CashFlow Hunter On Pair Trading, 3M And Iris Energy
Contributor since 2016 / 17633 Followers
Summary:
- 3M is spinning off its healthcare division, Solventum, but faces challenges due to looming liabilities and a lack of organic revenue growth.
- New York Community Bank is an interesting long opportunity, while M&T Bank is a potential short.
- Bitcoin miner Iris Energy has struggled due to poor capital structure decisions by management.
We Are
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CashFlow Hunter on 3M’s challenges and healthcare spin-off (2:20). Why New York Community Bank is an extremely interesting long (16:30). Bitcoin miner Iris Energy – management has done a horrendous job (32:30). Another interesting pair trade (35:50).
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Transcript
Rena Sherbill: CashFlow Hunter. Always great to have you on the show. Welcome back. Thanks for making the time.
CashFlow Hunter: Thanks for having me. Always great to be back.
RS: Likewise. Likewise. Always great to have you on. So I feel like a good place to start. You’ve been on a few times before talking some banks, talking some 3M (NYSE:MMM), talking some other names and general market things. But I feel like a good place to start is generally how you’re looking and thinking about things in general.
And then I think we can start with some names that you’ve talked about previously.
CH: Sure. So, I’d say most assets are priced for pretty good things happening, whether it’s credit markets or equity markets. Credit spreads are at pretty good tights, high yields. Credit spreads are at pretty good tights, and equity markets are at pretty high valuations.
That doesn’t necessarily change my outlook a whole lot, other than I generally think there’s probably a little bit more risk in asset prices if it seems like a lot of stuff is baked in — baking in quite an aggressive rate cut environment over the next — basically this year.
I heard estimates in, I think, probably in January that a lot of people were betting on six rate cuts than this year. And it seems like we’ll probably be lucky if we get about three. But they’ll be coming. But I don’t think you can — necessarily should be making huge asset valuation bets based on super aggressive Fed rate cut environment. That’s neither here nor there.
Most of the stuff that I’ve always focused on has been idiosyncratic special situations and there are just tons of them right now, which is good, fertile hunting ground on the long and the short side.
So if you want to touch 3M, it’s actually going to be fairly, there’s an event happening there in the next two weeks, so we can touch on that. So they’re spinning off their healthcare division, Solventum. I wrote an article about the spin out and it’s actually been one of the more read articles that I put out on Seeking Alpha. So I think it has like 12,000 page views, which is — that’s a lot for an industrial like that, I think. Certainly a decent amount for an article that I write with about 10,000 followers.
Anyway, so the healthcare division is going to be spun out on April 1st. It’s going to be called Solventum. I’m still surprised that it’s allowed to be spun out given that the company is aware of a large number of liabilities that are looming.
So that generally is usually viewed as, when you take a good — a decent asset and you pull it out of an enterprise that’s facing liabilities, it’s generally considered a fraudulent conveyance that you’re taking value out of the entity that can service those liabilities. So we’ll see.
If 3M gets into a lot of trouble with their PFAS liabilities over the next two to three years, I think they’ll – that then will be challenged. But whether it is or not, the gist of my article was, it kind of doesn’t really matter.
Solventum is not really a great business. It has four different business lines. It does wound care. It does – it is a dental solutions business. It has a healthcare information systems, which is basically software to run billing and stuff like that for doctors’ offices. And it has a purification and filtration business. None of those businesses really grows all that aggressively. The software business is the best business. And I believe that is – has grew last year at 4.7%. So that’s their best growth business in the healthcare business.
The healthcare division within 3M last year grew, I think, around 1%. So, I mean, that’s their best business and it’s growing at 1%. They’re going to be spinning that out with quite a bit of leverage. It’s going to be 3.5 turns of leverage, which the 3M is taking that dividend and they’re going to be using that cash to service the liabilities that they’ve already settled, that they settled last year for PFAS and for the earplugs business.
So of the $7.5 billion of dividends they’re getting from Solventum, most of that will be spoken for over the next two years in payments to service those liabilities. And then the remaining company will be on its own to service those liabilities. The problem with spinning out the healthcare business is, it’s a decent amount of the cash flow. It’s about 1.6 billion of operating cash flow and then I – we call it about $200 million of CapEx. So about $1.4 billion of cash flow is leaving the building there.
3M, I think at best case that I wrote was probably about a $6 billion operating cash flow business. And there’s about $1.5 billion or $1.6 billion of CapEx. And that number probably should be higher, the CapEx number. The company, in my opinion, its lack of organic revenue growth is a reflection of its lack of investment.
So the CapEx number then should be higher, but let’s just say it’s at $1.6 billion or something. If you have $1.6 billion of operating cash flow leaving the building with the healthcare business and then you still have $1.4 billion of CapEx left for the industrial business, you’re basically losing — that’s about $3 billion coming off.
So $3 billion off of $6 billion, it only leaves you with $3 billion and the dividend costs about $3.5 billion. So 3M is going to have to generate an awful lot of operating cash flow, just to satisfy its dividend with the healthcare spin coming off. And that’s before they have to service any other types of liabilities from remaining PFAS cases that are coming against them.
So, put it all together, I don’t think they’ll be able to cover the dividend, but that doesn’t stop them from increasing leverage to do so. So maybe they’ll try to preserve the dividend. I’ve seen Dividend Aristocrats blow up their balance sheets just to keep paying the dividend because they know that if they cut the dividend, they lose a huge investor base.
And even outside the dividend, in order to keep the valuation constant right now, the healthcare business has to trade at about 11x EBITDA, and then the baseline industrial business has to trade it over 9x EBITDA, just to keep constant on the current valuation. I don’t think those are cheap valuations. I don’t see why the – why Solventum would trade it at greater than 11x EBITDA.
It’s not a growth business. It has a decent amount of leverage and none of the businesses have been are really particularly high-growth businesses. So, maybe I’m wrong and maybe this — people love this business, but I think it’s going to be a tough stretch. So that’s my general view on 3M.
RS: Hypothetically speaking, if you had to weigh in, let’s say a podcast host was making you, what would you do if you were heading up 3M, given the PFAS litigation and settlements?
CH: Wow, that’s a great question. So 3M just got a new CEO. He was the CEO at L3Harris (LHX), which is a large defense business. And he is the Lead Director at Celanese. This guy’s name is Bill Brown. He’s Lead Director at Celanese, which is a chemical company.
So his — L3Harris was basically built through M&A and then cost cutting the hell out of M&A, out of the companies that they bought in M&A. And the symbol is LHX. And what’s interesting is they did a very big deal in 2000 and I believe ‘19. And then Bill Brown stepped down from LHX.
If you look at LHX from 2019 till now, so five years, stock really hasn’t gone in. So it’s not like, he left in 2022, but it’s not like he’s leaving this enterprise that over the – recent past has done amazingly well. The stock did well for quite an appropriate time when he was the CEO, but it hasn’t done so great since. And the stock at 3M has gotten a bit of a pop because people think that he’s going to go into 3M and he’s going to cut costs and he’s going to probably do some transformative M&A, I guess. I mean, that’s what he’s known for.
I don’t really know if that’s what 3M needs right now. I mean, maybe buying thing using the cheap capital that the capital markets are affording the company right now because it has a relatively high credit rating, is what you should use to buy a healthy business that cash flows a lot. That’s probably what he will be doing and use that cash flow to help insulate the company to pay its liabilities. But they’re going to have to buy a lot to generate a lot of cash flow to pay those liabilities.
But I guess the race is on to get those deals done before the markets wake up to the fact that there are these very, very large looming liabilities. And I guess he’ll try to cost cut as well, although previous — the outgoing CEO, Roman, he already had a whole bunch of cost cuts lined up right now.
I mean, the idea is that there’s one thing that Bill Brown has never done really that I’ve seen, I could be wrong, but I haven’t seen it, is he’s never been, like, a great organic revenue growth guy. And I’ve never — I don’t see anything that is in his track record of settling very large tort claims. And that’s — those are the two biggest problems for 3M right now, is that they have no organic revenue growth.
In fact, they’re basically are going to be left with a bunch of businesses that decline organically and they’re facing huge tort claims. And so I don’t see anything in Brown’s experience that is – addresses either one of those problems.
So I think my guess, what he’ll do is, he will use the cheap capital that the credit markets are affording him right now. And he’ll just go try to buy stuff and maybe try to sell some lower-growth businesses and just try to get more cash flowing through the business to deal with the claims in a manner that will allow the company to stave off financial distress, which if he doesn’t act quickly, is going to face in my opinion.
So, I mean, at least that’s what I would do. If I were him is I would say that, the bond market is saying, “Okay, you’re a great credit 3M, even though they’re really not.” So go ahead, borrow all you want, or borrow a fair amount and use that cash to go buy cash flowing businesses.
RS: And in terms of shorting them, still a fan?
CH: Yeah. I mean, no matter what is going to happen here, the credit is going to get worse. So, I just don’t see how the credit – 3M’s credit profile doesn’t deteriorate – markets, either he’s going to increase leverage to go buy businesses or the credit is going to get damaged by looming liabilities or both. It’s probably going to be both.
RS: Is there any kind of positive take on the situation that you give credence to?
CH: The only thing I can see is if Solventum, for some reason, is all of a sudden becomes this great growth engine, or people decide that they want to buy different parts of Solventum and they pay big prices for Solventum. Otherwise, I don’t really see why that’d be a great value creator. But if that does happen and Solventum stock takes off, then 3M’s 20% stake in Solventum will help, one, the deterioration of the rest of the business and the looming liabilities.
RS: Any other stocks that you’re looking at on the short side of things in a related sector or on the short side of things in a different sector?
CH: Yeah, I mean, look, it’s funny. I get a lot of grief about from 3M fans, because they’ll say, “Oh, look, here 3M’s up 10% since you wrote X, Y, Z article.” And I’ll just say, “Look, I mean, when I first pitched the short, I think it was last April, the stock was $105.” And it’s sort of bounced between about $105 and about $90, or something like that. And maybe it had a brief period of above $105.
But today, as I’m looking at the screen right now, it’s $105.13. So stock’s flat versus the S&P, I think up like 28%, or something since I pitched it. So it’s been — I use that an example as it’s just by shorting things that are flat or only up a little bit is like a huge win in this market. I mean, it’s just the amount of the FoMO that’s going on is pretty extreme.
So you have to be pretty careful with what you short. I think something that might make some sense as a short would be paired against a long, that actually I think the article is coming out in about 3 minutes. It’s an article I wrote for – it’s a long, but it’s an article I wrote for my subscribers. They had it two weeks ago. It’s coming out on Seeking Alpha today.
But New York Community Bank (NYSE:NYCB), I think is an extremely interesting long here. And I think a lot of the things that could potentially hurt it from here will hurt some other regional banks that have New York exposure that are still trading at pretty good premiums to book value. And so I think you could use those as a decent hedge to New York Community Bank.
The one I like as a short is M&T Bank (MTB) because they have a — the big risk for New York Community Bank is a deterioration of their rent controlled New York City multifamily apartment loan portfolio. And M&T Bank doesn’t have as anywhere as big of an exposure on a percentage of its loan portfolio to that sector, but it does have exposure.
It also has decent amount of exposure to Northeast Office, which can be problematic too. And it’s still trading at a pretty good premium to book value. Whereas New York Community Bank posts its rescue from Mnuchin or its investment from Mnuchin is trading at half of tangible book value, which is a pretty big disconnect.
RS: So talk to us a little bit about New York Community Bank, maybe a little bit more about the fundamentals or things coming down the line for them?
CH: Sure. It’s a really interesting situation. I’ll just step back. If you were to look at New York Community Bank in December, right before they reported earnings, there was nothing particularly glaring about the risk of the business other than the multifamily loan exposure, which I don’t think anyone was thinking that that was a looming time bomb that could blow up the business in a matter of weeks, like Silicon Valley (OTC:SIVBQ) had that problem, right?
They didn’t have, their deposit base wasn’t spectacular, but it wasn’t horrendous either, and they didn’t have any big losses in that securities portfolio. And it’s not like deposits had gone through this, like, exponential growth phase and then with cash flow burning companies like Silicon Valley had.
I think a lot of the problems that New York Community Bank ended up facing were actually driven by regulators, where the regulator said, “Okay, well, you’ve got this exposure to office. All right. Well, we want you to take a provision for the office component of your loan portfolio and assume there’s going to be an 8% loss.
Well, an 8% loss — provisions of an 8% loss for an entire segment of a loan portfolio. If you look at a lot of CMBS deals, like 8% loss in an office portfolio is about like — that’s like – that’s a bad – that’s about as bad as it gets. So they’re saying, “Okay, we’re going to make you take a worst-case scenario provision in your office loan portfolio.” Even though those losses haven’t materialized yet, they’re having to take provisions for potential losses.
And people, I think, saw that and got freaked out. And then they had a loan on a co-op that they had to take a big provision for as well. And people looked at that and like, “Oh my God, well, they’ve got all these other multifamily loans and they’ve still got all these other office loans and oh my God there, this is going to be this massive disaster here.”
So I broke it down in the article, is New York City multifamily has a history or it generally has been an extremely safe place to lend. Now the rent, the change in the rent laws of 2019 have definitely rocked New York multifamily – the New York multifamily business.
And to the point, it’s probably one of the worst written laws, maybe ever, certainly for New York City real estate. Although the Bail Reform Laws that have led to skyrocketing prime have been pretty bad too, but neither here nor there.
So the fact of the matter is a lot of rent controlled buildings that are 100% rent controlled apartments, or 75% to 100% rent controlled apartments. They might have – they have loans with an average coupon of, call it, under 4%. As those loans mature, those loans might have difficulty. That being said, they’re not all maturing in one fell swoop. And as I wrote in the piece, the 100% rent controlled piece of New York Community Bank’s loan portfolio has $900 million of maturities this year and it’s 58% loan-to-value.
So if you said, “All right, well, here’s a building that five years ago was worth $100 million, and we have a $58 million loan against it.” And if – it’s going to go into default this year. And so the building is going to be foreclosed and we’re going to sell it.
Okay, fine. Well, what do you think the building is going to sell for? If it’s — let’s say you assume a 25% decline in value of the 25% hit to the loan. Remember, you’re not starting 25 off of 100, starting 25 off of 58. So you’re basically assuming that the building will sell for 44% of its value from four years or five years ago. Maybe that’ll happen.
But if that happens, you’re talking about all 100% rent-controlled loans defaulting and having a 25% severity that would still only result in about a $225 million loss to the bank this year. And if you want to apply that to — down the entire curve of their rent-controlled business, where they have – it’s about – you can probably double that with the 75% to 99% rent-controlled stuff. You’re still only talking about $500 million for the loan provisions. And I’m not saying that that’s not terrible, but those are a lot of losses.
But again, you’re assuming very high severity and you’re assuming 100% default rate, which is very extreme. I mean that very, very, very rarely happens. In fact, I don’t think I’ve ever seen a loan portfolio have 100% loss. And if people forget that banks earn money on the difference between what they pay their depositors and what they lend out at. And so the bank is still going to — they have almost $80 billion deposits, but they’ve guided to about 2.5% net interest margin.
So they have $2 billion of margin to play with. Now they have overhead and they’ve got all kinds of other things. But if you start talking about the — you start putting in the context, the rate at which the losses will come through and compare them to the earnings, ordinary everyday earnings of the bank, it seems very manageable.
Now the problem that New York Community Bank faced before, and I think again this was — the regulators didn’t like seeing this, particularly with a relatively – with a loan book that potentially could have problems is, it had below average Tier 1 capital.
So in order to remedy that, they took this very large investment from Steve Mnuchin. And it’s a $1.05 billion investment. And what’s interesting is Steve Mnuchin was Treasury Secretary and the CEO he installed at New York Community Bank with the investment is this guy named Joe Otting who was Controller of the Currency.
But basically, you have the two most senior regulators — former – two most former senior regulators of the entire banking industry of the United States have teamed up to basically take over this bank. And I think those guys, A, they know all the regulators because the regulators used to work for them. And they said, “Okay, like, they looked at the big loans in their loan portfolio, and they kind of guessed at what the losses were going to be.
And they talked to the regulators, so they could have — and they said to the regulators, “Okay, well, this is where we think losses could be. What do you think where losses can be? And they arrived at a number that would make the regulators happy for a new equity investment. And that – so the newest equity investment they put in gets the company back at or above average Tier 1 capital rates.
And more importantly, it keeps them at pretty close to average Tier 1 capital, even if you have – you bring your allowance for credit losses up above industry standards. And so the new like old shareholders got really banged up because there’s a huge amount of dilution from these new shares that were priced around between $2 and $2.50.
But for new investors coming in now, new tangible book is $6.65. And if they exercise warrants, that goes to $6.22. But with the stock at $3.60, you’re buying it at a whatever, 45% discount to that. And it’s still an enormous franchise. It’s a $100 billion or it’s close to a $100 billion bank. And this is not something that in a, still a very large market. And it’s not often you get to buy things way, way, way below tangible book value with pretty heavy hitter guys coming in and putting new money in.
And Mnuchin and Otting also had worked together before, not just in government, but they bought IndyMac, which was a failed bank in California. They bought that from the FDIC in 2008. They stepped in and ran the business together, and they sold it six years later for a huge profit. And IndyMac was way more screwed up than New York Community Bank, if you ask me.
So look, I just think that this is a business that they will adjust the loan portfolio. Incidentally, the co-op loan that was written down in January earnings had caused so much consternation. They just sold that loan and they sold it at a markup from where they’d marked it down to. So they’ll still – they are going to – they’ll shrink the loan portfolio a little bit. They’ll deal with losses as they need to deal with losses. But in the meantime, this bank is going to, I think, be able to earn its way through really almost any problems that come down the pike.
RS: Can I ask you about a couple of other financial longs that you had discussed previously and see how you’re thinking about them?
CH: Sure. Yeah. (UBS) has worked out nicely. Schwab (SCHW) has worked out nicely. Those have been good.
I mean, look, it’s sort of playing out. I mean, I looked at Schwab and said, “Okay, yeah, got big losses.” Okay. Like they got big losses in investment portfolio. And okay, they’re fine. Like they’re only going to have to monetize it if they lose all these depositors. They never really lost any depositors. In fact, they kept on getting new accounts and they’ve continued getting new accounts.
Now look, it’s not a spectacular earnings story. I don’t think it’s a great long from here. But what did I pitch it to you at? It was like a 45 or something. And I said, “All right, that’s — it’s pretty easy. This isn’t going anywhere.”
UBS is super interesting. I think, that earnings story is really, really starting to — is starting to show what they’ll be able to do. I am curious what people are thinking that things is going to be able to earn. Yeah, I think UBS is probably going to be earning well north of $3 and growing from there. It’s a spectacular franchise.
They got scale of the century with buying Credit Suisse. And the stock is up 50% from when I think you and I originally discussed it. And I think it probably has another $10 to go before it starts approaching fair value. And that’s assuming that the thing doesn’t grow, but this could be a multi-year – multi-growth story that just compounds itself.
I think when we initially discussed that, I said, you can buy this one, just tuck it away and look at it five years from now, it’ll be a lot higher.
RS: And then another one, I wanted to get your updated thoughts on is not in the financial world – well, kind of, Bitcoin miner Iris Energy (NASDAQ:IREN). How are you thinking about them?
CH: They’ve been very annoying, to be honest with you. I think management has done a horrendous job with its capital structure. They decided to issue a tremendous amount of equity at crappy prices. And they did so, I guess, I mean, the good news is, I guess is that they have a net cash balance sheet, even though they’ve been keeping investing in the business.
But if you’ve got such high conviction in not just your Bitcoin mining business, which obviously fluctuates violently, but your high-performance computing potential. Why wouldn’t you at least maybe borrow off of that? Like why would you just do everything with equity? That just makes no sense.
So they keep their — severely capping their upside. I think the stock is going to – because of where Bitcoin is, they’re generating an enormous amount of cash. But I think the share count went from, I wrote about this with my subscribers, the share count went from something like $60 million to $100 million, like some crazy big number.
And yeah, I mean, they’ve liquefied the balance sheet, that’s good. But they’ve had numerous other opportunities that I know of to raise capital at much less dilutive rates. And they’ve chosen to raise equity at very low prices and that’s permanent. What are you going to do?
I think the stock probably can maybe go to $10, but barring it getting caught up in massive AI, massive AI enthusiasm, or Bitcoin enthusiasm, it’s probably going to be a tough slog from here. And the fact that it’s an Australian company, domiciled in Australia, doesn’t help either.
So, much less. I think they’re going to be a survivor through the halving and they’re going to, I think the high-performance computing component is super interesting, but these guys have deluded the hell out of everybody. And it’s kind of — it’s so the upsized cap, which is very annoying.
RS: Any other updates that you’d care to share with listeners, or things that you feel like might exemplify how you navigate the markets and how you navigate positions?
CH: Yeah, I mean, I think everything I’ve been speaking about has been special situation, idiosyncratic, event-y kind of stuff. Yeah, there are a bunch of other situations that are going to be interesting over the next little bit. But a lot of them, you just have to recognize the risk that you’re taking given what’s going on in the market, right?
So at New York Community Bank, if you want to make that bet that they’re going to be able to turn around, it’s okay. Well, what’s going to blow it up? Okay. Well, New York real estate really gets slaughtered, particularly multifamily, where you want to have a little bit of a hedge against it. So I think something like an M&T Bank as a short makes some sense against it.
There’s another pairing that’s I think really interesting. There’s a company called (CRH). It’s an aggregates and cement business. They’re about 75% U.S., 25% Europe. They just redomiciled in the U.S. in the fall, and they just filed their first 10-K, which allows them now to be added to the various equity indices.
So, the ETFs will have to buy them. And there are two comps in the United States that are exclusively U.S.-based businesses, Martin Marietta Materials (MLM) and Vulcan Materials (VMC). And those trade at like 17x EBITDA, up from 15x EBITDA in the fall; and CRH trades at 9x EBITDA, up from 7x EBITDA in the fall.
So I initially pitched CRH again to my subscribers in the fall when the redomiciling happened. And stock was at $50, now it’s at $85. It’s gotten some really nice love. It’s been a good win. But it should do a lot better. It should move much higher just to reach — and then let’s say, the Europe exposure is going to be an anchor on the valuation.
The concrete versus the aggregates is going to be a little bit of an anchor on the valuation, but fine. Let’s say that the business should trade at 12x EBITDA versus 17x of Vulcan or Martin Marietta Materials. That’s still 33% higher from here. So I think that’s a really nice bet to make and I think you could probably make it. You don’t have to short anything against it.
But given that the stock has already moved up from 7x EBITDA to 9x EBITDA, and the comps have moved up from 15 to 17, I think, you want to make sure that you hedge that multiple expansion that you’ve seen in the entire industry, which is not reflective of people getting super excited about that particular industry. I think it’s just multiple events you’ve seen in the broader markets. So I think you just want to hedge that out. And so I would — that’s a good pair trade CRH versus Martin Marietta and Vulcan.
RS: So, speaking of your subscribers, when you speak of your subscribers, you’re talking about your subscribers at Catalyst Hedge Investing, which is the investing group you run on Seeking Alpha. I’m curious, is one of the main things that subscribers write or chat to you about, is it about having the conviction and kind of being able to see it through, or is it more kind of finance-based or fundamental-based or what have you?
CH: There’s no rule with subscribers. You get different subscribers who want different things. Some subscribers are basically that I’ve spoken to are looking for someone to give them a model portfolio and they just want to put all their money, that’s what they have they want to invest. They want to have a model portfolio and you put that together for them and that’s it. That’s not really what the service is for.
I mean, I think that the model portfolio is just generally meant to be a guide in terms of my conviction level on things. And where I think this is an interesting exit point, this is going to be interesting exit. It doesn’t deal necessarily with like how to structure a portfolio certainly, and it’s not a — or even an individual position.
I like to use options a lot in my positions, particularly with shorts, just to make sure you’re tapping your downside because in case the short flies against you, which the system doesn’t really track that very well, it doesn’t let you put an option so easily. So it’s just a little bit of weakness in the system.
So for the investors who use it as a model portfolio, it’s not necessarily the most useful service. But for investors who just want like idea generation and maybe how to structure an individual trade, which is what I put in for my, usually almost all my work, my write-ups, is okay, it’s how I trade it, particularly for my investor group. Sometimes I’ll edit the articles for the broader service where I don’t say exactly how to trade it. I just give the general thesis.
So yeah, that’s sort of the two different subscribers and the subscribers that are really looking more for idea generation and how to structure trades and maybe entry and exit points. That seems to be the people that are most engaged, certainly on the chat board.
And it’s been a busy couple of weeks on service. I think I wrote like 14 or 15 articles in February just for the subscribers. I think this is a little bit slower month because it’s a little bit lower earnings, but they’ve still gotten about four articles through. And over half of them are exclusive to the service.
RS: And by the way, one of the few services that offers a 14-day free trial. So kind of nothing to lose if you want to check out what CashFlow Hunter has going on at Catalyst Hedge Investing.
CH: Yes.
RS: Yes. Appreciate your time as always again today. Any — I’ll leave you with the last word if you want, but appreciate all the insight, all the alpha opportunities that you’ve shared with us today.
CH: Well, no, yeah, thank you again for having me and thanks for bringing up alpha. I think in this type of a market where I think beta is a little dangerous, I think, you really want to focus on your alpha situations that are trying to play out no matter what happens to the market. And that tends to be what I specialize in. So — if you’re interested.
RS: And why would you say that beta is especially dangerous?
CH: Just given where risk assets are right now, given how much the market has moved up and how much most asset classes have moved up, it doesn’t seem like there’s any, other than maybe some commodities that have gotten beaten up, it doesn’t really seem that there are too many situations where I would say broadly that asset classes are cheap, right? I don’t say that right now.
I think you really want to – there are a lot of situations that are super interesting. I’ve touched on a couple of them and — on the long side, but also on the short side, but there are a couple of very interesting things that have been beaten up very badly or there’s – they haven’t reflected a looming catalyst value creation event that are cheap.
But broadly speaking, I think the markets are pretty richly priced right now. And it’s going to be a lot of macro noise here in the next, when’s the election, November, in the next seven months. There can be a lot of macro noise. So particularly with the rates situation as well.
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