Host
All right. Thanks, everyone. In the interest of time, we're going to go very quickly with introductions and then dive right into the conversation. I first want to thank all the panelists. I've known this group for a long time—a decade-plus, I think, for all of you—and it's really a privilege to be up here with some of the best investors in the industry today who have volunteered their time to share their ideas with all of us. So, maybe real quick, Andrew, and then we'll go down the line: quick introduction, please.
Andrew Ballou
I'm Andrew Ballou. I manage General Equity Holdings, founded in 2017. We're a long-short, concentrated investor based in New York.
Eduardo Marques
Eduardo Marques from Pretensul Partners. We manage about $2 billion in a long-short strategy. We're not so much concentrated and are very much mid-cap oriented.
David Rosen
David Rosen, Rubric Capital. We are a deep-value fund, and we also dabble in distressed. This is our 10th year.
John Lennon
John Lennon, Pleasant Lake Partners, also in our 10th year. We have an equity long-short hedge fund, a private equity drawdown structure, and then a multi-manager investment platform as well.
Host
All right. I'm going to start with Dave, because you said you're a deep-value investor. It doesn't feel like that type of market. Can you just talk about what it's like, what you're doing, and share an idea with all of us?
1. Deep Value Finds Viatris
David Rosen
Sure. It is a lonely thing to be a deep-value guy. And I'll tell you what: it also does create opportunity. If you just think about the world that we live in right now, most of the volume and the capital has gone to quants, macro funds, and pods. Almost all of those strategies require momentum as a component.
When you see stocks that go down meaningfully, that's otherwise known as visual volatility. There are literally no buyers. If I want to buy a stock, I can go out and be 50% of the volume, and the stock will still go down 10%.
Host
That must be fun.
David Rosen
Yes, I can literally buy all the stock all the time. So, within that context, I'm going to quickly pitch an idea that meets that criterion. Just by way of background, we're big fans of a company called Viatris; the ticker symbol is VTRS. It is a legacy generic drug company. Thirty-five percent of the business is generic drugs. The remaining 65% are branded generics and specialty pharmaceuticals.
The company is going to grow low to mid-single digits. It trades at 7 times current-year earnings and 6 times forward earnings. One hundred percent of those earnings is converted to cash flow. Fifty percent of it gets returned to shareholders in the form of dividends or buybacks, and they use the remaining 50% on M&A.
What's fascinating about Viatris is that they went and acquired a pipeline. That pipeline was coming from a company called Idorsia. The ticker symbol is IDIA SW. Idorsia had some liquidity issues, and they were forced to sell these assets. The 2 assets they sold were a product called selatogrel and likely cenerimod.
Selatogrel is literally like an EpiPen for somebody who has a heart attack, and it would effectively stop the heart attack from happening. Cenerimod is a lupus drug. These are both prospectively blockbuster indications. They were sold, and it's why we think Viatris is going to be more than a double in the next 12 months. These products are going to read out in the next 6 to 9 months.
As we dug into Viatris, we spent a lot of time trying to understand Idorsia. What Idorsia did is take these drugs, along with another drug that they own called Tryvio, which is an approved product that they have actually not launched yet, and put them into an SPV. They raised debt against it, basically taking debt off their balance sheet and putting it into this SPV vehicle. If any of these things hit—if either one of these drugs hits, or if they're able to sell that other drug—they pay off the debt, and the remaining value will flow to Idorsia.
That was interesting, but the more we dug into Idorsia, the more we were surprised by the incremental asset they have. They have a product called QUVIVIQ. QUVIVIQ is a drug for insomnia, but unlike normal drugs for insomnia that cause drowsiness, this one has no drowsy side effects. You actually are very wakeful on it. The drug sells like hotcakes in China and Europe, but it has a problem in the United States because, when it was approved in 2023, it was scheduled.
The reason why is that this is called an orexin antagonist, and it was something that hadn't been approved before. The FDA basically said, “Listen, since we don't know whether it's addictive or not, we're going to schedule it, and we'll find out. Come back to us.”
Now that they've had hundreds of thousands of patients on it, they want to come back and get it descheduled. The problem with the scheduling is that if you're a doctor and you're going to give a drug to a patient, if there's any risk of it being abused, that's a big problem. Another problem is that if you actually want to get it prescribed and get an updated prescription, you have to go into the doctor each time. It can't just be manually done. Again, there are huge thresholds for this drug to actually get to the blockbuster level that it should be.
What recently happened is that another company called Contessa got sold for $6.3 billion. Contessa has a very similar drug, except it's an orexin agonist, so it handles narcolepsy. What was really exciting to people was that they realized that dysregulation of these orexins is often an issue for people who have ADHD and autism. They're buying it because they think that this drug will work for those indications.
It turns out Idorsia just ran a trial for QUVIVIQ in pediatrics, ADHD, and autism. They've already come out and said that the trial was successful. It hit statistical significance. But oftentimes with these companies, they don't want to give you all the data. They want to do it at a conference or in a journal, so nobody knows the details behind it, and as a result, nobody is valuing this.
To the extent that the studies come out and are favorable for all these indications, all of a sudden, people will value this. On top of that, remember, they say they gave this to pediatrics, and the safety data came out and was great. There were no issues with abuse. They've given that data to the FDA.
The bottom line is that the stock is a 4-Swiss-franc stock. They're also running a trial for the wakefulness indication that they have overseas. To the extent that it gets rescheduled at a lower level or descheduled, and they get that wakefulness in the label, we think that's an incremental $22 a share, or 26 bucks.
To the extent that this data, which we know is good for autism, ADHD, and pediatrics, works out, and any of these things in the SPV work out, that's an incremental 16 Swiss francs a share. And again, within 3 weeks, we bought 10% of the company. We actually think that the upside is 42 Swiss francs versus 4 today, or a 10-bagger if all these things hit.
Host
Love 10-baggers. I didn't understand most of that except that it makes you drowsy. But I love 10x. You should start with, “I have a $4 stock that's going to $40.” Then people might have listened to the deep-value pharma talk. And so, Andrew, I'm sure you've got a 10-bagger.
2. Carvana Scales Used Cars
Andrew Ballou
Or something close to it. Yeah. I've been spending time on e-commerce in the last 6 or 12 months. As the AI onslaught has come through, I think some babies have been thrown out with the bathwater. If you're an e-commerce company with proprietary product, proprietary data, and vast physical infrastructure, AI may mean you are a significant beneficiary rather than simply surviving.
In that vein, I'll pitch Carvana to the group.
Host
Long or short?
Andrew Ballou
Long.
Host
Okay, just to clarify. I want to put it out there and make sure we know what side we're getting.
Andrew Ballou
Carvana is the largest online retailer of used cars in the country. It buys and sells cars from consumers and delivers them to their doorstep in a day or 2. No haggle, low price, great value proposition to the consumer.
The thesis is that it's a big market, a great team, big moats, wide moats, and growing really fast at a reasonable price. I think the stock is going to go up a lot. I think a number of people in the audience may be familiar with the story, so I'll just mention a couple of things that make it unique, in my opinion.
The first is the rarity of what Carvana is. There are 3 characteristics that Carvana has, which I think are incredibly rare to find in a single company. One is that it's the biggest company in the industry. It's the most profitable company in the industry. And yet it still only has 1% market share.
Those 3 things in a single company are incredibly rare to find. The reason is that the addressable market is so vast. It's $1 trillion, and there are 40,000 players in it. It's very fragmented.
The second observation I would make is that usually it's very difficult to project high, fast growth over the long term for any company with precision. Carvana makes it a little easier because the biggest driver of its purchases is word of mouth. Consumers love buying from Carvana. They generally refer their purchase to 10 other friends and say what a great purchase it was.
Elena
Typically, a company will see referrals hit its revenue in the year in which the referral happened. But the average consumer in the U.S. buys a used car every 7 years. So, the seeds for 2026 revenue were sown in 2021, 2022, and 2023. Similarly, the seeds are being sown now for Carvana's revenue in 2029, 2030, and 2031.
The last interesting point on Carvana that I would make is that Carvana underwrites loans to consumers who purchase its cars, like the rest of the industry, for about 90% of its consumers. Structurally, Carvana's loans are advantaged relative to competitor loans. There are two reasons. One is behavioral: Carvana sells its loans to investors—the same investors year after year—so they're structurally incentivized to underwrite conservatively relative to a used-car salesman whose main job is just to sell the car, regardless of whether or not you can pay the loan off.
The second reason is that, apples to apples, the car that Carvana sells is worth $500 to $1,000 more to the lender than its competitors' cars. The reason is its scale. It processes about 1 million cars a year, relative to a used-car lot that has 200 cars in the back. When it reconditions a car, it usually means that car is worth $500 or $1,000 more. So, if there's a credit event and the consumer can't pay back the loan, the lender repossesses the car, and it's worth that much more.
Host
How much, Elena? We doubled?
Elena
It'll triple.
Host
Is it? How do you get to that number, Elena?
Elena
I think the company will grow north of 30% for a long time. They have certain markets that are mid- to high-single-digit penetrated, and today the company as a whole is only 1.5% penetrated. The stock trades at around 20 times pre-tax next year's free cash flow, so this is going to compound for a long time. I don't know if it's a 10-bagger in 2 years, but it could be a 10-bagger in 5 or 10.
Host
All right. Eduardo, we were chatting about a bunch of stuff. I know you have a variety of things you've been looking at. I'm curious to hear what's grabbing your attention today.
3. Korea Offers Deep Value
Eduardo Marques
Yeah, this is a really odd time to actually be a fundamental investor because we're trying to reconcile the fact that we believe there is something large—this new industrial revolution, this AI paradigm—that is changing the way that we should approach valuations for stocks, but at the same time we're trying to stay truthful to principles of margin of safety, et cetera. And it's been hard.
In the S&P, we were just running the numbers the other day, and about 23% of the S&P today is semiconductor companies and optical companies, this sort of hardware-centric world where every AI play is either hardware or capital-goods companies. It's hard for you not to treat the AI opportunity as a cyclical. And as a cyclical, even if you believe in AI, valuations look really full. So, what we've been doing is sort of rummaging in odd bits and ends of the world and trying to find value opportunities in the space. I think Korea really stands out as the place where we find most value.
The example that I think is most widely known in the Western world is the valuation discrepancy between Micron and SK Hynix, whereby you can buy Micron at 10 times earnings or SK Hynix at 6-ish. These are 2026 earnings, and this is actually converting into free cash flow. These companies will be massive cash gushers for at least the next 2 or 3 years. There are all sorts of convoluted ways to reach out for the crack cocaine of Korean value investing, and I think we're there. We're sort of abusing it at the moment.
There are two ways to take advantage of Korean valuation discrepancies. One is to go for preferred shares. These are nonvoting shares that trade at massive discounts to common shares. Another way is to look at holding companies. I'll give you a few examples of what we're involved with.
Obviously, I think John is also familiar with SK Square, which is the parent company of SK Hynix. That's a very clear setup whereby you can effectively buy SK Hynix at a 47% discount, and the holding company is actually promising to close that discount through buybacks and dividend payments. This is something that doesn't exist elsewhere in the world.
The one we're most excited about recently is a company called Samsung Life. This is especially convoluted. Samsung Life is, like the name says at first glance, just a regular insurance company that does life and health insurance in Korea. But it turns out that it's actually the holding company through which the Lee family controls about 10% of Samsung Electronics.
Obviously, Samsung Electronics is the company that just reached a trillion-dollar market cap. It's a DRAM and NAND powerhouse. It makes the phones we see and the televisions, et cetera. That business today—Samsung Electronics—trades for about 7 times current-year earnings. And that's actually excluding about half of their microprocessor business, which is, in fact, a foundry that today is operating at zero margin. So, if they can fix that, we can have an Intel-like boom in Samsung Electronics.
My point is that owning Samsung Electronics through the life insurance company gets you to a massive discount. And how massive? Obviously, this is a bit of a Berkshire Hathaway question: you're owning an insurance company and you're trading the underlying parts. But in this case, the easiest way to see this is that if you just mark to market the Samsung Electronics shares that the life company owns, you're buying Samsung Life at 0.48, a little under 50% of its book value. And if you just take the dividends that Samsung is going to produce next year and run them through the net income of the life insurance company, you're buying it at about 4 times earnings.
This is how powerful these discounts are, and they've existed forever. Our thought process is that there's now finally this alignment of stars whereby the trade balance is favorable for Korea, the investor inflow is actually arriving from foreigners, as opposed to, for the past decade, Korean crazy retail degenerate traders actually moving money to buy Magnificent Seven stocks here. We're seeing support from government entities through programs such as the Value Up program, which is actually sort of forcing large Korean companies to review their governance protocols and effectively allow for buybacks and dividends, just trying to mirror the experience that happened in Japan.
I think this is happening very fast, and it was only last month that Interactive Brokers opened Korea for U.S. retail investors to trade. So, we're still very early in this opportunity of just formalizing Korea. It's a market that is today larger than the Canadian stock exchange in terms of market capitalization. The Korean GDP is equivalent to the Japanese GDP, and yet we treat it as if it were still in the Asian crisis. I think that as the market is maturing very quickly, this is creating the opportunity.
Host
All right. Thanks, Eduardo. I'm going to turn to John. Before you, I know we were just catching up—you just spent several weeks in Korea and Hong Kong, in Asia. Do you have a similar thought? Are you finding stuff that's of interest in the region? Then I would love to hear your idea.
John Lennon
Yeah, it's wild, right? We were just in Korea, and it's not that it's about the size, or just that it's larger than Canada; it's that—no offense to the Canadians in the audience—it just eclipsed Canada, and the world is almost coming to Korea. They're leaders in defense, shipbuilding, and memory. If you believe in a multipolar world, where there's going to be regional rearmament, and certainly if you believe in AI, it's just wild. It's amazing.
I think we met with a bunch of former Samsung employees when we were there, and they were jealous of the Hynix employees because Hynix redistributes 10% of operating profit in employee bonuses. Samsung is now doing the same thing, so there's going to be, on our math, a $40 billion—our math was $36 billion to $37 billion—tailwind in bonuses to Korea this year, which is like a mid-single-digit percentage of the GDP or something, just based on the bonuses for those 2 businesses.
If you look at the actual operating profit, on consensus numbers and certainly even more so on ours, for next year, Nvidia is the third most profitable company in the world. Hynix is number 2. Samsung is number 1, and obviously people don't think about it. So, we're involved in all these things. It's hard not to be.
You're not going to get Dave Rosen interested in charts that look like these ones, but if they're single-digit earnings multiples, growing hundreds of percent, and buying back stock, it's hard not to be involved. I think the spillover effects to the rest of Korea—and where we spend a lot of time, the consumer—could be massive and unprecedented.
Host
We'll see. Maybe, as we're saying this, it's the very top, and you guys get to turn around and flip and find some things to be short, but it was a very powerful research trip.
Yeah.
Host
How about—we've focused the whole panel on contrarian, out-of-favor ideas, but we were chatting. Give us a really out-of-consensus, non-obvious name that you like at the moment.
4. Reddit Becomes An AI Winner
Yeah, so I jotted down a few names. The one I'm going to mention isn't maybe so out of consensus, and you can press me for more and I'll say them quickly. I'm going to mention this one because the founder was just speaking. I didn't get to do primary research backstage, but everything that is perceived not to benefit from AI is in a factor basket that's getting destroyed.
Reddit shares are down almost 50% from the highs. Sometimes, when we approach investing on the long side, we think about the thing we'd be the scaredest to be short, just behaviorally, and it would be at the very top of my list. I think the total posts and comments on Reddit have grown from around 24 billion in 4Q to 25 billion this quarter.
There is probably a behavioral inflection that will occur in the back half of this year, where the licensing agreements that they have with Google and, at least, with OpenAI will be repriced. Our work suggests they could reprice on an apples-to-apples basis at around 5 or 6x, and then there will be a massive shift in perception at that moment. At the same time, Reddit is in a lawsuit with Anthropic. The outcome of that will be either great for Reddit or amazing for Reddit. You can only choose one.
At the same time, they're monetizing. Meta's ARPU is around 70; Reddit's is in the low 20s. We have them growing revenues over 50% and earnings over 75%, and it's around 14 times our next-year earnings number, closer to 10 times looking out to 2028. If all of a sudden this gets put in an AI-winning basket, it's between a double and triple from here. So that one's pretty interesting to us—ostensibly not so contrarian historically, but more recently a bit more contrarian.
Mason
Is there high short interest? Is it still a battleground stock?
John Lennon
High single-digit to low double-digit short interest. But just look at the chart and what happens on the days when, you know, pick a meme-ing AI stock—anything that is perceived as an AI loser in a software or internet basket does. It's definitely starting to be prime.
Mason
You got me thinking. One of the things that we've seen—and it's not just AI losers—is that when the AI stuff is going up or retail investors are engaged in the meme, everything else in the market becomes a source of funds.
One of the questions that we had recently was: after this Iran war, as oil prices went up, how would companies respond? Would they be able to pass it through? How would earnings be affected? There was a lot of nervousness around performance, and a lot of these stocks went down fairly meaningfully because there was fear.
Many consumer-facing companies actually reported good numbers and provided good guidance. Despite that, none of them went up. It was a function of the fact that people don't really care. They wanted to deploy capital in AI. So I think there's this universe of ideas that have more recently gotten de-risked, where you can deploy a significant amount of capital.
All right, I'm going to ask: is anyone brave enough to talk about a short idea? We don't really get that in the afternoon. For those of you courageous enough to come in the morning, we have a short panel where we force the issue.
John Lennon
I'm happy to go again.
Mason
We have a volunteer.
John Lennon
I'm happy to say, “Hey, I'm trying to sell my wares here, man.”
Mason
All right, let's hear it.
John Lennon
Come on. I've got 80 different short ideas, so I'm happy—
Mason
Take one. Okay, I'll give you 3 minutes for as many as you want.
John Lennon
Let me just take the one. I've got my soapbox here, so this is my one opportunity to actually speak my mind.
5. Quality Businesses Become AI Shorts
Let's just say that I think that, so far, the market has been very concentrated in trying to find these AI winners. Basically, everything today has the valence of an AI loser or a winner. What's clear in my mind—and this has been repeated; I'm not the first to come up with this line—is that it's easier to spot the losers than the winners. I think this was in the Third Point letter.
What is attractive right now, and also just really, really hard, is that the best short ideas are actually high-quality, compounding, great businesses. This is my contention: if you believe in a future of AI, then you really have to be watching out for service-level deflation, something that is not visible today in near-term earnings.
I think a lot of this is reflected in the performance of some of these stocks over the first quarter. People are scratching their heads because great companies are actually printing good numbers and their stocks are actually going down. What I think is happening is that this question of perpetuity value is slowly spreading away from just software and the business-process-outsourcing companies and call centers. This is now spreading to all of the knowledge economy.
With that in mind, I think there are a couple of amazing businesses that stand out as shorts for me. One is the whole online-classifieds space, in particular the one that we're short, a company called REA Group in Australia. This is real-estate online classifieds. Do I see today a clear threat of AI to the business of online classifieds? The answer is no.
Going back to your point about e-commerce, there are clearly e-commerce winners in the space. But if I fast-forward the models that we see today to a world 2 or 3 years down the road, is it possible that agentic AI will be good enough—and is it even in the roadmap of companies like OpenAI—to try to monetize their models by actually figuring out a way to interject in the process of buying and replace what we consider to be this amazing supply-and-demand marketplace moat? I think the answer is yes.
If you run a search today in Manhattan for a 3-bedroom apartment, you'll find that if you run it on OpenAI, the results are good enough, and the listings are not all coming from Zillow. They're actually coming directly from Compass and everyone else. So the ability for the growth algorithm of these online classifieds to just push price 5% a year forever, even if there's no audience growth—I think that business is broken.
REA stands out because it's actually the highest-multiple stock. I think what we'll find across these knowledge companies is that there will be a chasm whereby they're going to go from high-multiple, forever-compounding stories to value opportunities. Once they arrive there, then they're probably great for cash-flow-yield stories that we should be long, but there's a big hole.
Mason
Okay, so one of the things earlier this year—I think there was a recognition that the AI winners would be companies that were heavily asset-intensive, with a very high asset intensity.
John Hempton
Well, there was an acronym for it. I just forgot it.
Mason
Right. I forgot. But the concept was that anything that had low capital intensity could get disintermediated. The ones with high capital intensity—you use AI and you actually improve your margins, right? But all of a sudden now, when everyone talks about AI, no one's thinking about that. It's just the semiconductor companies. It's just—you have to be a neocloud, right?
The question is: when does that come back? Do we really want to buy the ones that are asset-light, that may trade at a really good multiple but literally can get completely disintermediated?
John Hempton
Yes.
Mason
Probably the answer is maybe even not, right? Maybe those aren't the buys. But why is nobody buying the other stuff now?
John Lennon
Yes. The true AI winner will be a mediocre business that will just be able to expand a low EBITDA margin by 2 percentage points. That will make a massive boom.
Mason
Right. And, John, I suppose that this is part of your thesis too around some of the, let's call it, value plays that you're involved with in the retail and consumer names, right? The margin opportunity from AI.
John Lennon
Yeah, if something has a 50% margin that goes to 52%, that's a 4% increase. But if it's 50 bps and goes to 2.5%, that's 400%, so there are some interesting things. There are a lot of public-to-private transitions that we're slowly attempting to instantiate, where enacting better management with good old-fashioned strategic and operational thoughtfulness and AI tools can just lead to mitigating the downside risk. In some cases, like you guys, you can make your 10-bagger too. So, yeah, there's a lot that's very interesting there, for sure.
Mason
And that doesn't seem to have happened yet, right? The public market—I mean, you just talked about doing it in a private setting.
How come the public markets haven't done that?
John Lennon
Sorry, Mason. I know you're the moderator.
Mason
I'm here to watch like everyone else. I just roll you guys over.
John Lennon
Well, you don't know the answer, which is why, over the past few years, we've slowly tried to engage without, to be sure, being traditional activists. We only engage in conversation with management when we're genuinely strategically interested, but because we don't know the answer, we've just said, “Hey, if there's an opportunity to buy a 20- to 50-cent dollar where the dollar is going to grow a lot, let's get after it.”
The point on Reddit was that human content can be more valuable because of the amplifying impact. But obviously, buying ostensible shitco retailers is a lot more contrarian than that. I'm sure I'm the only one—I'm even lonelier than you in that.
Mason
Yeah, I'll play that.
And on that note, in a separate direction, but related to AI and human capital, we've chatted about it. I think a lot of people in the audience are starting their careers in the industry. All of you have been doing this for a really long time, though you all look awesome, young, and wonderful. But it's a different world. It is an AI world for our business. I think most people here are involved in investing one way or another.
What's your advice for a 25-year-old getting started in our industry in this crazy AI world? John, maybe you want to start with your thoughts. Andrew, we'd love to hear yours. Anyone else?
6. Human Judgment Still Matters
John Lennon
I have a derivation of the same idea, which is, in a somewhat contrarian way, that I think the human element will be all the more important. When I was in my 20s—some people may be offended by this—I found the industry to be extremely distasteful. I almost left it, and I would rather have had a fistfight in the street with most of the people who participate in our industry than share my investment ideas with them.
Mason
How do you really feel?
John Lennon
If you don't think the industry is full of douchebags, then you should probably look in the mirror—all of you in the crowd.
Mason
Ooh, wow.
John Lennon
Thank you, guys.
Mason
Damn. Over.
John Lennon
No, no. But around that time, the East Rock guys were involved with Sohn, and someone there said to me, “You should view things more with the spirit of abundance.” I was like, “What the hell is that?” I've had to claw with my fingernails for every inch of this opportunity.
Around the time I launched my firm, someone I admire for his wisdom—he might not like me referencing him—who was, interestingly, Andrew's partner, said, “I just remember this moment where he said, ‘Man, wait to see what it feels like to make money with your friends.’”
Ten years later, I'm sitting on the stage. Andrew's like a Zen Buddha—he even looks like a Zen Buddha—but he's calm in the face of the storm. I don't know if he's helped me make money; he's definitely prevented me from losing money with his balance and kind of voice of reason.
Speaking of looking young, Eduardo had no gray hair when he launched his firm, even 5 years ago, pretty much. There's a lot of silver there now, but he's the best short seller I know. Any time I want to look at something on the long side, I pose it to him to get a counter to it.
Mason
Dave had dreadlocks.
John Lennon
Yeah, yeah, yeah. But Dave is on my Mount Rushmore of living investors. He's done it in a lot of different ways over the course of his career, but when we launched a multi-tiered business model, he was the person who gave me the most valuable advice for being the best fiduciary I could be for my LPs.
I think you can be maniacal and competitive but also have wonderful virtuous-cycle relationships. I wish I knew that earlier in my career.
Mason
That's beautiful. All right, and on that, thank you, guys. Thank you.