Podcast Summary
This podcast features an interview with Jack Farley, a portfolio manager at Grizzly Rock Capital. The discussion revolves around small-cap value investing, the impact of passive investing, and the importance of free cash flow. Mauy also shares insights on avoiding value traps, the role of short selling, and the potential of sustainable aviation fuel.
Key Takeaways
Small-Cap Value Investing
- Unique Opportunities: Small-cap stocks, particularly those in the Russell 2000 index, often present unique investment opportunities due to their mispricing and misunderstanding in the market. These stocks require deep research and a focus on value investing.
- Investment Approach: Grizzly Rock Capital adopts a rifle approach to small-cap investing, focusing on specific companies going through inflection points or exhibiting cyclical growth.
Importance of Free Cash Flow
- Value Measure: Jack Farley uses free cash flow as a measure of value, as it represents the cash available to owners over time. This metric is crucial in identifying businesses with increasing free cash flow over the next one to three years, leading to good returns.
Short Selling
- Role in Investment Strategy: Short selling allows investors to sit out market drawdowns and bear markets, enabling them to keep moving forward without taking significant steps back. It involves making bets on specific companies without talking to their management.
Impact of Passive Investing
- Market Dynamics: The rise of passive investing has led to the big getting bigger and the rise of network effect businesses. This trend has made it important for active managers to differentiate themselves and add value.
Sustainable Aviation Fuel
- Investment Potential: An interesting investment discussed in the podcast is in Calumet Specialty Products, a business that is the largest volume producer of sustainable aviation fuel in North America. The company is converting from an MLP to a C Corp and has a growth business in renewable fuel production.
Sentiment Analysis
- Bullish: The podcast expresses a bullish sentiment towards small-cap value investing, particularly those companies that are going through inflection points or exhibiting cyclical growth. The guest also shows optimism about the potential of sustainable aviation fuel, highlighting Calumet Specialty Products as an interesting investment.
- Bearish: There is a bearish sentiment towards large companies like IBM that struggle to adapt to rapid changes in the industry, making them potential value traps. The guest also expresses concern about the impact of passive investing on the market, noting that it has led to the big getting bigger and the rise of network effect businesses.
- Neutral: The podcast maintains a neutral stance on the future performance of the value factor, acknowledging the structural issues but remaining open to the possibility of value investing making a comeback.
