This week, Dan welcomes a guest who he describes as "my style of investor"... Stansberry Venture Value editor Bryan Beach.
In his newsletter, Bryan hunts for gems in the beaten-down, hated microcap sector of the market. And no one does it better than Bryan... Thanks to years of creating and auditing financial reports for the "Big Four" and software companies, he has honed his talent for uncovering opportunities within the dense terrain of Securities and Exchange Commission ("SEC") filings.
Dan and Bryan delve into a conversation about special purpose acquisition companies ("SPACs") – a topic Bryan has been covering well before the 2021 bubble popped. And he has dug deep into the "SPAC scrap heap" to uncover a few diamonds in the rough, naming a few businesses on his radar, too.
Bryan also discusses another overvalued group of stocks that's a favorite of his – Software as a Service. Then, he scrutinizes the housing market, and Dan shares his "macro" point of view on the matter.
Finally, Bryan urges listeners to keep an open mind when investing... and to not readily dismiss the speculative side of the market...
I encourage our readers to be thinking about all parts of their port. There's a time to go deep in microcaps and there's a time to avoid them altogether. And everyone's situation is a little bit different. That's what I think is important...
Pull up and look down at your portfolio. Get out of the weeds and look down at your whole portfolio... There's some part of the market that you haven't thought about in a while that you probably should think about again.
Editor, Stansberry Venture Value
Bryan is the editor of Stansberry Venture Value, an advisory service focused on small-cap value investing. He is also a senior analyst and contributor to our flagship product, Stansberry's InvestmentAdvisory, and the bond-focused Stansberry's Credit Opportunities.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. This week, we'll talk with my brilliant Stansberry Research colleague and friend Bryan Beach. In the mailbag today, lots of book talk in the mailbag. It'll be fun. And remember, you can call our listener feedback line at 800-381-2357, tell us what's on your mind, and hear your voice on the show.
For my opening rant this week, let's worry top down and invest bottom up. We'll talk about that and more, right now, on the Stansberry Investor Hour. Last week, I attended an annual invitation-only small investment conference called VALUEx Vail. We go up into the mountains in summer and have a little bit of fun and a lot of serious investment presentations, we interact socially and listen to each other talk, and it's a really great exercise. And I always come away from it kind of renewed and refreshed, and this year was no exception. I was struck, overall, by the quality of the presentation, the quality of the work behind all of these stock picks that I was getting, and I came away wanting to buy five different stocks.
So you know that's a good thing if you got five ideas that you just can't wait to get after them. But there was one overriding thing that sort of grabbed hold of me and it won't let go, and so I have to talk about it. That's what I do here on the podcast and in my weekly Stansberry Digest. I sit down to write and I sit down to make notes for the podcast and I think, you know, these things won't leave me alone. There's a reason for that, right?
Either I'm giving into something that I shouldn't give into or I'm just letting my emotions guide me in what I believe is a good direction, and I think I'm doing the latter. And the thing that I came away with from Vail this year that will not leave me alone is the need to invest bottom up and worry from the top down. What does that mean? Well, that phrase actually I stole it from a very famous – well, a famous value investor, if that's not an oxymoron [laughs] named Seth Klarman. He says, "We worry top down but we invest bottom up always."
I think that sums up how you ought to do it. Worry about inflation, but be very careful. For just one example of a top-down worry – worry about inflation, but be very careful about your expectations of the performance of any given asset that you purchase which you may believe is immune to inflation or will even benefit by it. I don't think anything really benefits from inflation. It seems like it. It seems like, well, if there's inflation, you just buy commodities or buy gold or buy oil or all of these things.
But how many people are extremely disappointed in the performance of gold since inflation began ticking higher and higher? A lot, because it hasn't exactly taken off. It's just kind of gone sideways to slightly down. Yes, it's outperformed the Nasdaq, and I've pointed all this out before. It's dramatically outperformed everything – stocks, bonds, bitcoin certainly has done terrible. So yeah, you've got to temper your expectations.
For me, gold is something you just kind of accumulate over time and you'll probably never sell it. I know I'll certainly never sell it again, [laughs] and I'll continue accumulating it over time. Investing from the bottom up is the part that I think I may have neglected recently. So let's talk about that. You know how to worry top down. Look, I've worried top down on this show and in my newsletter and anywhere anybody will let me, in the Stansberry Digest, a lot over the past year and a half, two years since about December 2020, January 2021.
Around that time frame I really just thought, "Oh my goodness, this is a massive bubble. Look out below." And partially, that has come true. I don't think the bubble is half-done bursting. I think it's barely a quarter or a third "begin to burst." But let's worry about that another time and talk about investing from the bottom up. What that means is every stock you buy, if you're buying individual stocks for yourself, you should know that business.
You should know that business at least as well as if you were planning to maybe go into it, and you should know the details. You should know something about the management team. I think that's a very important sort of qualitative thing that most people kind of gloss over. And you can assess their performance by looking at how they've allocated capital, especially if it's a company that has done a lot of acquisitions. First of all, you would ask yourself, "Is this the kind of business where you can roll up a bunch of companies without creating a huge problem?"
Because for example, I remember one of the early companies I looked at was Waste Management many years ago, more than 20 years ago at this point. And they were involved in a huge scandal because they rolled up I think 444, if I remember correctly, companies, waste-management companies in the U.S. and Europe, and the CEO was involved in a scandal. Actually, there were two top officers of the company. I remember Rodney Proto was one of them – he might've been the COO – and then there was one more whose name I can't recall, and they were ousted and ultimately I believe they were prosecuted. I don't know what happened to them.
Then a guy named Maurice Myers came in. He was from Yellow Freight and I think he was as turnaround specialist. I don't think he was a trucking specialist, because he came into Waste Management, which is not a trucking company, and he got things turned around. And I looked at it at the time and I thought, well, there's $13 billion of revenue here that's really sticky given the fact that once a municipality chooses a waste hauling company they're probably not going to change it unless the company is just a total disaster in their performance of doing the job.
So I thought even with a financial scandal it should be OK. And this guy Maurice Myers, he has a track record of turning businesses around. So they divested some assets and they just got – [laughs] you know, they became honest in their accounting and away they went. We've also, within the past two years here, added it to the Extreme Value portfolio. I don't give all the picks away because my subscribers pay a lot of money, but I have given a few of the large-cap ideas away.
And frankly, I don't have the numbers in front of me. I don't even know if it's a buy right now. I think it is, but I really don't know. I don't know the buy-up-to price that we put onto it. But that's the point, right? I needed to sort of look at the situation and think about it not just in terms of the numbers. From the bottom up, you want to know that too. You want to know about free cash flow generation and margins, the history of margins.
Why do they earn the kind of margins that they do? Well, these are steady margins because it's a "steady Eddie" kind of business. And you want to look at how they have bought back shares if they do that and how they've paid dividends, and you want to look at the kind of returns that you can expect on the kind of business given the amount of capital they have to employ. There's a lot to it.
And that's just some of the financial stuff. You also have to do those qualitative things like what I described with the turnaround situation in 1999, as I recall. And the stock did really well from that point forward. It was a good pick at that time. So invest from the bottom up. Get to know the business you're in.
Know the situation. If the stock price is down, why is it down? Is it down just because we're in a bear market, let's say, or has it really been crushed even more than the market for some reason, right? And is that reason fair to the business going forward for the next three, five, 10, 20, forever, 50, 100 years, you know? [Laughs] You have to do that.
You have to think about each business. If you're buying individual stocks, you just have to do it that way. The only people I know who don't do that are traders, and they don't really think a whole lot and they don't really invest from the bottom up business by business. They just say, "Well, I want to buy waste management companies for some sort of macro reason," or they say "I want to buy companies where the 50-day moving average is crossing the 200 –" you know, they're technical traders, in other words, and they might acknowledge that they're looking for companies in a particular industry or with a particular type of business or something, but they're technical traders.
But see, those people are ready to get out at the drop of a hat. A long-term investor invests from the bottom up and is prepared to hold through drawdowns over a long period of time. There's a difference there, and I'm more of a long-term investor. That's when you invest from the bottom up, and that's what you should be doing if you are buying individual stocks for yourself. I'll try to keep this topic more in the loop.
I'm still bearish on the overall market, but a lot of stocks have gotten beaten down and I heard a lot of good ideas in Vail. They don't want me to share them because it's a small group of people and they don't want me, you know, publishing all their ideas, but some of them will say that it's OK for me to talk about them, but we won't know that until some time. I usually get an e-mail that says don't talk about this, you can talk about that, etc.
All right. With worry top down, but please invest bottom up if you're buying individual stocks, let's go ahead and talk with a guy who's very good at investing from the bottom up. His name is Bryan Beach. Let's talk with him right now.
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Time for today's interview. Our guest is my Stansberry Research colleague and friend Bryan Beach. Bryan is the editor of Stansberry Venture Value, an advisory service focused on small-cap value investing. He is also a senior analyst and contributor to our flagship product Stansberry's Investment Advisory and the bond-focused Stansberry's Credit Opportunities. Bryan Beach is a former Big Four auditor and a certified public accountant who holds bachelor's and master's degrees in business and accounting.
He spent six years in public accounting and then a number of years as a controller and director of publicly held software companies. Bryan, welcome to the show.
Bryan Beach: Hey, Dan. It's good to be here. Thanks for having me again.
Dan Ferris: Yeah. So I like having you on because you're my kind of investor because you're covering all these small-cap stocks that are sort of out of the way and some of them can be quite beaten down. I don't know, you're just like my style of investor. [Laughs]
Bryan Beach: Yeah. That's one of the things I've been focused on, is microcaps here for the last – really since 2017 that's been my focus, although I still write about a lot of large caps with some of our other newsletters, but that's been my focus. And I do get "growthy," maybe more growth names than you would probably lean toward in your publication, but the name of my publication is Venture Value and that's really what we're looking for, is kind of those beaten down and hated names in the microcap corner of the market.
Dan Ferris: Yeah. I feel like all of us value guys had to become some version of growth investor in the last 10 years, didn't we?
Bryan Beach: Yeah, it's been an interesting time to be a value guy. You know, I actually come from a background in software companies, so I was pretty comfortable there reaching out into the software realm over the last couple of years, but that party ended, of course, and now I'm back in value land, so yeah, it's been an interesting couple of years for sure.
Dan Ferris: OK. So just so the listener knows, before we started recording Bryan and I were talking about SPACs.
Bryan Beach: Yeah.
Dan Ferris: And Bryan, you mentioned that I've written a little bit about SPACs in here, here and there. What I've done is bash the hell out of them so far.
Bryan Beach: I know. Yes.
Dan Ferris: But the days for bashing are over, right? I mean, long over at this point, right?
Bryan Beach: Yeah, yeah. SPACs were a really fun target for people like Dan for a long time, and I've been writing about the SPAC market for a long time, since 2017 is when we recommended our first one, and it was really interesting watching that market evolve over the big bubble in 2020 and 2021 and then again watching the bubble burst. I think that that bubble was kind of unique in terms of the reasons for it inflating, the reasons for it imploding. It's been fun to write about, and so far it's been less fun to pick stocks out of.
But at some point, Dan, when this bubble bursts, we value guys have to start asking, you know, when is it cheap enough? Are we there yet? So that's been some fun material to learn about and write about. We've been covering that since 2020.
Dan Ferris: I find SPACs very interesting because it just reminds me of typical value-land type of stuff, because 90% of the companies that back into these public SPAC vehicles are nothing you'd ever want to own, right?
Bryan Beach: Yeah.
Dan Ferris: But every now and then you stumble across something that's a really good business, and it's been beaten down along with everything else.
Bryan Beach: Yeah. And that's what we're looking for, for sure. I don't know. Do you want me to go back and kind of talk about what a SPAC is? I don't know if your audience is familiar with that. But if we're going to talk about this, I mean it might help to have some context, but I don't want to – I don't know how much you guys are familiar with that.
Dan Ferris: Yeah, do it. Tell them what a SPAC is and then give us the Bryan Beach SPAC spiel.
Bryan Beach: [Laughs]
Dan Ferris: You know, bring us up to date with where you are and what you're buying.
Bryan Beach: It's not a spiel, but yeah, it's really interesting though. As a student of just investing or valuing companies in general, a SPAC is a Special Purpose Acquisition Company, and so a sponsor – I'll just assume I'm a sponsor – I will go out and raise a bunch of money and I will raise, say, $100 million because I'm a very well-connected sponsor. I will go out – and I'll have a public company shell, and then I will go out and I'll try to find a company to buy, a private company to buy and tuck into my shell. And so that is, in a nutshell, the mechanics of a SPAC.
And writing about these as long as we have – back in 2017, you know, we only saw a handful of these SPACs out there, and the SPAC itself dates back a couple of decades before that at least, a blank check company it's sometimes called. And really to your point historically, these have been the types of companies that couldn't go public the traditional way through an IPO, an initial public offering. So there's historically been kind of a SPAC stench about the types of companies that choose to go public in this way.
Dan Ferris: All right. So do you want to talk about a specific one that you like right now?
Bryan Beach: Well, yeah, I mean for –
Dan Ferris: Let me tell you something. Our listeners would love that. [Laughs]
Bryan Beach: Yeah, well let's – Dan, just to continue, historically that's been kind of the playbook with a SPAC. The stock market has never really loved SPACs. And then starting in 2020 and 2021 things got pretty interesting. And Dan, what happened is a lot of people started raising money for special purpose – a lot of sponsors out there started raising money to find companies to take public through SPACs. This corresponded, of course, with all the stuff you've been writing about over the last couple years with stimulus checks and new people kind of pouring into the stock market.
And what was interesting, what I started seeing in 2020 and 2021 is these sponsors began to overpay for these private companies. So when we first started writing about this, Dan, if you owned a private company that does, I don't know, maple syrup or bicycle seats or whatever you guys do out in Oregon, [laughs] you've got your company. And if I'm a SPAC sponsor who's looking for a target, I might say, "Hey, Dan's company's worth $1 billion, right?"
So you're a very successful bicycle seat manufacturer. And so I might take your company public, merge with your company at a $1 billion valuation. You with me so far?
Dan Ferris: Yes, sir.
Bryan Beach: All right, good. And I apologize. You can make your company something else if you want, but we'll just go with bike seats for now. So what began to happen in 2020 and 2021 is there were so many sponsors out there, and the way it works – I should've mentioned this – a SPAC sponsor, they have two years to find a deal or else they have to return all the cash to their investors and all the work was for naught. Or if they consummate a merger they get to keep 20% of the company free and clear.
So as a SPAC sponsor talking to Dan in 2017, I might've said, "Dan, I think your company's worth $1 billion," but in 2020 and 2021, I'm coming at you and I know you're hearing from other SPAC sponsors because you've got a pretty good business, right? And so I start doing all these crazy things to try and entice Dan. I'm saying, "Look, I'm going to get a celebrity sponsor, Shaquille O'Neal or one of the Kardashians or somebody to – Cheech and Chong, whoever, to try and entice Dan.
Or I might just say, "Hey, I'll merge with your business at a $1.5 billion valuation." I've got a little bit of a, I don't want to say moral hazard, but as a SPAC sponsor, I'm incentivized to overpay. I'd rather own 20% of an overvalued company than 20% of zero. And so we started to see – when we saw all these SPACs raising money there began to be kind of a separate market out there, like a crazy SPAC sponsor valuation market out there as companies like mine, my SPAC company, were looking to buy companies like yours. Yeah, are you with me so far, Dan?
Dan Ferris: Right. It's all hypothetical. Let's remind everyone of that.
Bryan Beach: Yeah. No, I know. I'm not really a SPAC sponsor and I don't think you've got a real company, but this is the kind of thing sponsors were dealing with as they were really up against – especially toward 2021 and in 2022, a lot of these SPAC sponsors are up against the wall to try and find targets. So what's happening is they're overpaying. And what's really interesting, Dan, you're a guy who talks a lot about the stock market and the stock market is sometimes irrational, and actually what's been interesting to watch in the SPAC world is that it was the SPAC sponsor market that got irrational, and when I merge with your company and I take your company to the public markets, the public company markets are saying, "No, Dan's company is not worth $1.5 billion, it's worth maybe half of that or maybe $1 billion."
So as soon as I merge, we see the stock market actually become quite rational and take the exuberant sponsor valuation all the way down by 40%, 50%. So it's been an unusual bubble because what's caused it to collapse is not necessarily been some of the things you've been writing about, although that's part of it – inexperienced investors, just hype, Reddit, Wall Street – that's kind of part of it. That was definitely an element to it. But a lot of it has been that the SPAC sponsor market just was so competitive for so long that the valuations got out of hand.
Dan Ferris: Roger that. OK. So then we get to, I don't know, what was it, like last – you know, just call it spring of 2021 a lot of the – like the cannabis and even like the speculative tech stuff like the ARK fund and SPACs peaked and started falling apart. So they've had a year-plus to let all the air out and where are we now? There are deals now, right?
Bryan Beach: Yeah.
Dan Ferris: There are good deals now.
Bryan Beach: I think so. I mean, you know, so Dan, that's a great point. I think we're at a really interesting part of the market right now. There was all this excitement, and I think – I don't have the numbers in front of me, but Bloomberg has a de-SPAC index or an index of recently released SPACs, and I think that index is down something like 70%. So on average, these SPACs that come public at $10 are now trading at around $3.
So some of that's due to the valuation aspect we've been talking about, some of it there's some dilutive – I won't get into the technicals, but there's some kind of dilution that happens with a SPAC a lot, and so that might lop off a dollar or two of valuation. But on average, these SPACs are down 70%, 80%, and at some point you've got to ask, "Is there anything interesting in this pile?" We've been calling it a "SPAC scrap heap"... "SPAC splats." You know, as you mentioned, EV companies, electronic vehicle companies – there's cannabis.
There's some good businesses but there's also a lot of "hypey" kind of businesses. And I'm not saying all the cannabis businesses or all the EV businesses are hypey, but a lot of them are. But some of these, Dan, are businesses with 20-year histories that were generating cash before they went public, they may or may not have stumbled through the pandemic – and the pandemic was in the middle of all this. That is a curveball to try and factor into your valuations. But a lot of these companies – not a lot, but we're finding a handful of these companies with long operating histories, that generate cash flows, that have been kind of thrown out with the SPAC bathwater, and that's one of the interesting things we've been writing about.
Made four or five of these picks off of the scrap heap, [laughs] some of them at $3.50, $3, and most of them have continued to fall so I look like an idiot. But let's see in 18 months. You know, you can have me back on here and you can either, like I said, point and laugh or, you know, pat me on the back. But so far these SPAC diamonds we've been picking haven't turned around, but I think that they're interesting, particularly as we look toward 12 and 18 months out.
Dan Ferris: Yeah. I mean, look, you know, if you just picked them and it hasn't been that long, you're a value guy. All of us value guys, you know, we're always early, so absolutely. We'll check back in 18 months, but what – can you give us a name? Can you give us a specific story that you like? We don't want to offend your paying subscribers.
Bryan Beach: Yeah, yeah. There's a really interesting one, Dan. Let's talk about this company. It's called ATI Physical Therapy, OK? [Laughs] And so they do what you would think they do, right? They do physical therapy. That's a very kind of one-on-one, person-to-person kind of a thing. Not techy at all.
So it's not a new business. It has a long history, a long operating history, and it's got a lot of room for growth as they kind of either roll up this industry or open new clinics, and so it's a pretty good business with a lot going for it. It's not particularly capital efficient, but it's a pretty good business with a lot going for it, and it's not one of these techy-type things. I don't want to bash a guy or Monday morning quarterback too much, but the CEO just couldn't – he probably couldn't have handled the pandemic worse for this particular business. Again, I don't like to – it's hard with the pandemic, Dan.
I mean, nobody knew what to do, right? I watched my kids' teachers try and struggle, at our office we kind of were figuring out who needs to be in the office – everyone had to kind of figure it out. It's easy to sit here in July of 2022 and pick apart how someone handled the pandemic, and so I don't want to bash anyone, but here we go.
This guy really couldn't have done it any worse. So heading into the pandemic he furloughed or laid off everybody that was at the clinics. And again, there's no playbook. He had never been through anything like that, he'd never seen anything like this, and sometimes I check – I don't know if you do this when you're evaluating companies. I always like to look at Glassdoor, you know, that website that tracks what employees think of companies. Do you ever look at Glassdoor?
Dan Ferris: I don't really look at it. I've looked at it before, but not for a very long time, actually.
Bryan Beach: It's an interesting way to just – it's just a data point. You know, like do the employees even like working there, right? That's kind of an interesting question. Like any kind of review site, you know, people can say whatever they want on the Internet, so you take it with a grain of salt, but this was a very popular place to work going into the pandemic, and then it went from 90% approval to like 15% approval as this guy just kind of has to lay everyone off and furloughs everyone. And so then fast forward to like 2021, people start going back, start getting physical therapy, and there's this enormous problem because they don't have anyone working at their clinics anymore. They fired everybody.
You know, there's all this demand but no one to provide the services, and nobody wants to go work there anymore because of the reputation. So obviously the pandemic hurt their business, but then once things started coming back there weren't employees there to help. So the board parted ways with this CEO, and that's when we got interested and we bought – and as it turns out, we bought way too early. A new management team, as you can imagine, I think they're kind of taking a bath with their new, you know, guidance and result. So we'll see what happens.
But as a value guy, you know, a couple of things are interesting here, Dan. This business was profitable before, right? We're not talking about – there's a SPAC out there I always talk about, and I think it's Metals Corp, and maybe it works, maybe it doesn't, but Dan, their business model is – have you heard of them? Metals Corp? I think you might've written about – this is – I think they have submarines that mine battery material off the ocean floor. Does this ring a bell to you?
Dan Ferris: It's vaguely familiar, but yeah, I've criticized that whole effort to mine off the ocean floor. I thought it was crazy, but –
Bryan Beach: No, so this is a SPAC that does that, and I think I remember you writing about that at some point. And maybe it'll work out. I don't know. But you certainly can't say it's a proven business, right?
Dan Ferris: No. [Laughs]
Bryan Beach: So this was a proven business. They were profitable before they went public for many, many years, and I think there's reason to believe that the pandemic did not permanently impair this business model. Once this thing gets back going it's going to be profitable again. And of course at some point in time, the stock market will begin to appreciate it in terms of valuation. You know, the other thing is there's another public company called, I believe, U.S. Physical Therapy, USPS I believe is the ticker, and they played the pandemic perfectly.
I don't know – you know, they never furloughed their – you know, they just – the demand was there, and when the demand was there they were ready to meet the demand and they basically just had a good management team in place ready to handle it. And they're still profitable and they've got a nice, you know, 20 times multiple, you know, a nice, healthy multiple on them. It's a better company. It's better run, it's got less debt. So I'm not saying that – but ATI Physical Therapy, even if they never get to that kind of a multiple it still would be double or triple or more from today's prices.
So I have reason to believe that this is a profitable business model, a couple of good reasons to believe, and it just – there were some horrible missteps along the way and it got interesting. As a value guy, I'm now pretty interested. And like I said, I got in above $3. I think it's way below $2 now, so I certainly don't look smart at this point, but we'll see. I think that there are a lot of companies like that in the SPAC scrap heap right now.
Dan Ferris: Very cool. By the way, the ticker symbol you're looking for I think is USPH on that other one. USPS is like 5 cents a share. It's something else entirely. But USPH has a $1.5 billion market cap, so yeah.
Bryan Beach: It's a good company. The market, you know – yeah, sorry, USPH. We don't need to get to that kind of a multiple for ATI to work out, ATIP to work out. You know, we'll see. [Laughs] I'm officially out on a limb now, but that's an example of the kinds of things I'm seeing in the SPAC scrap heap.
Dan Ferris: Yeah. And to be fair to you, I mean, come on, you and I both know how small-cap investing works. Those stocks are notoriously volatile. You know, the fact that they're small means they can be pushed around a lot, and right now everything's getting pushed around a lot. So the fact that you bought it at $3 and it's $1.50 or whatever, that's just par for the course and that says nothing about the long-term prospects. But it sounds like you found a really interesting gem in a pile of not gems. [Laughs]
Bryan Beach: It's mostly – you know, every month we go through and we look at every SPAC from the last couple of – three or four years, and we track them. We track them through every part of the cycle, from a SPAC raising money to a SPAC finding a target, and then once they find a target the merger has to happen, and then we get interested once the stock drops down to $3 or $4, and then that's the list that we start looking at. Most of those have a lot to do with cannabis. There's some drug therapy stuff that I don't really understand. It's not my wheelhouse, not my circle of competence.
Some of them might work out, some of them might not. And a lot of electronic vehicles, you know, battery kind of stuff that again – but every once in a while you'll stumble upon a good, old-fashioned value business, you know, and the kind of thing that Dan might be interested in looking at.
Dan Ferris: There you go.
Bryan Beach: And those are the ones we peel back and look at. And it's been really funny, when we started tracking this, I believe it was in March of 2021, only 4% or 5% of the recently completed SPACs were trading below $5. They were still kind of beloved, and now it's 70%. Dan, these are the market extremes we talk about, you know?
There are lots of reasons why SPACs probably should have fallen, but should 70% of them be trading for less than $5? I'm not too sure. That's what we're looking for, and time will tell if this is all a wasted exercise.
Dan Ferris: Right. It makes me wonder which ones aren't below $5 at this point. You know, was it the ones that went to $50 first? [Laughs]
Bryan Beach: Yes, now –
Dan Ferris: They're not down 90%.
Bryan Beach: Yes. Some of them are way above – went sky high and are now down at $8. But most, I would guess – I could come back and answer this question more, but I would guess a lot of them that aren't that low might be two weeks – it might be just because the merger happened two weeks ago. [Laughs] Who knows? But it's been an interesting group of stocks to track if you've got kind of a quantitative bent, which my team and I do over at Venture Value.
Dan Ferris: All right. So I started out saying, you know, the SPAC was one of the bubbles that started popping a little over a year ago. Obviously they're still popping, but is there anything area like that? Like for me, another area like that is cannabis.
Bryan Beach: Yeah.
Dan Ferris: Is there another area that's just been so beat up that you really like it now?
Bryan Beach: There is, and it's another area that you're constantly making fun of so, you know, we're going to just have to pretend like we get along for another couple of minutes here.
Dan Ferris: [Laughs] Which we do, we do.
Bryan Beach: Yeah. [Laughs] We really do. But it is funny. Software-as-a-service, Dan. That's another area of the market that got to ridiculous valuations, probably too much in 2020 and 2021, and I saw a lot of the things you said about it. You and I, we could probably bore your listeners talking about whether a sales-based multiple makes sense or not for a SaaS-based business, and we can debate that. But no matter how you value these companies, the valuation got out of control – 25 times, 20 times sales on average for a high-growth SaaS, Software as a Service, businesses.
And again, what is appropriate to pay for a high-growth SaaS business? I think you and I can debate and probably disagree on, but mid-20 SIC revenue multiple is probably too high. They're now down – like again, on average, in a want to say mid-single-digit multiples, you know, five to seven times revenue. You know, it takes a long time for a SaaS business to flip to cash-flow positive, so you and I can't talk about EBITDA and free cash flow multiples on this group of companies, but there are a lot of already-profitable SaaS companies, Dan, that again have established business models. The hypergrowth period may be behind them, but they've been thrown out with the rest of the SaaS companies. And Mike DiBiase and I, we both kind of work on the Investment Advisory newsletter, which is a large-cap company – we've been covering some of those.
So again, a lot of these SaaS businesses, they deserve to have been walloped by 80% in terms of valuation. But a lot of them haven't, and so that's a corner of the market that I actually haven't waded back into yet. I'm a little bit scarred, but I'm going to probably start looking hard at those, especially the larger-cap companies. I mean, these are just good businesses. They really – a lot of them are. So I'm going to start getting interested in those again. What are your thoughts on that? Am I crazy? I know you're not a big SaaS fan necessarily, so talk me down.
Dan Ferris: No, no. I don't need to talk you down. You know, I'm just generally skeptical. I think I am a little skeptical of the idea of assigning a lot of importance to a sales-based multiple, but even that, I don't know, I know at some point – look, the whole idea of value is that absolutely anything can get cheap enough to be attractive.
Bryan Beach: Yeah, yeah.
Dan Ferris: And I know that SaaS companies are just the same way. You know, I haven't dug into them nearly as deeply as you or any of the other guys at Stansberry, so for me, it was just – I was looking for anecdotal signs and symptoms that we were in a massive bubble, and I just wanted people to get the feeling of it, and SaaS companies trading at 30-plus times sales were just an easy target. [Laughs] You know what I'm saying?
Bryan Beach: Yeah, for sure. What was the company you write about a lot that the CEO in the year 2000 was trying to explain to investors how dumb the multiple was? Was it –
Dan Ferris: Scott McNealy from Sun Microsystems.
Bryan Beach: Yeah, Sun Microsystems. Right. And that valuation was not outrageous by 2021 standards by any stretch, right?
Dan Ferris: Exactly. Yeah. He was talking about 10 times sales being crazy. What were you thinking, he said.
Bryan Beach: Yeah.
Dan Ferris: And then, you know, it was three, four, five or more times that, you know? A stock would go for literally 60 times sales to 40 or 50 and some analyst would come out and say, "Hey, it's a buy." [Laughs]
Bryan Beach: Yeah.
Dan Ferris: It's just like, crazy.
Bryan Beach: And I do think SaaS is part of the market that these kinds of more inexperienced investors or speculators or whatever you want kind of really drove out of control. I think I just kind of made the point that I don't think that that group was a huge part of the SPAC bubble, but I do think that that group started buying whatever you want to call it, the Robinhood group, that group of inexperienced speculators or investors. They really started heaping a lot of attention on these SaaS companies because of – you know, it's Zoom, it's – a lot of the hot names at that time were generating a lot of Tweets and a lot of Reddit threads and stuff like that. So SaaS definitely got I think out of control, but I never stopped looking at the businesses, and the businesses are really pretty interesting.
In a good, subscription-based business a dollar of revenue is very valuable because there's no sales effort for the next two, three, four, five – I mean, they just tend to renew. If you find a good SaaS business with a 95%-plus renewal rate, that dollar of revenue really is more valuable than a dollar of Dan's bike seat revenue. You've got to keep going out and finding new customers. So I don't know, I'm going to keep my eye on that corner of the market as well. Very interesting.
But I don't know. You're more of a macro guy than me, Dan, so I'm going to have to ask you, like what are your thoughts on just the market in general? You're obviously pretty bearish still, I'm taking from the stuff I'm reading in your Digest and whatnot?
Dan Ferris: Sure. I mean, I'm just expecting a normal outcome from a massive bubble, and we could argue whether or not it's a massive bubble, but to me, I think it's an everything bubble. I'm in the – I don't know, call it the Jeremy Grantham camp, you know? It's like massive bond bubble, 5,000-year low yields, you know, and a massive equity bubble with stocks by the measures that have most negatively correlated with subsequent 10 and 12-year returns, just the most expensive moment in all recorded history. And now, you know, if you look at the CAPE ratio for the last 130 years or whatever it is, it's back down to the 1929 peak, the third biggest bubble in history. [Laughs]
So it's like this thing was really, really expensive, and there are reasons maybe why – there are a lot of businesses like SaaS companies that are highly capital efficient and you could say, well, the market deserves a higher multiple.
Bryan Beach: Yeah.
Dan Ferris: Sure it does, but we also know that when things get really frothy and crazy and people are paying $250,000 for a banana taped to a wall and calling it art, and they're buying NFTs for millions and millions of dollars that sell for $100 a year later, you know, there's a bubble, OK?
Bryan Beach: Yeah.
Dan Ferris: And I'm just looking for a normal post-bubble outcome.
Bryan Beach: What do you think about housing? I'm looking at some companies kind of ancillary – kind of associated with the housing bubble or market or whatever. I don't know. What do you think about that? Is there a crash coming or is it more going to be like 15, 20 years of stagnate prices as the market kind of absorbs? What are your macro thoughts on that?
Dan Ferris: So my concern is that you got two big pieces of household wealth, right? You've got stocks, and they've been hurt white a bit this year, and then you've got housing, and that housing – there's like $28 trillion of home equity out there right now, and that's a real asset. People borrow against that and they spend money, and just even if they don't borrow against it they feel richer and they spend more. You know, if you lop a few trillion off of that it can hurt. But I can also see a scenario – you don't want to get too facile and too primitive and dogmatic here. I mean, it could be that asset prices maybe, you know, like housing and maybe hard asset prices, in general, stay elevated, right?
Bryan Beach: Yeah.
Dan Ferris: And maybe people just – it's the goods and services that see some kind of an inflationary effect. I don't want to pretend that the outcome is real simple – oh, inflation, everything stays high-priced, or deflation, everything falls in price. I don't think that's a good way to think. So housing is a concern for me. It tends to be a leading indicator, and like the pricing, if you look at the Schiller National thing, that's like a couple months behind, and by that latest reading on that is like April and it's still going up 20% a year.
But if you look at like the Mortgage Bankers Association, the average purchase mortgage price, it's down like 10% or so. So that could be nothing, right?
Bryan Beach: Yeah. That's an interesting – like you say, it's an indicator, and people tend to feel wealthy. Your backyard barbeque around the Fourth of July, you know, everyone's like – no matter where you are in the country peoples' home values are kind of way out in front of where they were 24 months ago, but people don't – you know, you feel richer but at the same time you know I can't move anywhere else because it's expensive. I might make money on this house. I'll have to turn around and spend more on the next house. So it's kind of a weird form of wealth. [Laughs] Like a stock, you can't just convert it to something else as easily.
Dan Ferris: Right, right. It requires borrowing really. To get liquid on a house you've got to borrow, right?
Bryan Beach: Yeah. But as houses get more expensive, you know, I look at – I was looking at a flooring company, right? So are people going to be fixing up their houses since they're not going to move or adding a deck, lumber, or whatever. That corner of the market impacts so much of what we think about. And even into the SaaS world, there's SaaS companies that facilitate the closings on real estate transactions, the insurance on title.
There's all kinds of – that is a big monster with lots of tentacles, the housing market. That can really impact a lot of things. So that's been an interesting place to look and always interested to hear what other people think of where that's going too.
Dan Ferris: Yeah. Housing. It's tough because, look, I'm more of a macro guy, but for me, believe it or not, it's a temporary state. You know, I just felt I had to get this way because when you get to an extreme high of valuation overall – like this doesn't happen all the time.
Bryan Beach: Yeah.
Dan Ferris: So when it does, I just feel like my antennae go up, right? But I hope to not be a macro guy much anymore within the next couple years. [Laughs] I aspire to that.
Bryan Beach: It's more fun looking at companies to me, you know?
Dan Ferris: Yeah.
Bryan Beach: Bottom up. It's a little bit more fun.
Dan Ferris: Totally agree. And it's a less-fraught way of life. You know, it's great when you can just kind of forget about all this stuff and know deep in your soul that you're looking at something that's so dirt cheap you don't care about the stock market. All right, Bryan. We've been talking for quite a while and we're at the end of our time here, but I do have my final question that I would like to ask you.
Bryan Beach: All right. Shoot.
Dan Ferris: Final question's the same for every guest no matter what the topic, and it is very simply: if you could leave our listener with a single, simple thought today, what would it be?
Bryan Beach: [Laughs] Oh, gosh. Yeah, I mean, I guess I'm just really trying to help my readers understand that there's really no part of the market that is financially off limits. I keep looking where everyone is not, and asset allocation plays a big part in that too, Dan. I mean, my market – or my product is about microcaps, and that is a highly speculative corner of the market. But at any given time, there's probably a reader out there who has room in their portfolio for that. So I encourage our readers to be thinking about all parts of their portfolio, and there's a time to go deep in microcaps and there's time to avoid them altogether, and everyone's situation is a little bit different.
So that's really what I think is important, is to kind of pull out and think about – pull up I guess is the word I'm looking for and look down at your portfolio, get out of the weeds and look down at your whole portfolio, your asset values, we were just talking about housing, precious metals, whatever, stocks, bonds. There's some part of the market that you haven't thought about in a while that you probably should think about again. And to the part that's more speculative in nature, you know, there's some interesting stuff happening in the microcap world. And yes, Dan, there's some interesting stuff happening in the SPAC world and the SaaS world, and so yeah, that would be my parting shot at least from a financial point of view. Yeah.
Dan Ferris: Yeah. And that's a great message. That's a classic value message, right? Look everywhere. Anything can get cheap enough to be really attractive. I totally agree with you. I do.
SaaS, SPAC, all of it. It can all become really attractive, and I know there are great businesses in both of those areas and many others. So well said. Yeah, totally agree.
Bryan Beach: All right.
Dan Ferris: And thanks for being here, Bryan. I really enjoyed it, as always.
Bryan Beach: All right, man. Thanks again. Hey, let's talk in 18 months and you can either make fun of me or get me a free bike seat or something.
Dan Ferris: Yeah, that's right. [Laughs] OK. All right. Thanks a lot. Bye-bye for now.
Bryan Beach: All right, bye.
Well I hope you enjoyed that conversation as much as I did, which I often say because I think we talk to a lot of great people, and Bryan is one of my favorite guys in the value world because he winds up looking at all kinds of companies in all kinds of industries, and that final message is really, really important. And that's part of the essence of value investing. Anything can get cheap enough. There's a quote in the Intelligent Investor by Ben Graham. I can't quite remember it, but that's what it amounts to.
Anything can get cheap enough to be a really attractive investment. You know, not everything you hold always needs to be a super high-quality business. It needs to be extremely attractively priced and good enough sometimes. Sometimes those are the best bets. And I think we're coming into a time now with the markets down where people like Bryan are going to keep finding more and more and more of this stuff, and because I believe that value investing is at the beginning of a five or 10-year outperformance cycle, you know, right now he's complaining that the things aren't performing well, and in five or 10 years everybody's going to say, "Boy, that Bryan Beach, he's such a genius. I've made so many triple-digit gains with him."
Because guys like him prepare for this. This is their time to shine. Bryan's a great guy, right? So we just enjoy talking with him. All right. Let's take a look at the mailbag. Let's do it right now.
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and I respond to as many as possible. Or call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show.
Lots of book talk this week. So let's just do that and then I'll get to a couple of other financial-related questions.
So first up is Cole F., and he says, "Following a lot of Stansberry's information alongside TradeSmith, I keep seeing the strategy of risk-based position sizing and keeping an equal-for-all positions. I was hoping you could elaborate on this as I've tried to look this up and can't seem to find any good reads on why this works best. I also wonder, is this just for equity allocation as if we were to mix bonds in with their low beta you wouldn't end having more than?"
I'm not sure. Let's see. I thought I understood this question, Cole, but I don't. I think you're asking is this just for equity allocation or is it for mixing bonds to try to build a low-beta portfolio that performs better than an equity portfolio? Maybe that's what you're asking, but I didn't quite get it by the way you worded it. Then you said, "All insights are appreciated. All the best, Cole F."
The risk-based position sizing and keeping it all equal is the only idea that I can address here, Cole. I learned about this in one place and that is in Jack Schwager's Market Wizards books, and I highly recommend that if you have not read absolutely every single one of them, buy every single Jack Schwager Market Wizards book and read every single word of it. This idea will be covered by many, many, many of the interviews. Every chapter's an interview, so all these different traders, a lot of them will cover this idea.
I don't know any other decent source for it, but man, will that be a fantastic read if you haven't done it. I envy you for what you're about to discover. Good topic. OK. A little bit more book talk.
Ozzie writes in and says he's really happy that we had Doug Casey on the program. Here, I'll read his whole e-mail. It's pretty good.
He said, "I still recall my first sighting of Doug. It was in November 1980. He was a guest on The Phil Donahue Show and I was in my dorm room at Ferris State. Phil was very put out by Doug's general attitude, wealth, wealth-building plans, and disdain for government nonsense and just about everything. There was a Karen," by which I believe you mean an epithetical reference to a woman in the audience, "who had gone all-in with silver at the top and was very angry with Doug for his take on silver and completely missing the basic point of buy low, sell high. She was doing it backward. Very amusing. Still available on YouTube and still worth watching. Have followed Doug for a long time. He still seems like a smart guy. The High Ground series is outstanding, although I do not like to joggle the elbows of my favorite authors. I'm in need of more High Ground novels. Hint to Mr. Casey and Dr. Hunt. Eagerly awaiting High Ground book No. 4. Thanks, Ozzie."
So for those of you who don't know, Doug Casey and John Hunt have written three books in the High Ground novel series that they created with the main character Charles Knight and some other minor characters around him, and it's excellent. It's everything that I hoped Atlas Shrugged would be, but it's much more readable and much more exciting, and the ideas are just incredible. And the way the ideas in the story are woven together, really excellent.
And exciting. It's an adventure series really. So I highly recommend it. I don't know when the next book is coming out. I've asked Doug about it and he says, you know, they're – he's talking with John Hunt about it, so that's all we know right now. But yes, funny you should mention Doug's appearance on Phil Donahue in 1980. I just watched this again in my hotel room in Vail last week.
I don't know what made me want to watch it, but I was struck by one thing, which is how polite Phil Donahue was to Doug Casey, even though he clearly kind of stood on the other side of many of these issues, and he was challenging Doug on these things. He was very polite, and it's nothing like what you get on modern talk TV. You know, people are so rude, and it was refreshing. I wish that could be restored. I really do.
Even if it's something great that I want to read, you know, I don't always follow through. All right. There's one more. George O. writes in and recommends The Creature from Jekyll Island by G. Edward Griffin. This is a big, big book on the Fed, and I don't know if I really endorse it, but I think you should read it. I think it's worth owning. You should own it and you should definitely try to read it.
I never got through the whole thing, but I enjoyed some of it. And for me, it's just an extremely detailed accounting of the right attitude toward the Federal Reserve. That's the value of it to me. All right. So that's all the book talk for this week. Two questions.
One by Miles C. – three, sorry – Miles C., Phil, and James. James says, "Dan, I'm a longtime listener. Why is the U.S. dollar strong recently or at least stronger than I expected?" And he asked some more complicated stuff, but I think that's a common question that people are struggling with today.
Look, for me, I don't need a whole lot of analysis on this. At roughly 60% of global foreign exchange reserves, and roughly – the last number I saw was 78% or 79% of global transactions, it is extremely difficult to sell anything on this planet of ours without getting paid in dollars. It's just hard. So when people are selling crypto – you know, they sold that market down by what, $1 trillion or $2 trillion, when they're selling stocks, multiple trillions sold of value has gone out of that market, selling bonds, again trillions have come out of bonds, you know, what are you going to accept on the other side of that?
You know, 80% of the time all around the world it's dollars. So it's sort of – people think it's strange that we're having inflation and the dollar's strong. It's strong versus other currencies. First, let's get that right. It's strong against a basket of other currencies. That's why I've called it "the prettiest mare at the glue factory," right? It's a dead horse waiting to be liquified into glue, right?
It's not a pretty situation. Another way to say it is that it's the worst currency in the world except for all the others, but it is what it is. Next is Phil, and Phil has two questions. He's one of the many people complaining about gold. He says, "From what I see, gold is about the same price as it was 10 years ago. It hasn't had a big downturn this year like stocks and bitcoin, but it also never had a massive appreciation over the past 10 years. I own gold and silver and have for many years and I'm bullish on the future, but how do I feel good about my holdings? Because it seems as if there was a massive opportunity cost of holding those assets when compared to just about everything else."
[Laughs] I'll answer that one first. You know, I hear you, but for me this is just – there's an attitude toward gold that I think is wrong. Everybody wants to own the asset that's in a bull market all the time, and you can't do that.
It's silly to even try unless you think you're – well, I would say unless you think you're George Soros or Stanley Druckenmiller or somebody like that, but even they made huge mistakes. Ask Stanley Druckenmiller about 1999 and early 2000s some time, or just Google and you'll find a discussion of it, because he's talked about it a lot. So yeah, look, you accumulate gold because you don't want to have all your savings in fiat currency, and gold has been around for 5,000 years and people have used it to preserve wealth across generations and generations for 5,000 years.
And I think it still does that, right? It's done a great job since this bear market began. You know, the fact that the CPI goes up some amount and gold doesn't immediately fly straight up... that bothers people. It doesn't bother me at all. Gold's a 50-bagger since it was completely detached from the U.S. dollar, and it has beaten stocks in the 21st century so far. That's not bad, and that's good enough for me to just keep holding it. I'll probably never sell it.
The other question was an economic question. He said, "You reiterated on last week's podcast of needing a money supply that gradually increases to adapt to a growing economy. I was surprised to hear that based on your free-market principles because of how you address the 100 years prior to the Federal Reserve and the deflationary times that the U.S. experienced. The famed Austrian economist Murray Rothbard wrote in his book What Has Government Done to Our Money? about not needing a growth money supply, as 'the free market will simply adjust by changing the purchasing power of the monetary unit.' What would be the downfall of having a fixed monetary supply, especially in a digital world where decimal points of a monetary unit could simply be extended further? Thank you, Phil."
Phil, look, I'm not going to sell myself as an economist, which I think is a dirty word anyway. [Laughs] It's a horrible business. And I'm certainly not a monetary expert, but I simply would point out to you that we keep mining gold. Gold is fantastic money. It was money during that 100 years prior to the Federal Reserve period that you referred to, and we just keep digging it out of the ground, and in my opinion, it keeps doing what it's supposed to do. That's all I'll say about that.
Finally, this week, Miles C. says, "Please explain in simple terms what the Fed printing money means. Thank you."
That is a huge topic. I will only talk about one thing that it means. One thing that it means is – you see, the Fed prints money and it buys securities, and so it takes securities from banks, a couple dozen of them at this point, I think, and the banks then take the money and it becomes bank reserves.
You can't spend bank reserves at the store. That's why we don't get inflation from that, or we don't see inflation, we don't – prices aren't caused to rise because of that. Not directly, anyway. So that is one thing that it means, and it's one thing that I think a lot of people have misunderstood, especially over the last decade or so since the Fed really turned on the – you know, unleashed the "bazooka," as former Treasury Secretary Hank Paulson once put it.
So that is one thing that it means and I think that's an important thing to understand, right? I think inflation comes from the government printing money, which they do when they borrow. They borrow money into existence, right? And people buy those bonds. The Fed has bought a bunch of them and then they spend the money, and they put a lot of it directly into people's pockets this time around. And they printed a lot, trillions and trillions since the start of COVID. These are good questions. Thank you, Miles.
Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy.
If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @investorhour.
On Twitter, our handle is @investor_hour. Have a guest you want me to interview? Drop me a note, [email protected]. Or call the listener feedback line at 800-381-2357. Tell me what's on your mind and hear your voice on the show. Till next week, I'm Dan Ferris. Thanks for listening.
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