short in nature, you know, as difficult as it is to envision, I I think you could see, you know, a relatively positive economic backdrop. And I think that that is kind of why like the banks trade at high valuations and and the the market trades at high valuations. Uh I definitely do think that that you know this could be the the the straw that breaks the camel's back as far as the consumer if these energy prices stay this high for a long time though. >> Let's talk energy producers though on the other side of that. They seem to be the beneficiaries of of slightly higher energy prices here and they've all had a pretty good run since the start of the year. >> They really have. Yeah. Yeah. Absolutely. I I mean I know you posted a lot of stuff on on energy and and the undervaluation relative to oil and I you know I thought you were right on and and we've got decent exposure to energy. Uh we we've been big in Devon for quite some time. Devon energy. I really like the management team there. >> Yeah. >> I feel like >> I like that they focus on >> intrinsic value per share. So they look at that. Okay. You know what's the the valuation of the stock trading at? Is it better to buy back debt or to to buy buy the stock back dividend you know uh and they on the mergers too so like when they do these acquisitions so that's a management team that I think has built a lot of trust over the years and it's nice seeing the stock being rewarded again obviously you know bolstered by the war u accidental which was Buffett's big pick and it kind of languished for quite some time and then it was interesting last year when Berkshire had the deal for the chemicals company I don't think the love that for accidental necessarily, but uh that stock's had a really great run. And then another area where I've been uh we've been heavy in is I like the the MLPS and the infrastructure plays. I feel like those were really cheap uh going into this. So like uh EPD uh ET energy transfer uh ONIO is not an NLP, it's actually an LLC kind of like Kinder Morgan is. Uh so you're which is nice. You don't have to file like a K1 or anything like that, but along with that you have a slightly higher a lower dividend yield. Uh but that one's had a really nice run. And those are great because even if uh commodity prices dip pretty substantially if you do get some um peace deal or something like that, uh the the the pipeline company should still do quite well. And I think it just reinforces more than anything. I mean, how do you argue against developing our our our uh local energy infrastructure when you see the crappy situation that Europe's in, right? I mean, I mean, look at Europe. They are they are they are >> backs against the wall uh because of some of the political choices that they've made in in relation to energy. >> Yeah. It's it's to America's great fortune that we have that huge uh shale in the middle of the country that that's been and and I think they describe America as the Saudi Arabia of gas as well. >> Yeah. Yeah. No, we're we're super lucky for so many so many reasons and I mean there's a lot of stuff beyond that. I mean there's a lot of oil off California. There's uh if they ever wanted to tap into that stuff that that they could. So but but energy security I think just has to be the key takeaway. I mean you cannot be reliant on on you know these these nations that that are uh you know a lot more it's a lot more dangerous environment uh shipping through the straight of Hormuse than you know your own pipelines in in your country. >> What do you make of that merger that Devon has going on? >> I think they've done good smart acquisitions over time. I I feel like I I think that they prioritize reducing their debt loads after them. Uh and like I said, they're one of the few companies that really is vocal and has a long-term history of looking at intrinsic value per share and what creates the most value uh for shareholders. So, there's a logical basis there. A lot of these other companies, you know, don't don't do that. They're they're kind of empire builders and I think that that's where you know the biggest mistakes occurred. So I think that a stock like Devon, a company like Devon, a management team like that you can invest a lot more confidently than you can with some of those. I mean, remember remember Exxon? I mean, Exxon's a wonderful company, but remember when they bought XTO, you know, at the peak of of gas prices and they've done that a couple of times and and there's so many so many uh transactions like even even accidental uh that that acquisition that they made right before oil collapsed that that caused Buffett to step in with the preferred stock investments uh because they had screwed up their balance sheet so royally. Uh, I mean that's a that's a mistake that has cost so much to shareholders and taken years to to try to rectify and clean up. I do sometimes worry that the oil and gas guys are a little bit like, you know, precious metals in the sense that when the prices are low, they all get religion and they they all make these really great capital allocation decisions and then prices get high and they all lose their minds and start doing all the silly stuff again. >> That's why I like them when they're cheap and I don't like them when they're expensive. Yeah, that's been the history for sure. So, I think it was a while ago, but I I liked uh we invested over the last five, six years quite a bit in like uh Trans Ocean bonds. Uh so, they're high yield bonds a lot. For a while, they were going for like 12, 13% and then like 10%. And those have worked out just fantastically well because they had they have a capital structure problem, not a business problem. And uh you know, they've had a good backlog. They just had a lot of debt. uh relative and and and it wasn't an environment for offshore drilling where they could use all of their rigs, so they had to cold stack some of them. And they just uh combined with with one of their largest competitors uh and and the balance sheets looks a lot better after this uh acquisition. And so that those bonds have done really well. And it'll be interesting to see if now the equity uh could be a play. It's it's run up quite a bit now. I think it's doubled uh from not too long ago, but uh yeah, it'll be interesting to see how some of that stuff uh p works out. >> Uh do you want to talk about EPD and you'll they're they're utility like in that, you know, they can invest a few billion dollars each year at a a a solid rate of return. And so, you know, when you combine that with like a six or seven or 8% dividend, depending on when and where you buy these things at, you get a little bit of growth on top of that, uh, you know, it's a it's a nice low double-digit type returning investment with a lot less risk than the overall market. So, I mean, if you think that the market's going to do what it's done over the last 15 years, you're going to lag behind in something like that. But if you're like me and I would imagine you where you think that the next 10 years might be more like you know 2000 to 2013 type thing where you know you get a few bare markets big bare markets and you you get basically a lost decade. You know those types of of investments can do really really well. >> Yeah. I mean I I I don't hope for the bare markets but I I do hope for a better market for value. >> Oh for sure for a little while through here. >> Before I forget I wanted to mention something. So, you just kind of talked about capital allocation and so we're kind of going back to the BDC's, but I wanted to give an example of of just how stupid some management teams can be. So, there's a company, it's it's FSK. So, KKR kind of uh took over the management of this really badly performing BDC a while ago, and they've kind of reshaped the portfolio a little bit. Uh but but basically the the the stock is trading at about 50% of its net asset value. 50%. And every year what people also need to realize is these loan portfolios are returning hundreds of millions or billions of dollars of cash depending on the size of the BDC. So they're returning all this money. And so analysts rightfully in the last conference call, the quarterly conference call, they said, "Well, why aren't you buying back your stock at at 50 cents on the dollar?" Like, how does that not make sense? And the answers were horrendous. It's like, well, we have bought a lot of our stock in the past and it's like just nothing applicable to the current environment whatsoever. And one of the reasons why some of these companies don't want to do that is because they're earning management fees on based on the asset size of the BDC's. And so if they were to buy back uh stock, that's going to reduce the management fee a little bit. But that is just such short-term thinking because the market is going to reward the best performing managers and the best performing companies. And so if you're if you're buying your stock back at 50 cents on the dollar and and showing that you have your shareholders best interest, that's going to go a long way. And so I think that, you know, mark my words, I think that that will be uh a major catalyst once that starts uh full-fledged in whatever asset class, but but especially in that private capital space. >> Um while I've got you, one stock we have to talk about is assured guarantee >> ago. That's one that uh I know you've been tracking for at least a decade. More than a decade because we we've been talking about this since 2016. >> Oh yeah. I think I started investing in it maybe the end of 2008 or beginning of 2009. So it's almost been a 20 years 20 year journey there. Um and yeah, so that's that's another case of just phenomenal management. So you have a bond insurance company. So they're the number one bond insurer in in the world and not a great business. It's not an amazing business by any stretch of the imagination. There's it's decent um but but demand hasn't been tremendous. They kind of benefit more in a in a you know higher rate environment for their investment portfolio, but lower rates you get more bond issuance. It it's just not been a a great environment. Uh but what management has done >> well it's got terrible headline risk. You should >> terrible headline risk. Headline risk a little bit. You had Puerto Rico. You had COS during the financial crisis. You had all this stuff. >> Anytime there's some big financial crisis blow up there in the paper as being somewhere. It looks like >> they're not in private capital yet. I haven't heard them named in that yet. But but what's so good is they have a great CEO Dominic Fred Rico who's been he's been with the company since they IPOed in like 2004 or 2005. and or even before that, but he's been the CEO and uh and he's bought back stock. So, they buy back about $500 million of common stock each year on average, I think, over like the last seven years. The current market cap something like 3.7 billion. So, they're retiring 12 to 13% of their shares each year. And every single dollar of these stock buybacks over the last decade has been at a large discount to, you know, their their book values and and adjusted book values. Right now, the stock's trading at at something like 45% their their um adjusted book value, 66% of of their book value. Uh so it's really cheap. And if you look at the actual uh portfolio, the the the the troublesome credits are kind of like water utilities in the UK for instance, you know, water even even with Puerto Rico, the the water company paid its debt. Uh you know, the UK is very sophisticated economy. You know, they're they're doing all right. And and just like I talked about with the private uh with the BDC's, if you're buying back your stock at 66 66% of of uh net asset value, you can make up for some of these added credit losses in the future. So good good capital management can really reduce some of those mistakes on the underwriting side as well. So, so yeah. So, I do think it's a a buy at these levels and I actually bought some today uh just because I think the valuation's cheap enough where you can. >> So, the it's they they publish these figures too. Adjusted book value is one of the book value and adjusted book value are figures that they publish in their uh reports. So, you can track those numbers and you can see how they've done uh over >> the growth has been extraordinary. I mean, it's it's you got to look at it. It's it's it's so interesting to see. It's there's very few insurance companies that have grown their uh booked value like AGO has, but AGO has a way lower return on equity than some of the other ones that that you know would come up in that type of screen. It's not the best business in the world, but I would say he's as good of a capital allocator as any that and he's got that kind of bulldog personality where it's like screw screw it. If you're going to give me my stock at this at this price, I'm just going to buy it back. And he does it consistently. And I I give him a lot of credit for that. I think that's so rare. >> How much of the business does he own, though? >> I don't think a ton. I mean, cuz he's getting older and so so he's he he he has bought at times, but he's kind of in that, you know, systematic offload, but they do pay a decent amount in stock in in compensation to their management team. Uh, but overall, I think he's done really really well. And it's one of those where it's like, look, it it might not be the best company in the world, just like Croup, but if you're buying at the right valuation, it's super attractive. And once again, BDC's, I'm not Mr. BDC. I didn't own any of these things for a long time. But if you're buying them at 20 to 35% discounts to the liquidation value of their loan portfolios, a lot has to go wrong before you lose money. I if if you're a long-term investor, >> uh I think I I heard him say once that he wanted to be the last shareholder, he was going to have the last share. >> Yes. He used to I used to talk to him and and we joke about that. Absolutely. Um, yeah. I mean, I mean, he told me >> Yeah. Yeah, I probably did. Uh, but but yeah, I love that. I love that attitude, you know. It's like it's like that's fine, you know? We we we know what the value of the company is. Uh, and so we're going to keep doing that. >> Um, let's talk about the market in general. How do you feel? >> I think I I feel like it would make a lot more sense if the market was down 10% from here, you know? I think that that would make a lot more sense. It's It's interesting because the Mag 7, they're all down on the year uh quite a bit, but really you've I mean, we've had oil up, what is it? It's like the the oil companies are up like 3540%. Energy companies, utilities are up. Uh I think some types of consumer staples are up. I know a lot that aren't up. Um so it's it's really just it's it's interesting. you it's hard to see where you know the indices are finding stabilization from especially with the mag 7 down. So I don't think the index is attractive at all but uh but I mean it's durable. I've thought that for a long time and it's done done really well. So we'll see the timing. >> Last year the argument was Mag 7 is really the only game in town. and the other 493 are sort of sucking wind and they're the only thing keeping the index up and then since magn 7 stubb stumbled in whatever Q4 last year it's been the other 493 that'd be holding the index up >> it's incredible it it really is incredible I mean it speaks to the power of index funds for sure but I I will just say you know as someone that my first job out of college was Vanguard uh in the early 2000s and that was right after the financial crisis and I I mean during that time people had just lost 50% in the tech bubble and you know they weren't feeling super optimistic about the indices even though the 90s and 80s were fantastic and then you had 2008 when the market went down 50% again and it was like okay buy and hold's dead uh you know let's talk about gold coins which probably would have done pretty well in hindsight you know or annuities or blah blah blah and and and so you the people that are advocating for index funds and and you know saying how great they are, did they did they go through those times and and were they as bullish on them during those times? I think that that kind of stuff matters because a lot of people aren't going to feel the same way. If they get kind of a lost decade, they might not have that, you know, really long-term mentality. And if you're retired, can you afford a lost decade? That that goes unnoticed a lot. We, you and I both know that index funds can be phenomenal. If you're 20 years old and and the market's relatively cheap, index funds are a great way to go and then just focus on your job and your family. If you're 70 years old and you're depending on your investment portfolio to to to finance your retirement, how does a lost decade look? How much, you know, what allocation? A lot of clients that we see, a lot of portfolios we review, Toby, are like 90% equities for people even in retirement. So, I think that that's a big risk that's out there. Yeah, there was that period from 2000 to 2015 something like that where even the best companies in the market Microsoft and Walmart all those sort of companies were >> by the time 2015 rolled around the underlying and I looked at these and I looked at them with leaps at that period in time because there was so little volatility in the equity that the LEAPS was super cheap too >> and the stock had done nothing and the underlying businesses were still like there wasn't much of a difference between the runup to 2000 000 and the period from 2000 to 2015 that was sort of they had the business was were comparably good through that period. The only thing that Microsoft had that like the one year where they had the step back in revenue in like 2010 or 2011 something like that and they had Steve Balmer was the CE. >> Steve Balmer I was going to say that you had the Steve Balmer risk when he was making some of those acquisitions. I mean those were scary for all shareholders but I I remember the time well. I I agree. That was an amazing time uh when you could buy some of those. But you know what? They didn't all work out great cuz like Intel was really cheap, too. >> GE was another one. >> Well, GE ended up working out, but it took 15 years, you know, after that when when they finally, you know, did all the divevestaturures and everything like that. But like yeah, I mean Microsoft paid off. Aer uh you know, their their cloud platform, you know, really did it. And you had kind of a similar scare, right? Like right now people are worried about software in relation to AI but the cloud was a big risk for a lot of those software companies too. Uh remember I mean when they were flipping their business models uh from selling actual physical software where you own something to um you know the subscription model there was a lot of risk there. >> Wow. and and you know this I remember the stocks did have some blips during that time but it actually ended up being a big profit driver uh for those companies for like the Adobe's of the world. So we'll see. I I do think that I think that it looks like a lot of these AI tools are going to be leveraging you know the software as tools uh you know but but I'm not Elon Musk. I I don't have the brain capacity to figure that one out for sure. >> What do you think about do you follow something like constellation? Do you have a view on you the Canadian software? >> The software one? >> Yeah. >> Yeah. Yeah, I've looked at that one. Uh I think it's I mean it's not super cheap, but I I like you know kind of the management strategy there. I think that a lot of their you know softwares seem to be missionritical. Um so actually I have bought a tiny tiny bit of that. Uh but it's not something I'm I'm big into yet. It's not something that that I feel you know I I think I'm still learning about how that's going to be impacted by by some of the transition in there. I do look at Adobe. I do own some Adobe and like they had a really nice quarter actually, but the CEO stepped down and so the stock kind of sold off in unison. Sold some puts actually on like Salesforce.com uh when when that had a big sell-off uh just because it's g it's all it's going to take time for this displacement to occur. If you're if you're a big company, it's really hard to just say tell your whole Salesforce, hey, we're going to get off salesforce.com and we're going to try this, you know, vibecoded option. You know, that's not going to be attractive. That's how these people are paying their bills. They're paying their mortgages through their sales and stuff like that. So, uh yeah, I I think that that's opened up smart and those stocks have started to rally. Uh it's really kind of the private credit worries that that has spooked the market, but some of those software companies have had a nice little stealth rally. Salesforce included. What about something like PayPal? Do you attract PayPal? >> I do. I do. I I think PayPal's attractive. Look, the business is not amazing. There's a lot of competition there. But, but I think that payments are are pretty cheap right now. So, PayPal, there's Fiserve, there's global uh global payments uh that that you know are all pretty cheap. I I could see someone coming in and buying PayPal out. I wouldn't I wouldn't be shocked by that at all. A lot of these are cheap, but then you look at the stockbased compensation stuff and and that's like the depressing element of it is that, you know, it's not like an AGO where or a Devon where you can really trust, you know, the management teams to act in the best interest of of shareholders. PayPal's had a big buyback, but some of it's to buy back, you know, the the shares that they issue. Uh just like I mean, look at what Nvidia does with that. That's crazy. Um so, but yeah, I I do I do like the payment space and I'm actually in that. Um, it's cheap. It's really cheap. And I I think, you know, it's got a good chance of working out well, especially if a a buyer does uh step in there. >> What about something like Intel? Have you tracked Intel? >> It's too I I don't love I I've tracked it a lot over the years. And I've just too many misfires. Uh, and now then you have the government ownership element of it. So, so for me, it's not my cup of tea. I I'd rather in I'd rather buy Nvidia than I would Intel personally. I think Nvidia, you know, I don't I don't know that those margins are sustainable. I I think not, but like I think you could make an argument for it, uh, a credible argument for it, you know, even at these levels. Uh, whereas Intel is just kind of in the too hard pile for me right now. It's they have a lot of hurdles to overcome. >> What else haven't we discussed? What are we missing? >> I think that's been, you know, a pretty good uh, comprehensive discussion. One other thing I'd say is is one area that's kind of been left for dead a little bit is our real estate investment trusts. Uh you know in this AIdriven world uh real assets are going to have real value. And so I'm not talking about office like properties but but you know some of these some of these attractive companies like Avichi properties for instance that's that owns a lot of the Las Vegas casinos. They own a lot of regional casinos as well. uh 100% of their rent was paid during the lockdowns of 2020 and you you can get it at, you know, 6 and a.5% dividend. They're growing that dividend over time. That that could be really attractive. So, you've got, you know, two 3% growth over time plus a 6 and a half% dividend. You know, some of those real estate investment trusts are are really cheap. Uh I got burned last year on on Alexandria. Uh it's a a biotech lab and adjacent office space uh company that that you know it it has a really great history. The stock traded over 220. It got down below like 90 and it started looking really interesting at really cheap valuations. But that that market has just been overs supplied and the administration's policies have have just kind of spooked a lot of these biotech companies from wanting to grow their their office and lab footprint. Uh, so it got hit pretty hard, but I think that's really cheap here. So, I think that there's some opportunities in the real estate space. It's a great way to add yield and diversification to your portfolio if you're really heavily in more traditional equities or tech. >> Um, Tim, tell us a little bit about TNT Capital Management. >> Yeah, so we're based in in Arizona. Uh, we were in California for a long time, too. Uh, but we managed close to $200 million of assets. Uh, and we combine our deep value investing strategies with conservative income generating option strategies like the covered calls, like the cash secured puts. You know, they're strategies that that your advisor at Morgan Stanley or Meil Lynch is probably not going to do for you and they can really be beneficial uh in more adverse market conditions or rangebound market conditions. Uh, so yeah, you can reach us at uh ttvalueinvesting.com and uh my Twitter's uh Tim Travis Value. >> Good stuff. Uh well, that's uh that's all we have for this week, folks. We'll uh see everybody back next week. Jake will be back uh from vacation and uh we'll be here same bat time, same bat channel. Tim, thanks so much for spending time with us. >> Appreciate it. >> Crushed it as always.