October 24, 2022
We recently hosted our inaugural Ideas & Networking Conference in New York City on September 22nd. It turned out to be a fantastic day with great speakers and participants. I specifically want to thank our special guest speakers, Brooks Gibbins, David Moehring, Ailon Grushkin and Mark Gerson, for sharing their ideas and insights.
As a follow-up to that event, I am excited to share the edited excerpts from my fireside chat with Ailon Grushkin. Ailon discusses the current market environment, shares several specific investment ideas, highlights a few important technology trends, and explains why he’s excited about late 2023/2024.
Ailon has run a very successful New York City-based investment firm for the past twenty-five years, with a primary focus on “nano-cap” and commodity-orientated investments. I’ve known Ailon for well over a decade and I am proud to be an investor in one of his funds. While he is below-the-radar and not well-known (this was his first public interview and he does not tweet!), he has an enviable track record. He is also incredibly smart, passionate, seasoned, and one of the best stock pickers I know. I think you will find his approach to be very differentiated.
As a reminder, these ideas are not a solicitation to buy or sell any security. Please do your own research.
I hope you enjoy our discussion – if you would like to be introduced to Ailon, feel free to email me!
Finally, in the coming months, I anticipate sharing additional excerpts from my chats with the other conference participants. Enjoy!
William C. Martin
Topics in this Issue of An Entrepreneur’s Perspective:
- Interview with Ailon Z. Grushkin – Small Cap Investing Through the Cycle
- Favorite Podcasts & Media
- Arrival of “Artificial Intelligence” – Part 2
- Recent Tweets from @RagingVentures
Interview with Ailon Z. Grushkin – Small Cap Investing Through the Cycle
To start, please tell us a bit about your investing background.
I started investing when I was 13 years old, using Bar Mitzvah money. During the summers, I worked for the futures division of Merrill Lynch. I got my commodity trading license at the age of 16. I believe I was the youngest licensed commodity trader in the U.S. I’m not sure how I slipped through!
When I used to sit on the desk at Merrill Lynch’s Futures Investment Partners, I would put in trades for traders like Paul Tudor Jones and John Henry, all the great futures traders of that time. They were my idols and I looked up to them tremendously. Back in those days, we were primarily trading the 30-year bond, not the 2-year and 10-year. Intervention from central banks to bolster currencies would move the markets all the time. Today, we saw for the first time in a long time, the Bank of Japan step in and buy yen because it’s been in free fall. We haven’t seen intervention like this in over 20 years. When I woke up and saw that, I was like, oh my god, it’s been a long time.
From there, I went to the John M. Olin School of Business at Washington University. Unfortunately, I have nothing kind to say about this school. I learned nothing there. It was a complete waste of time. I spent a hundred thousand dollars on my education and got nothing from it. Even worse, I missed four good years of a bull market. The S&P was up about 53% over the four years while I was in college wasting my time. That was very disappointing.
Out of college, I went to Prudential Securities and I was in their futures division. It was there that I realized I couldn’t really work for anybody. I needed to do my own thing. In October 1996, I launched my first hedge fund. That fund was started with $750,000, half from me and the other half from friends and family. I’ve been basically growing it mostly organically ever since. I don’t go out in public to speak, and I don’t seek to raise money. I also don’t have marketing materials.
My main fund focuses on what I call nano-cap stocks, which are smaller than microcap. Stocks anywhere in the $10 million to $250 million market cap range are my sweet spot and what I most enjoy. In 2003, I saw a coming bull market for commodities that were out-of-favor for over a decade, and I wanted to find a way to capitalize on it. So, I launched a commodity-based fund with equities linked to commodities and that fund has been in existence ever since.
Do you short stocks?
No, I don’t short stocks, even though I could see what’s happening now in the markets coming from miles away! Today’s investment environment is very reminiscent of 1999 and 2000. Back then, when I’d go to the gym, everybody was super excited and talking dot coms. You could only make money. Everybody was talking about AOL and other Internet companies. Of course, that blew up in everybody’s face. It wasn’t easy money like everybody thought.
Now, 20 years later, 2020 and 2021, I go to the gym and all I hear about is crypto; there’s literally 4,000 different cryptocurrencies! This could be the greatest mania of all time. I can’t believe this, it is insane. They just kept going up. Similarly, between the two eras, there were around 400 IPOs back in 1999 and 2000. In 2020, we had over 400 IPOs and in 2021, astoundingly, over one thousand new companies made it to the public marketplace, which included SPACs. I felt like it was déjà vu all over again. This has to blow up.
Although you don’t short, you will actively manage your cash on hand. If I recall, you came into 2022 with around 30% of your portfolio in cash, is that right?
Right. Between November 2020 and February 2021, I raised my cash position to over 40% and I said I should go on vacation and come back in two years. Unfortunately, I didn’t. I should have even sold the companies I liked — everything’s crashing. The good news is the cleanup process in 1999 and 2000 took about two and a half years and from the peak, for my part of the world, which is blown up and is much further advanced than the rest of the market, we’re a year and a half in. Somewhere around the end of summer 2023, hopefully they start flattening out and I’m looking forward to a great 2024!
Talk about how you structure a portfolio because you literally own hundreds of stocks and you’re always buying and selling. How do you size positions and construct a portfolio?
I have about 150 stocks in my main fund. My first rule of thumb is I never put more than 5% in any individual company. I’ve seen many crazy things happen that are completely unpredictable. Out of fear, I don’t want to ever hurt myself too badly in any one company. My top 10 companies are about 25% of the portfolio and they’re in varying sectors. I love the technology space, but, unfortunately, it’s a tough space to be in right now.
I’m currently in the stage of rebuilding my portfolio. I’m feeling my way through. I have a year or year and a half before I think we get the real turn, and I don’t know yet which companies are going to be the next emerging leaders. Right now, I think I’m still running with about 27% in cash. I made the mistake of thinking that stocks might be a buy when they were down -85% from their highs. Back in the early 2000s, that was a good metric. In this market, you’re already seeing stocks down -95% from their highs. You can still get hurt from that -85% to -95% drop. Unfortunately, I’m still learning!
One of the first things I learned in the 1987 crash was, coming out of it, I made a giant mistake — I bought all the leaders from that previous bull market in 1988 and none of them worked. If you go back to the year 2000, anything you bought in that previous bull market, they didn’t work in the next bull market. So here we are, I’m trying to find what are going to be the next big leaders. You need to find what’s coming next.
Tell us about your largest position?
My number one position is a company called Silicom (NASDAQ: SILC), which is Israeli-based and too small for most funds to invest in. It only has 7 million shares outstanding with the stock around $35. But they’ve been profitable for 70 straight quarters… the company has been around a long time. They play in the NFV space, SD-WAN, and 5G for ORAN (Open Radio Access Network). ORAN is virtualized software for wireless networks, which is just starting to take off. All this next gen stuff. They do about $150 million a year in revenue. They earn over $2.50 cents per share. Consistently profitable, which I really love.
I think we’re at this point where there’s a lot of converging technologies and a lot of big telecom companies are now adopting ORAN technology and Silicom sells into this space. They’re fairly dominant. I think you’re going to see their revenues probably double over the next three years and their earnings will probably more than double as well. I think the stock, because it’s such a small float, and after you go through a bear market like we’re going through, it’ll be in such tight hands that once the momentum starts, they can often have crazy runs. And I could see something like this running well into the hundreds if they grow, like I suspect they will.
Are you spending any time looking at beaten down SPACs?
In the SPAC space, there are probably some great companies that came public. Taboola (NASDAQ: TBLA) is one company to look at, they do personalized recommendations. If you go on the CNBC website and you read a news story and you scroll down, you’ll see other news stories that are generated by AI based on your interests and you’ll see it is powered by Taboola and they have over 15,000 advertisers. They have over $600 million in revenue, $155 million in adjusted EBITDA, and $85 million in Non-GAAP net income. It’s a real company with a $480 million market cap. They will survive. You’ll get a hiccup here for the next year, but I think most of these stocks are now already discounting something like that.
Another interesting SPAC is Next Door Holdings (NASDAQ: KIND), which has a wonderful pedigree. They do hyperlocal advertising in the neighborhood. There’s huge insider buying by the founders of the company as well as by all of the VCs. They have a huge cash hoard of $660 million, but they are burning money. The CEO is Sarah Friar who used to be the CFO of Square. Before that, she was at Goldman Sachs. It’s now trading under a billion-dollar market cap and is probably worth a shot, has $250 million in revenue. But this is also why I don’t bet the ranch on any one company…
Do you own any turnaround plays?
I own a turnaround play, which is a company called Yext (NASDAQ: YEXT).
I own that one too!
All right. It’s a dog with fleas. I suspect they won’t be around forever. It feels like the new management team is going to clean it up. It should turn profitable in the fourth quarter and trades at 1x average recurring revenue, which is absurd for a company in its space. It feels like a double or more. I think eventually it’ll end up in the hands of somebody else.
You wanted to discuss Cathie Woods?
Well, Cathie Woods is not as dumb as she seems right now. Nor was she as smart as she seemed when her funds were going to the moon and she had $50 billion under management. She will come back too and survive. Her stocks are obliterated. Her portfolio is a wonderful place to go shopping, particularly if you love busted IPOs, like I do.
I’m skeptical, but what are you thinking?
There’s something like UiPath (NYSE: PATH), which is in the business of robotic process automation. It’s bigger than what I’m usually focused on. But usually when an IPO comes public and it was super-hot, there was often a reason for it. Some great technology. There was a reason why Woods got very excited initially. UiPath is one of those. The shares are now down about -85% from the top. It has a boatload of cash, $1.7 billion. They do about $1 billion in average recurring annual revenue. It’s trading at about six times that, which is a lot. But it’s a leader in its field. This market should grow for the next 10 years. You start small, you buy it all the way down. It’s maybe 1% of the portfolio now. I have no high conviction in anything until about a year from now. You build very small positions and you feel your way through a period like this.
Any more ideas?
Another IPO that I thought seemed kind of special was Sprinkler (NYSE: CXM). They’re sticky. Yes, very sticky. It’s a wonderful business. I think over time they’re going to be running near break-even. They also have a ton of cash, around $500 million of cash and $600 million in revenue. It’s a legitimate company trading at less than four times ARR. Something like this has a shot at being one of the next leaders in the next bull market.
Talk about silicon carbide and electric metals, one of the prominent themes in your book.
Electric metals are technology companies (not miners) that are enabling the electric future like EV cars or renewable energy, basically that whole space of green energy that the Democrats love to talk about and fund or look forward to funding. I like electric metals. Obviously the future is very bright for anything in that kind of space.
As you go to the 800-volt or fast charging for electric cars you require greater voltage throughput, which is what silicon carbide enables. Two companies in the space are Wolfspeed (NYSE: WOLF) and ON Semiconductor (NASDAQ: ON). Silicon carbides’ attributes are unique and special and very necessary. The space is expected to grow from $1.8 billion in sales, which is still mostly non EVs, to about $6.3 billion in 2027. With the war in the Ukraine and higher oil prices, the trend is accelerating and the build out in the space is happening faster than expected. You could see WOLF raising their numbers and investing in capacity far faster than anybody expected. The same for ON and STM microelectronics (NYSE: STM). WOLF, however, is the only true pure play in this space. They make the actual wafers. ON will do well, but they are very diversified and with this current chip glut they have a problem, like everybody else in this space.
Any other ways to play this EV trend?
There’s a tiny company called Amtech Systems (NASDAQ: ASYS), which has 14 million shares outstanding and a $10 stock. They make the equipment for lapping and polishing wafers. Their two biggest customers have about 80% market share in the silicon carbide space. They should benefit as the build out occurs over the next five to six years. Unfortunately, they have another side which is semiconductor capital equipment, which is a terrible place to be these days. I know the government’s investing in it, but it’s a highly cyclical space and you have to be very careful there.
How else are you playing kind of EVs and electrification outside of just silicon carbide?
On the mining side, you can go to copper. I love copper long-term. A year or two ago, Goldman Sachs put out a report calling copper the new oil. Although oil has had a resurgence here, it probably won’t last forever. I think copper is that next golden metal and it needs to be a lot higher to induce the kind of mining we need to have enough supply to satisfy future demand for the metal.
If you look at the average electric vehicle, it uses 5x more copper than your typical combustion engine. That’s 75 kilograms of copper versus 15 kilograms for a traditional car. If you go to a bus, an EV bus, that thing is a real hog and that’ll take on about 370 kilograms of copper. If you look at the demand for copper in offshore wind, it is three times as much copper as an onshore windmill.
Are you buying copper miners? How about Freeport?
You could buy Freeport, but I like to go to the smaller miners. There are tertiary pure play copper producers like Copper Mountain (OTC: CPPMF) or a Taseko Mines (NYSE AMEX: TGB). These are all a couple of dollar Canadian companies. These are the kinds that you’ll get the three-to-five-fold move in when they wake up again. They had great moves in 2020 and they’ve fallen off a cliff and they look like they’re looking for a bottom here. I’d rather go there than owning a BHP (NYSE: BHP) or a Rio Tinto (NYSE:RIO), where only a portion of their business comes from copper. But they’ll do well too over the long-term.
One area that you’ve been scaling into recently is biotech. Tell us about that?
The biotech sector has absolutely collapsed. Hundreds of companies are trading below cash. I know they all burn money, but I also know from history that the shotgun approach to investing in biotech can do pretty well. It’s kind of like venture capital investing. Some will go to zero, some will do nothing, and then you’ll get a handful that will go up five and tenfold.
So, I put together a book of about 35 biotechs accounting for around 20% of my portfolio. I have no idea which ones will work. I’ve already had a couple that got bought out this year, that was helpful and I just redeployed the capital back into the sector.
Do you own gold or silver?
I always own some gold. It’s been a dud. Bitcoin has really stolen a lot of gold’s thunder. Now, with higher interest rates, it’s making it very difficult to invest in gold. I suspect, though, like any commodity, eventually there will be a resurgence and people will want it again. I don’t know when, it just seems to happen over time. It seems quite difficult to own right now with interest rates pushing 4%.
Silver is another kind of electric metal, but it doesn’t really trade based on the value in the technology chain and consumption. It just tracks gold.
Do you still own 02Micro (NASDAQ: OIIM), which is trading at a big discount to its proposed take-private price? (Editor’s Note: OIIM subsequently agreed to be taken private at $5 per share, a 50% premium to its recent trading range)
I do own it. If you have ever spoken to the company, they are impossible to communicate with. I have no idea whether they will or won’t accept the take-private deal and make it disappear. I was going to talk about that company. I figure at some point they will take it out, they have a very bright future.
OIIM is a play on intelligent batteries. They have a lot of great customers. They work a lot with Japan. They have great technology and, even though it’s really a Chinese company, they have the ability to meet the specs for the Japanese, which is very difficult.
They’re also making a move into the mini-LED space and eventually the micro-LED space, which are two emerging technologies that our TVs will be using in the future. There will be humongous growth there over time. If it stays public, they will be one of the few ways to play growth in that space. Again, it’s a profitable, it may not be profitable for the next couple of quarters, but eventually based on what they’re doing, it seems like they will also hit another inflection point where their revenue should really take off.
If they stay public, it’ll probably do quite well. Again, 2024.
Thank you! Congratulations on all your success over time and good luck navigating the markets.
Favorite Podcasts & Media
Learning for Investment Analysts and Future Portfolio Managers
Neckar Value’s Frederik Gieschen hosts my friend Alix Pasquet of Macaya Capital in a tour-de-force presentation that looks at the best ways for investment analysts to learn, improve, and hone their craft, including looking at common mistakes they make. Alix also discusses potential ways to transition to the role of portfolio manager, and the challenges associated with that change.
China’s Looming Economic and Demographic Collapse
One of my favorite regular podcast listens is “Goodfellows”, which is hosted by Stanford’s (conservative) Hoover Institute and which includes H.R. McMaster, Niall Ferguson and others. This episode focuses on ongoing America-China relations and specifically focuses on some of the demographic challenges faced by China. Notably, the Chinese Government forecasts that, even with favorable policy changes, China will see a -46% population decline by the end of this century and a -66% drop if policies do not change.
Business Breakdowns: Berkshire Hathaway: The Incomparable Compounder
This excellent primer walks through in great detail the amazing compounding machine and fortress balance sheet that Warren Buffett has built over the years, specifically highlighting the power of the company’s insurance operations and float as well as the substantial capital reinvestment opportunities present in Berkshire’s railroad and energy businesses. This download gave me comfort in maintaining a large investment position in Berkshire, with solid prospects for steady growth for years to come (with or without Buffett).
Louis-Vincent Gave: The Case for Emerging Markets
Ted Seides’ hosts a thought-provoking discussion with Louis-Vincent Gave on currencies, energy, China, Europe, the attractiveness of emerging markets and more. Worth a quick listen.
Non-Traditional Endowment Investing with Washington University’s Scott Wilson
This was one of the more interesting investing podcasts I’ve listened to as of late. Scott Wilson is perceptive, analytical and pretty sobering about the prospects for various asset classes including private equity, L/S, venture, etc.
Arrival of “Artificial Intelligence” – Part 2
In a prior issue (https://ragingcapitalventures.com/an-entrepreneurs-perspective-interview-with-michael-gibson/), we highlighted the “Arrival of ‘Artificial Intelligence’” with new technologies such as DALL-E. We wanted to follow-up on that original post with some mind-blowing recent additions that are worthy of your attention:
https://podcast.ai/ — Combining computer-generated “ultra-realistic” speech with an AI learning model, Podcast.AI’s inaugural podcast features “Joe Rogan” interviewing “Steve Jobs.” The AI is impressive, but the synthetic speech was most interesting – and scary (what are implications for call-back security checks)!
Hyper-Realistic Mark Zuckerberg Avatar – The Zuck demonstrates emerging avatar technology which includes all sorts of interesting facial gestures, shadows/lighting, etc. Deep fakes are coming! https://www.youtube.com/watch?v=So8GdQD0Qyc
https://www.gomoonbeam.com/ — One of a number of new AI writing or editing tools, Moonbeam allows you to create long-form content using AI from a small number of inputs. Schools are going to have to reinvent how they teach writing and monitor plagiarizing; come to think of it, writers might have to reinvent how they write too! See the before and after below:
Here’s what I entered into Moonbeam:
Here was the final output from Moonbeam (there was an interim outline step that I could have edited if I wanted to): sorry for the small print
A Selection of Recent Tweets from @RagingVentures:
Craig Hallum Buy Initiation of $DSP worth a read. $DSP is cash flow+ and trading close to its $207 mm of cash on hand. Strong ad spend growth obfuscated by shift to variable pricing model; this should dissipate in ‘23. 40% of biz is connected TV, $DSP also has cookie alternative.
— Raging Capital Ventures (@RagingVentures) October 18, 2022
Optically, $ATKR – a mostly commodity maker of pipes, wires & conduit – doesn't look expensive at 5x '23 EBITDA ests (Sept YE). But Street assumes EBITDA margins of 24.5%, which is above the avg. *gross margins* earned in '16-'20. Backlog will help, but margins are due to revert.
— Raging Capital Ventures (@RagingVentures) October 13, 2022
This windfall is only getting better for $FFH, with six month T-Bills now yielding 3.9%! Plus, with many other insurance co. balance sheets now wounded by falling asset prices, Fairfax can play offense and take both market share and rate in a still “hard” insurance market. https://t.co/YANeqN3Fcl
— Raging Capital Ventures (@RagingVentures) October 12, 2022
Maffei fatigue/skepticism has been building, and with most Liberty stocks in the toilet ($FWONA the main outlier), the Nov Investor Day could be rocky. Do they *finally* collapse $LSXMA/$LSXMK and $SIRI to create a win? Maffei has been fairly vocal about this topic as of late.
— Raging Capital Ventures (@RagingVentures) October 5, 2022
$ACTG / Starboard extension is expiring soon, will we see a deal? As long as neither side gets piggy, there are plenty of levers to create a win-win. Starboard can book a gain & unlock cash in a tough market; $ACTG can get an accretive deal & a simpler structure.
— Raging Capital Ventures (@RagingVentures) September 13, 2022
Mr. Rollins selling $ROL pretty hard. Great business, but also a very expensive one. Could a more expansive float lead to a less expensive valuation? pic.twitter.com/hE8uyDnaf1
— Raging Capital Ventures (@RagingVentures) August 19, 2022
Interesting exec shakeup at $CMTL – both Kornberg and Porcelian out in a matter of weeks, after decades of involvement. Likely some back room dealing here, maybe the company will go back in play
— Raging Capital Ventures (@RagingVentures) August 10, 2022
$CVNA has taken a lot of medicine, but used car prices have held up. What happens when we get a quick -10% to -20% in used prices? Seems inevitable, and would likely freeze up securitization markets. This could lead to a $UPST-like revenue air pocket for a poorly capitalized co.
— Raging Capital Ventures (@RagingVentures) August 9, 2022
Fortuna Audaces Iuvat – Fortune Favors the Bold!