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  • Todd Peters

Miller Value Partners - Dan Lysik

On Thursday September 16 we hosted our next "Meet the Manager" webinar. Dan Lysik of Miller Value Partners joined Todd Peters for a great discussion. We are so excited to offer NS Capital's unique investment research with an ever growing audience. Enjoy the full video below.


 

Full Transcript:


Eric Hahn:

All right, hello everybody. We got a few more people filing in. I see people joining but we'll go ahead and get started, make sure we stay on time. I want to thank everybody for joining us today. My name is Eric Hahn, I'm a managing director here at NS Capital and I'm so excited to have you joining us today for another one of our Meet the Manager webinars, and we have an incredible guest for you.


Eric Hahn:

Now before we get started, just a simple reminder that everything discussed today, no solicitation to buy or sell any securities. Everything is for informational purposes only. Now without any further ado, I'd like to introduce everybody to Todd Peters, the chairman of NS Capital's investment committee. Todd?


Todd Peters:

Thank you Eric, and again, thanks to each of you for joining us for our third Meet the Manager. We hope you find this both interesting and informative, a chance to learn from and about our manager partners, and as Eric said, we are extraordinarily excited to have Dan Lysik, senior portfolio manager of Miller Value Partners, for today's conversation. Dan has been a trusted partner in the Alpha Ring since May of 2018. Now we are very grateful for a business development colleague of mine for recommending that Dan reach out to us in late 2011, and we are most grateful that we did.


Todd Peters:

We had our initial meeting with Dan on January the 9th of 2012, and it was very clear from that initial meeting of Dan's passion, enthusiasm and knowledge for investing and we knew that this was somebody we wanted to get to know better, and so between 2012 and 2018, we conducted an additional 25 interviews with Dan, including in-person meetings in New York City and at his office in Baltimore, Maryland. And after each meeting, we became more and more convinced not only of his investment expertise, but of the quality of the individual that he is.


Todd Peters:

So in 2018, when the investment committee decided to restructure the Alpha Ring, we knew that we wanted Dan to be a part of it and thankfully Dan agreed. Now Dan operates within a segment of our Alpha Ring called the too cheap to ignore bucket, and essentially what that means is the investing public has become disinterested or has decided to ignore a group of companies. When that happens, you have a disconnect between the operating value of the company and its publicly traded stock price. So it gives an opportunity for somebody of Dan's expertise to take advantage of that. Dan focuses on our smaller companies in the United States primarily.


Todd Peters:

Now before I bring Dan in, I'll go through a few of his accomplishments and his career path so you can get an understanding of what we saw and continue to see in Dan today. Dan is a 1997 graduate of the Columbia Business School's value investing program. It is one of the industry's and nation's most prestigious programs in the investing space. He has been a 1998 chartered financial analyst and designation charter holder, since 1998 I should say, which is a rigorous three-year program just to be able to have the charter. His investing career began in 1997 at Brown Investment Advisory, where he stayed until 2005. The last five years, he was portfolio manager for The Value Strategy, which we will discuss in more detail in a moment. He helped take that strategy from a $100,000.00 firm investment to a billion dollar pool of capital and a mutual fund structure.


Todd Peters:

In 2005, he was recruited to PNC Capital to be senior vice president and head of fundamental equity investing, where he was overseeing a billion dollar pool of capital at PNC. In 2009, at the recommendation of Bruce Greenwald who was the director of Columbia Business School's value investing program, Dan finally had the chance to make the leap of starting his own firm and so he formed Pratt Capital in 2009, which he operated independently until combining forces with Miller Value Partners in 2016 and we'll discuss more about that collaboration later on in the interview. So with that, Dan, thank you so much for joining us today.


Dan Lysik:

Hi Todd. Thank you for having me. I appreciate it.


Todd Peters:

It's great to have you. It's great to have you. So let's jump right in and one of the things Dan that we state that we look for in the managers that we partner with are the ability to create their own strategy, but also to have a differentiated view and I think there is no better way to start the differentiated view and own strategy discussion as you at Brown Advisory, which as we all remember in '97 to 2000 was the go-go years of the original internet and Brown was very much into the telecom and media and telecommunications space and you, coming out on your own stating, "You know what? I think I see an opportunity to do something where we should focus on price first, not just growth." I think that's an interesting place for us to learn about your start in the industry and particularly in your segment of the investing space. So if you wouldn't mind, expand on that for us.


Dan Lysik:

Sure. Love to do that. So it was interesting, you go back to the 2000 time period, you had a market that obviously was becoming very concentrated as you kind of alluded to. Telecom media valuations were expanding, the overall S&P 500 was approaching a 30 P/E multiple, a 3% earnings yield. With the bond market at that point at a 6% yield, and so opposite today. Bond market was 2x more attractive than the equity market. So we had clients that were looking at equity market that was getting more expensive and were concerned in general about how do we go about investing that and we saw a significant amount of dislocations, companies that were not being well-followed that provided very attractive low valuation opportunities and so in my prior experience in being at Columbia, we looked across the marketplace and said, "We could put together a pre-diversified portfolio, about 40 holdings all up and down the market cap spectrum," and these holdings we thought ... We looked at the valuation multiples of being at double digit earnings yield. It was 3x the overall market. And so we got very excited about what that portfolio could potentially do especially when it was three times as attractive versus the overall market job.


Dan Lysik:

And so, if I was to take a second, maybe fast forward to today. There's a lot of similarities back to when we started that initial time period because you've got a market that's got a little more concentrated in totality, with the larger market caps in general that are kind of pushing out the valuation multiples. But different than that, it's been driven by low inflation and lower interest rates, but there's a tremendous amount of dislocation in the market today similar to there was back in 2000 time period. So when I look at our devalue strategy today it's north of a 30% earnings yield and normalized free cash flow yield, [inaudible 00:07:32] as excited today as it was back in 2000 when we first started the strategy.


Todd Peters:

Interesting. Now if we continue on the starting of the strategy in 2000, did the leadership at Brown kind of see what you saw or did it take a lot of convincing for them to give you a chance to start the strategy?


Dan Lysik:

So it took a while, that's why we started with the $100,000 firm capital. And so it was literally in the June time period in which this started, and the market started to kind of break somewhat in recognizing some of these lower valuation securities around March of that year. And so it was interesting, when we started it, we initially internally called it the non-tech telecom and media

[crosstalk 00:08:18]-

Todd Peters:

Right, right, right.


Dan Lysik:

And then it even evolved over time to we called it the green banana portfolio, where you had these over time as the market recognized, you had something in the portfolio to recognize and drive performance and wipe it. And so it was an initial starting point that we started out, that we had to do a little bit of convincing and as the performance continued to improve and we saw a lot of companies that we owned that were so much more attractive than their peers, in their sectors in the overall market. And that valuation started to narrow, I think the confidence got even bigger over time.


Todd Peters:

Excellent. Sure. Now, the initial strategy that you formed there was a lot of that driven by your time at Columbia Business School and the learnings that you had there? What kind of formed the underpinning for you on that process?


Dan Lysik:

So a lot of the initial screens that we put in place came out of work that was done by Fama and French, and the folks at LSV, in which we would try to help us triangulate and look for dislocations in the market, and a common thread of a low valuation universe studies that have been done historically have shown out performance over a long time period. And so, we developed these in a way to almost allow us as a value investor in a risk of being early. And so finding things that were dislocated most likely in a big discount to the peer group allowed us the comfort and flexibility in the margin of safety to dig deeper, understand the business models and the opportunity for potential investment that we could actually do quite well over a long time period.


Todd Peters:

Excellent. Excellent. And I know we'll discuss kind of the evolution here a little bit but I know you continue to build kind of brick by brick on that initial founding. Now one of the things that we do like to see and we really focus our attention on, are people that are not only investment professionals, but they know what it's like to run a business themselves. And you made that leap in 2009 with the forming of Pratt. Could you give us, what was the catalyst for that, why did you pick then and what was kind of that confidence in you that you said, you know what? This is the right time for me to step out on my own and form Pratt?


Dan Lysik:

Yeah. So as you know, when you go back, coming out of the great recession, 2008, 2009. You had tremendous dislocations that were in the market so a lot of companies who had revenues had been under pressure for the fire, couple years they were down in market price, 50% plus. And the profitability for a lot of those companies were near historical tops, and so when we step back and look at dislocations of price and value to take a universe in which you're going to look at the screens in which I was following, never seen how many companies were actually coming through those.


Todd Peters:

Right. Right.


Dan Lysik:

And so, we had clients that were with me at Brown that had recognized the same thing, and said hey, this is a very interesting time. And if I was to go down the path of doing my own firm, focus just on doing value strategy, they had interest in doing that because they saw a tremendous opportunity to a new investment approach they could actually capture and be successful at doing that. And so that was the early part, genesis of doing that and again, having Bruce Greenwald's input, timing and when it made sense to actually go look at that. What I didn't realize fully, and it kind of came to me after a couple years of doing it, is that what I tend to notice is that when you come out of dislocations like a recession, the reason the return's potential or value investing and specifically taking advantage of unloved companies is so great is that a security can actually get revalued multiple ways. And so, you have the return the profitability.


Dan Lysik:

So the market will a lot of times re-rate companies based upon that top level valuation assuming it's more permanent than potentially temporary. And so as the companies start recovering and move to a more normalized profitability, you get a re-rating of the valuation that happens that also expands valuation of drive performance. And so that was a learning that came out, and we saw our small and mid-cap holdings within the portfolio do extremely well the first couple of years. And dial forward to kind of 2012 when we first started, it made me interested in looking at more concentrated approach for the strategy.


Todd Peters:

Right.


Dan Lysik:

And so I initially started with 40 holdings. And sort of what I had done going back to the years at Brown. And when I saw how the performance and still within the portfolio, the small and mid-cap holdings were still very attractive, becoming a larger portion of waiting. It was just next evolution stuff for me to go down the path of looking at concentration. And around that same time also, speaking with you, I actually started meeting with Bill Miller and talking about what I was doing at Pratt, being that we're both Baltimore, and he had a great interest in the concentrated strategy and actually became one of my first clients.


Todd Peters:

Oh, excellent.


Dan Lysik:

Yep. So that was 2000- Go ahead.


Todd Peters:

I was going to say, for most people, probably know Bill Miller but for those that may not, could you just give a little bit about Bill Miller so that people can understand his importance in the industry?


Dan Lysik:

Again, going back, I think he's the only person who's outperformed the market for consecutive years as long as he did throughout the 80s and 90s time period. So incredible value investor, has incorporated free cash flow in his analysis to kind of find his price securities. And whether the value or growth by using free cash flow is the isometric that allows him to kind of find these dislocations and he's had incredible success in his career outperforming market over a long time period. And so it was great to kind of share with him when I first kind of met, we were sharing ideas of opportunities that we saw in the marketplace, and even his past experiences going back earlier in his career to kind of connect the dots on how the market had evolved, and how his approach evolved over time.


Todd Peters:

And when again did kind of your initial, one of your early, concentrated portfolio-


Dan Lysik:

It was in the later 2013, in that time period. And so I met with him periodically, probably a couple times a year, every year, going forward. And so we have great dialogue and so you can see how the portfolio is shaping up to that level of concentration. And I have a greater understanding, at that point in time he was with Legg Mason. And he was looking to go out and actually become fully independent and to me, having grown up at Brown which is an independent firm, Pratt Capital which is an independent firm, there was a great opportunity for me to partner with him which actually led to me joining Miller Value in 2016. So as he and his team were separated, they had in place, everything from the back office that supported his business for 10 plus years. So I would say a gold standard from an operations perspective, trained us, compliance, operations.


Dan Lysik:

And so it allowed me, from somebody who was sitting at Pratt Capital with multiple hats, I could take a lot of those hats off and stick them in the closet, and I could really hone in on the investment approach of the strategy. And so that was exciting in joining the firm. The other aspects of the firm too that was really appealing, I got to know Bill and one was sharing the information across the investment team, there's knowledge base. And we also have internally, a strategy which actually invests across the capital structure. And so as a value investor who's looking strictly at the equity, you can get clues as to the risk and opportunity by looking at the debt. And so if the debt is not signaling as much risk based on how the debt's priced, it gives you even greater confidence if the market is overreacting on the equity to actually take advantage of those.


Todd Peters:

That's fantastic.


Dan Lysik:

So that's been great learning for me. And then I also helped kind of use Bill's view on and focus on free cash flow into the investment approach and expanded upon a normalized free cash flow, normalized [inaudible 00:16:51] for each one, the companies which I own. So that's been incredibly helpful because it allows me to see how you could unlock value through capital allocation. And then greater access to management. So it was easier at Pratt to focus and get access to management to understand the business from small and medium size. And so making the leap over to Miller Value, even greater access allowed me to get even deeper knowledge of companies.


Todd Peters:

The one thing that I've noticed too certainly since we've formalized our working relationship in that Bill also really appreciates wanting to just be private again, wanting to be focused, not getting back into some of the things that he was very successful with, like Mason, but just taking it to a different level. And you guys really had a similar perspective on that as well.


Dan Lysik:

Yeah. My feeling is that when you're independent and you have a lot of your personal capital, every one of the senior folks do here and the investment strategies, it's much easier to be aligned with clients and focus on the investment and hopefully you're doing the right thing on squaring up more of your time and doing that. And it's different than most of Wall Street. It's a joke that we always have, it's interesting, great value investors are sometimes not located in New York. It's being away from what's happening on the day to day, we're more focused on looking for opportunities and looking out five years plus on the company, so what that could actually mean. And the evolution also of the strategy when I joined here three years ago, I took the strategy to an even more concentrated level. So today it's 10 to 20 holdings, and I've done that through becoming even greater companies which I own, and becoming ... Talk a little bit about how different traits of the strategy and investment philosophy has changed over time.


Todd Peters:

I think that's a great way to start because when we first met yes, you were still kind of that 40 stock, or 40 company kind of ... And then we've seen you over time narrow it in, and it's not just because you've decided to narrow just the number on its own, you've kind of gotten more involved with management discussions, trying to be helpful, doing a lot more things to allow you to become more comfortable. So I think it would be great to understand kind of a little bit more of that timeline, how you started, and now you are where you are today.


Dan Lysik:

So the one part, probably the biggest change for me was recognizing a company owns the business model, and the own the assets. And when you're dealing with security prices that are down more than 50% from their recent highs, the market tends to be really focused on the business model and what may be potentially affecting your term profitability, and the way that makes the market concerned about the level of profitability. And it gets to the point where it may start to disregard very attractive aspects the company actually owns. And so over the years what I recognized is understanding the assets gives you one, a margin of safety for your initial investment, and protection because obviously that's the cornerstone of making sure you have a good return but also venture capital that you're investing. But in understanding that asset base, there's also ways in which potentially you could monetize, non-core assets and start to unlock value for equity holders. And when you get a greater sense of how the asset base is and the extensiveness, it allows you to start asking questions back towards the business model on what can be done to unlock and basically improve the operations over time.


Dan Lysik:

And so your comment that you highlighted on conversations of management, that's then the evolution of how I've gone from where we were just focusing on screens and lower valuation security at Brown, to where I am today, which is an ongoing dialogue. We share with management our past experiences from how other management teams have allocated capital or made decisions to approve the business model in some of these companies, that dialogue is great because the management teams come back to us and all of a sudden will look at what we're doing and give us a deep understanding of the business. And so the names of the holdings as I've gone and gotten more confident to take the holding size from 40 down to 20 to 10 to 20 today. So that's been kind of the evolution.


Dan Lysik:

And then the last thing I would just through out is just coming out 0809, recognizing how compressed valuation and companies out of [inaudible 00:21:40] and deliver up substantially higher returns. Companies that are going through transformations are also very similar to companies that are coming out of a recession. And so a company going through transformation which may take five years in most of the investment universe has less interest, there's less coverage following that. You can get a similar return set over a five year time period if you understand how the business could evolve and how the valuation could change. And so that's been kind of another natural evolution.


Todd Peters:

And that's one of the things that we were most excited about when we began our conversations about you joining the NS Capital Alpha Ring. So I have to ask, you had moved to Miller Value partners, much bigger firm. You certainly, we are grateful to have you as part of our team but what about the NS Capital opportunity was appealing to you or what was something that you were happy to be a part of what we were trying to execute for our clients?


Dan Lysik:

Yeah. And it's been a pleasure working with you on this and I appreciate the opportunity to do it. If you follow the sequence of how the strategy has changed, going to five to seven holdings when I'm at 10 to 20 today is just another step of concentration. Very familiar on how to do that. I'm able to grab what I think are the best opportunities within the 10 to 20 portfolio and populate a more concentrated portfolio for you all. And I think the importance when you have a concentrated strategy that goes after price dislocations is having a client that has capital that matches up your investment rise. And so I know that the viewpoint of the Alpha Ring is looking out five to seven years on the investment horizon. That's how we think about what the opportunity is looking at that.


Dan Lysik:

And then being one of seven managers, to me, that specializes in that investment approach, makes it much easier for me to commit capital and focus on the right long term investments because I know other folks are focusing on their portion of the portfolio and I can be laser focused on how do I make the right investments in your term, which quarter to quarter, who knows what happens with performance? But longer term hopefully is putting it in the right places that are going to generate superior returns for clients. And so it's been exciting for me to be a part of the opportunity.


Todd Peters:

Well we've certainly been grateful for all that you've done for us and for our clients. I think now, maybe give our clients more of a specific look at a couple of names in the portfolio.


Dan Lysik:

Sure.


Todd Peters:

And so as I mentioned to lead in, you focus kind of on smaller companies, traditionally. US based. I think it would be interesting to have people maybe get one of your initial holdings that you start out with May of 2018, and then we'll kind of then transition to one that's maybe a newer name so they can see what you're looking at today. So how about we start with one of the initial holdings which has certainly had a very interesting road, since May of 2018. Could you talk a little bit about Neighbors Industries?


Dan Lysik:

Sure. So Neighbors is interesting. Probably the best way to start describing it, similar to financials coming out of 08, 09, the energy sector went through a horrible 2015 through 2017 time period. And a cyclical trough that you'd have to go back 50 years to come up with something similar. And so right away that attracts us because the security prices are down, there's less capital that's interested in that area, so there's probably some pretty good price dislocations. Neighbors, I had been familiar with the company in the past actually messed with them so I was familiar with insight as to what they are. For the audience, they're one of the largest global land drillers. So if you're drilling for oil or natural gas you would use one of their rigs to facilitate that. And so usually what happens in the cycle is you come out, [inaudible 00:25:40] comes back, you see recovery in capital spending and folks will reach out to Neighbors and you'll see them start contracting more rigs, and get a higher price, and that works as a posit, their business model.


Dan Lysik:

What changed for Neighbors which made it even more attractive for us, they were a little bit over levered coming into that 2015, 2017 timeframe. And they changed to become more focused on free cash flow generation, more efficient [inaudible 00:26:09] the assets, and then de-levering the balance sheet. And by de-levering the balance sheet, had the opportunity to actually unlock equity value, substantial equity value for shareholders over a long time period. And so, we looked at this as a great opportunity. We're at 70% valuation discount because of leverage to their peers. And yet, all their peers combined did not have operations internationally equivalent to what Neighbors was. So it just made no sense. The superior asset base that they had. And so, when we look at how the companies over the last three years will remain this initial investment, we're still invested today because we went through covid, everybody knows the price of oil basically collapsed, the space went through another step lower.


Dan Lysik:

And it's our viewpoint, in that there's been an under amount of investment that's taken place within the energy complex. There's been a lot of focus, and rightfully so, on carbon reduction. But the industry overall as we go through an economic recovery, is going to see more and more supply potential not keeping up with demand because there's been a lack of focus on drilling. And so we think Neighbors is well positioned as commodity prices move higher and we see recovery and cut backs for them to deploy. And so they're not going for market share. They're focusing on putting the rigs back to work at higher prices, and then they have a great JV relationship at [inaudible 00:27:36], which no one on Wall Street is talking about. It's not written about because it's going to happen over the next five years.


Dan Lysik:

But that could actually add, $100, $200 million of profits as they scale and deliver rigs to that JV. So it has the ability for the company to get an $800 plus million of [inaudible 00:27:56] free cash flow of over $400 million. And the stock today has a market cap at about 700. So as we further de-lever the balance sheet, that's going to accrue more than one to one, and you look at a normalized profitability and put it with the rest of the industries valued on those normalized profitability, it's a stock price that's at least five times higher over [inaudible 00:28:18].


Todd Peters:

Wow.


Dan Lysik:

And so, we understand it may take a while to go from where we are today for them to de-lever the balance sheet, but we think we're getting paid to be patient.


Todd Peters:

Yeah, you see a potential path. One of the things with Neighbors that you've had a lot of communication with the managements of that, and I recall even in January of 2020, before we had the full extent of covid that you were impressed with some of the things they were doing then that actually helped them really get through the covid experience much better than their counterparts.


Dan Lysik:

So that's a great highlight there, Todd, because that reduction in the way they were focusing on near term maturities. So one of the other things that I've learned is the balance sheet risk when you're investing in securities that are underpriced, maybe have a business model that's a little bit stressed, making sure the near term maturities are to a point in time where it can be handled, and that's why the focus on free cash flow in my mind is incredibly important. And so Neighbors did a great job in de-levering the balance sheet to make sure that their near term maturity profile was significantly less risky than it was when you went back five years ago. And they were starting to sell off non-core assets, and driving a much better efficiency on the working capital side, taking [inaudible 00:29:41] lower.


Dan Lysik:

And so they had that flexibility to be able to weather a downturn. And then they also aggressively, where everybody it took them two quarters, they went after their cost structure right off the bat from senior operators who had been in the business 40 years, who had been through very steep downturn in the 80s and understood it made sense to just take the costs out right away because you're in a cyclical industry and make sure you're a low cost provider to be able to manage through that downturn. And so I kind of look at all those things gave us confidence when you had the stock move significantly lower than the price of oil to then step in and take more of a longer term view that they would actually benefit long term from that.


Todd Peters:

That's right. And for those listening, Dan and I work very closely on the way that he weights the portfolio, and he has been a buyer when we've had these opportunities and it's resulted in an average lower cost for our shares, but he's been using this management communication and his own research to take advantage of these and he's done it very, very effectively. So let's move to a newer name in the portfolio, let's talk about Gannett. Let the people understand what you see in Gannett.


Dan Lysik:

Right. So Gannett would be one of those transformation situations that we highlight before. So everybody's probably historically familiar with, Gannett has been around for a lengthy period of time, local newspaper company which right away, everyone's like, "Why would he ever been interested in a local newspaper company?"


Todd Peters:

Right.


Dan Lysik:

And so we got first exposed to Gannett through a buyer investment in the new media, and Gannett and new media actually merged a couple years ago. The CEO from New Media which we knew, became the CEO of the combined entity. Very, very smart operator. And so his vision in combining the two companies was, let's get more efficient in the newspaper operations, but there was a ton of content that Gannett actually had within their fore walls. And I'm going to bring in outside senior folks from other media companies, whether they looked at Disney, Apple, Spotify, that have success in growing subscription business models. And let's bring them in house and transition this company to a digital media company. And one of the things that people don't realize is Gannett actually has the sixth largest, and again, for a smaller marketing company, the sixth largest digital audience that's in North America.


Todd Peters:

Oh, wow.


Dan Lysik:

And so 135 million folks are actually accessing their content every day. And so the goal was we can actually start developing this high reoccurring, very profitable subscriber base and get that up to 10 million over the next five years. And so we looked back and went all right, is there anyone else who's had success in the industry in doing that? And we came across New York Times who actually had gone and Gannett would be the first one to say hey, we're following New York Times' roadmap on their success. And what essentially happens is the market perception changes on the [inaudible 00:32:50] headwinds of a newspaper because newspaper has been challenged by the advertising and subscriptions, advertising a higher margin and that's been weighing on the whole industry in general.


Dan Lysik:

As the subscription growth actually starts to grow, you offset that once you get to a level of subscription revenue to the business model. And because it's so profitable, it's a natural offset to the advertising. And so then the market can then look through and start to see the potential for the enterprise growing. And so that happened for New York Times at two million subscribers, it looks like that's a similar number that makes sense for Gannett. And it looks like they'll be there within the next 12 months.


Todd Peters:

Oh, wow.


Dan Lysik:

So that's [crosstalk 00:33:31] growing pretty rapidly. Then the other area which is incredibly fascinating is they put together a digital media solutions groups that targets and focuses on helping small businesses go out and find new customers and coming up with digital solutions for them to go out and find new leads. And so in combining their two businesses, that's an $18 to $19 billion industry, and Gannett is very fragmented and Gannet is actually the largest now at $400 million in revenue. And so they're going to look to bring that 15,000 to 100,000 as they grow the sales force and basically sell more solutions and that could be a billion dollar opportunity for them from $400 million [inaudible 00:34:15]. And so when we step back and look at, there's a high likelihood a company can get growth and back to $4 billion even with the secular challenges in the newspaper business.


Dan Lysik:

And then if you look at what New York Times' valuation is today, it's north of four times the revenue, other digital media solutions, there's a company called Wix, well nexus of four times revenue. And Gannett today is at less than point three.


Todd Peters:

Oh, wow.


Dan Lysik:

So like okay, if we get the $4 billion revenue, you start putting multiple revenue, because all these new businesses are going to add higher margins, so you're going to have free cash flow, it's going to be likely normalized higher than $500 million. [inaudible 00:35:01] it's going to start to grow, you can start to see putting a one, two, three multiple on a revenue basis of $4 billion, a market cap that starts to move towards $10 million.


Todd Peters:

Got it.


Dan Lysik:

Which is a billion that we're sitting at today. And so we think again, it'll take some time as this kind of transformation story plays out, but there's an incredible incentive to continue to kind of accelerate this path as a CEO would actually get stock as part of his incentive, if stock price is over $10 a share and [inaudible 00:35:34] on the program, he's incentivized obviously to kind of plan forward. And so we're very excited to spend a lot of time with the company and understanding the opportunity sense and there's even more things we could do on the content side that can merge.


Todd Peters:

Oh, wow. Well it'll be interesting to see how it unfolds.


Dan Lysik:

Yeah, one other thing. I'll just tell you, those two names that you just mentioned, they're actually, if I look today, their value strategy would be in the high 30s from a weighting perspective. And [inaudible 00:36:03] capital portfolio would be in the 40s, so two examples of where we have two companies that are well north of a double for the next couple years to hopefully drive some performance in the long term.


Todd Peters:

No, that's excellent. Well thanks a lot for that Dan, very, very informative and very helpful. I think let's turn it over to the audience to see if they have any questions for us. Eric, are there any instructions you need to give to the audience for Q and A?


Eric Hahn:

Sure. Right along the bottom toolbar of everybody's window, there's a Q and A button. Just go ahead and click that and go ahead and enter your question if you have one and we'll be sure to get to it. We have a few in the queue already here, Todd. So if you want to go ahead and hit some of those and as more come in we can get to those.


Todd Peters:

We'll do it. Thank you Eric. All right. Here goes. It looks like first one, Dan. So, we have educated, or in a letter, we mentioned in our July letter to our clients about GameStop that we actually did have a position in GameStop and we mentioned that you were the manager overseeing that. So the question is, tell us about the GameStop experience. So, we let them know that you were not just playing the January part of GameStop, you had been a long time investor, but tell us what that was like, kind of going through that January part of GameStop.


Dan Lysik:

So, crazy is probably understated, and happy that the market recognized what the company was undertaking. Surprised at how fast and how quick, it's probably the only time I've invested in a company where the short position went over 100% of the float.


Todd Peters:

Wow.


Dan Lysik:

Which to me, was God, I didn't even think that was possible. Obviously the amount of shorting that was taking place in the marketplace. But Todd, I've been invested in GameStop another time historically because the industry goes through these cycles of new consoles that come, and then the games are high margin, they come right behind it.


Todd Peters:

Okay.


Dan Lysik:

Because of that cyclicality, the time that I've made a lot of money in the past investing is a lot of consumers will go out and buy new games when they know the next game console cycle is coming out. You have a pause, revenue drops, and the market gets concerned on how long would that be, and then will GameStop have the new consoles, they'll have their physical games which really is their business model. And so, that was our genesis of the investment initially was around playing the cycle that was going on.


Todd Peters:

Okay.


Dan Lysik:

And then we had a new management team, that actually joined around the same time, two outsiders that came in. CEO and CFO who had great backgrounds at basically running more efficient operations.


Todd Peters:

Okay.


Dan Lysik:

So they came in and said, GameStop, our SGA is way too high. Your stores are going to be consolidated. You have 40 million loyalty members, capture those and keep those folks by just shifting and closing a couple stores here and there. Your supply chain needs to be more modernized, spend money there. Because your working capital is too high, we need greater takeout SKUs and get much more productive on the pre-cash. And so when we looked at what they had in place, and talking through with management, they thought they could get to a higher margin than what the prior cycle had been for the company which again, no one on Wall Street had even a buy on the stock, everybody had a sell. They thought online gaming was going to displace the company, they would be a beneficiary. Even all the new game consoles were going to still have this physical ability to play physical games. And then as we went and dug into the asset piece, just to highlight very briefly on that, we were shocked to find they had a million square foot of office space, distribution space, that they could do a sale lease back due to the balance sheet.


Todd Peters:

Damn.


Dan Lysik:

They had an airplane, we're not sure why they had a corporate ... And they got rid of that. So that was another way to get some incremental cash. And then the last piece which blew our mind was they had a magazine subscription called Game Informer. And not a lot of folks know it, but it's got close to seven million subscribers. And so when we went and looked at transactions, Time Magazine was sold for $80 a subscriber recently, Sports Illustrated changed it for $40. And even Fortune was over $100 a subscriber. So there was about 300 million to a billion of value if the company needed to realize that for any point in time for the coming cycle that could be monetized for shareholders that were also attractive.


Dan Lysik:

And so we're starting to go through into the cycle and then covid hit. And as we know for all retail companies were under significant pressure because the market was concerned that the foot traffic wouldn't be there, had fix cost of the stores, and the companies would burn cash and now GameStop would have the challenge of the cycle coming and then having challenges of their store fleet. And so we looked at all the assets and the market cap got down to $200 million in that time period which looked to us to be insane for a company that could get to $6 billion in revenue over the next couple years. And we had cash on the balance sheet of $500 million and they were being more efficient just as management was highlighting [inaudible 00:41:48] operation, took a lot of cost out to the cash burn rate, was low in our opinion.


Dan Lysik:

And then we obviously noticed that the consumer who couldn't go anywhere during covid, gaming was an outlet for them and so all this inventory they had was in hot demand just to get their hands on anything at home, even if it was the old cycle, and so that really kind of worked as cash was coming in, management paid down that and then bought one third of the stock back.


Todd Peters:

Okay.


Dan Lysik:

So they're obviously confident of being out executed just to retire an attended offer, 37% of the flow. And so we were sitting on an investment which was different from kind of what materialized later in the year, but as we went throughout the year, all of a sudden you saw one of the largest shareholders was the founder of chewy.com, who said this company is making enhancements to the supply chain but should be an omni focused company. And his involvement around the same time we saw an improvement in the revenue and the short position being so high was a perfect storm that kind of led the stock to a valuation level that was much higher than even the peak of the cycles that were invested in.


Todd Peters:

Right.


Dan Lysik:

And so that was kind of the perfect storm that the start, the beginning of this year. And the last portion of stock that we sold is lower than where the shares are today, but it was up 30x from the lowest addition that we had, so.


Todd Peters:

Yeah, it was insane to watch that. We were grateful for the return we got on that one and your work because again, you continued to buy, brought our average costs down to very low for our clients and we took full advantage. Okay, next question. Pretty straightforward but how do you know when to sell and I would ask that if you wouldn't mind giving us two versions of that, one is, when is it time to just kinda outright sell, like a GameStop or whatever, and when might be a time where you just want to maybe keep it but reduce the size in the portfolio, so a trim?


Dan Lysik:

Yep. So hard question for a value person looking at being early, is your biggest risk. Selling too soon is also a potential risk.


Todd Peters:

Right.


Dan Lysik:

So if I look at GameStop as a perfect example, it's when the embedded return of what's being discounted for us that there's a better opportunity to bring in the next name from the 10 to 20 portfolio. And so when you see multiple expansions, especially for companies going through transformations that's really driving the share price, for me as a value person, a company that's going through this time period, which you could have a setback, that makes sense one for you to consider to trim the holding, and then if you have another opportunity that's even better that's in the wings to kind of exit.


Dan Lysik:

The other thing which would be if we're wrong about the fundamental value of a company. And you come across a data point or an event, and that price to gap of the fundamental value is much less because it's lower than what we initially thought and creates risk, or it's something on the balance sheet with the assets is less than we initially thought. And so we hope we don't have many of those that would make a reason for us to sell and we'd be fortunate to have more of the former. And what we found also in this kind of experience of running this more concentrated portfolio for [inaudible 00:45:22] capital, and I think the first one actually was our position A bot that was a takeout in the portfolio, something that I experienced back at Brown. But once the position size goes from 25 to 30%, just because it was a transformation, there could be something that could happen, it would make sense for us if it was multiple expansion of driving it, to look at redeploying five to 10% of that capital back into something else within the portfolio.


Dan Lysik:

Especially if the company's done really well in the position sizes of something that may be as attractive, may have just fallen by the success of another. And so you can kind of reallocate capital. And what I've done is always done portfolio construction bottoms up. And so, in thinking that five year opportunity for each holding, we think we know what the embedded long term potential is, and we want to marry up the most amount of capital like Neighbors and Gannett, where we think is the greatest long term return. And so the embedded return when we look out five years plus today for the [inaudible 00:46:28] strategies are in the high 300s and capital is in the 400s, because we got a higher weighting on companies that we believe could be multi-baggers, look out on the opportunity stuff.


Todd Peters:

That's excellent. Here we go, next question. What gets you excited when you find an idea?


Dan Lysik:

So, gosh, I think probably the biggest thing that makes me think, my gosh, we just stumbled across something that's incredible is when there's a portion of the business that's embedded that the market is overlooking. That is growing in size, and there are public companies valuations today that would suggest that basically the rest of the enterprise is for free or it's worth multiples of what the market is looking at today. And I'll give you just a real brief kind of description of one of our holdings which is Pitney Bowes. Pitney Bowes, that everybody would know, has been around for 100 years. The mail meter is the genesis to how that business was formed. And the new CEO came in from IBM and he looked at the business and said, secular challenges of mail are substantial. We need to find something new that's going to drive the company forward.


Dan Lysik:

And so, they looked at, they had a cross-border business with eBay that they were handling. And he goes, this is fascinating. We should be able to basically drive and grow an eCommerce business through some tuck in acquisitions and help companies do the delivery, returns and cross-border [inaudible 00:48:10]. And we could really develop something that's sizable. So, eight years later, it's a billion and a half business in revenue, it's now half of the revenue in total. And so when we looked at, that's now scaling up, they brought in folks from Amazon, FedEx, UPS, to help get even greater efficiencies to drive the free cash flow of that the next couple years. And then we looked at transactions, stamps.com which was bought out at eight times revenue. There's similarities for part of the business. And then there's only three companies globally that do cross-border. One is a UK company called Global [inaudible 00:48:48] just did an IPO. It's at 20 times revenue.


Todd Peters:

Oh, wow.


Dan Lysik:

And if you look at the cross-border business, it's half a billion. So it tells us that, that billion and a half goes to two billion for Pitney Bowes over the next five years. It should be worth multiples of that, and if you think about the market of that today, it's only at billing.


Todd Peters:

Oh, wow.


Dan Lysik:

So likely you're going to see them, they'll attract activists at some point, the company will separate it if the valuation overall doesn't reflect that. So that's what gets me kind of jazzed up when management is growing the right part of the business, doing the right thing, it creates a lot of value for sure, and allocating along the way reduces debt, buys back stock that further [inaudible 00:49:36] value.


Todd Peters:

That's fantastic. All right, it looks like we've got another question come in. Value got off to a great start, particularly at the end of last year and early this year. But now, if you kind of go by what you see in the growth value charts, it seems to have backed off a little bit. Have you been affected by any of this potential movement away from value of late?


Dan Lysik:

Yep. So if you look at value in general, most of what's in the value universe would be more cyclical in nature today, and smaller market cap companies would be in there. And so, when the market has been concerned about the Delta variant and the perceptions of what that could mean to their recovery, you would see some of the cyclical areas in the marketplace have obviously been affected somewhat. And so that has a dampening effect on near term valuations. So it has affected the portfolio a little bit on that front. And so, you can also look at interest rates, and longer duration equities which have actually held up and done quite well. And over the last couple of months which makes sense because the market has been concerned about these near term time periods.


Dan Lysik:

We think again, as we look forward, that the economy is likely continuing reopening, and seeing a recovery that's going to take place that should benefit a lot of our holdings and the more cyclical parts of the marketplace. And even the transformation companies that I mentioned which today I think we believe that there's a combination of transformation and some of the more cyclical things like [inaudible 00:51:08] that continue to do well.


Todd Peters:

And I know that you have taken some of this opportunity over this last couple months to add some weightings, you've repositioned the portfolio, which is what you've done since we've worked together since May of 2018 is when you get these opportunities, you take advantage.


Dan Lysik:

Right. So we recently eliminated a holding that had done well in the portfolio and reallocated that. A couple of our more cyclical names which had compressed in valuation. So hopefully as we come out of this time period, the portfolios I mentioned, the embedded return by those movements increased by about 30% of the portfolio. So we hope we're kind of getting the portfolio into a position to be a beneficiary as we [crosstalk 00:51:49].


Todd Peters:

Excellent. Well, Dan, it looks like we have no further questions. So I just want to say thank you so much for being a part of this today, we're so grateful for not only your time today but all your time and attention on our clients behalves. And we're excited to see where the next 10, 15 years takes us. So thank you so much for being a part of it today.


Dan Lysik:

Right, thank you. I appreciate the time. Thanks.


Todd Peters:

Eric, I'll send it back to you, buddy.


Eric Hahn:

Okay, great. Thank you Todd, appreciate it. That was really great, and Dan, thank you for your time as well. And one more final thank you to everybody who joined us on today's webinar. As always, if you have any other questions or follow up, feel free to contact us, we're always available, and definitely keep an eye out in your emails for our next Meet the Manager, which will be coming out to you in a few more weeks. Everybody have a great rest of your day. Thanks.