Exploiting Investor Biases and A Look at Lyft with Evan Tindell - The Special Situations Report Episode 37

Episode Summary

Executive Summary: In Episode 37 of the Special Situations Report, hosts Asif and Damanna Surya interview Evan Tyndall of Byrene Capital. Evan discusses his journey from professional poker to value investing, emphasizing the exploitation of cognitive biases to find mispriced equities. He covers portfolio concentration, international opportunities, and special situations like mergers and spin-offs. The conversation also delves into specific investments like Lyft and Meta, and the challenges of shorting in irrational markets.

Main Topics: From Poker to Value Investing (Priority: 5/5): Evan Tyndall shares his transition from professional poker to value investing, highlighting the mathematical and strategic parallels between the two disciplines. Exploiting Cognitive Biases (Priority: 5/5): Discussion on how systematic errors in analysis, such as home country bias and anchoring, create mispriced securities that can be exploited for investment gains. Portfolio Concentration and Diversification (Priority: 4/5): Evan explains his approach to running a concentrated portfolio of 15-20 stocks, emphasizing the importance of understanding each position and managing risk through diversification across different sectors and geographies. International Investing Opportunities (Priority: 4/5): The conversation covers the structural advantages of investing in international markets like Japan and Mexico, where valuations are significantly cheaper than in the US. Shorting in Irrational Markets (Priority: 4/5): Evan discusses the challenges of short selling in the current environment, including meme stocks and short squeezes, and how he differentiates between ridiculously valued stocks and those with active short squeeze campaigns. Special Situations: Mergers and Spin-offs (Priority: 3/5): Analysis of merger arbitrage opportunities, focusing on wide spreads and situations where the underlying equity is attractive even if the deal breaks, using examples like Humana, Twitter, and US Steel. Lyft Investment Thesis (Priority: 3/5): Evan shares his analysis of Lyft, noting its strong financial performance despite being overshadowed by Uber and autonomous competitors like Waymo, and the potential for long-term growth.

Key Arguments: Cognitive biases create systematic errors in stock pricing, leading to mispriced securities that can be exploited. International markets offer significant valuation discounts compared to the US, making them attractive despite lower transparency. A concentrated portfolio of 15-20 stocks with diversified risks is more effective than over-diversification. Shorting should focus on ridiculously valued stocks rather than those with active short squeeze campaigns. Merger arbitrage opportunities with wide spreads and attractive underlying equities can provide high returns. Lyft is undervalued due to its strong financials and growth potential, despite competition from autonomous vehicles.

Data Points: Percentage of US stocks trading below 10x EV/EBIT: 5-6% - In the US, only 5-6% of stocks trade below 10x EV/EBIT, compared to over 50% in Brazil and Mexico. Walmart US vs Walmex valuation: 40x vs 18x forward earnings - Walmart US trades at 40x forward earnings, while Walmex trades at 18x, despite Mexico's growth potential. Lyft revenue growth: 13% - Lyft is expected to grow revenue by 13% this year, despite competition from autonomous vehicles. Lyft market cap vs revenue and EBITDA: $7B market cap, $6B revenue, $500M EBITDA, $800M-$1B free cash flow - Lyft's market cap is $7B, with $6B in revenue and significant free cash flow, indicating undervaluation. Number of Japanese stocks below 10x EV/EBIT: 500-600 - There are 500-600 Japanese stocks with market caps over $100M that trade below 10x EV/EBIT, excluding certain sectors. Waymo market share in US ride-sharing: 2% - Waymo currently has about 2% of US ride-sharing, with aggressive projections reaching 10% in 4-5 years.

Pivotal Quotes: "The number one thing about investing is like we're all trying to find some way to identify stocks that are undervalued or overvalued... And you just try to set up a framework that you think will give you slightly better odds than just randomly picking stocks." — Evan Tyndall: Explaining the core challenge of investing and the importance of having a systematic approach. "In the US, you're on a golf course with a big fairway, and there's a tree in the back of the fairway, and you're trying to hit a nine-iron that hits the tree... In Mexico and Brazil, you're just in a forest, and if you just whack the ball in a given direction, you're going to hit something, you're going to hit a cheap stock." — Evan Tyndall: Describing the abundance of cheap stocks in international markets compared to the US. "I think now more than ever, investors are doing themselves a disservice if they don't look at international stocks." — Evan Tyndall: Emphasizing the importance of considering international opportunities for better valuations.

Implications: Investors should consider international markets for better valuations, exploit cognitive biases for mispriced securities, and maintain concentrated portfolios with diversified risks. Special situations like mergers offer opportunities, but shorting requires caution in irrational markets.