TIP275: Mastermind Discussion 4Q 2019 (Business Podcast)

Episode Summary

Executive Summary: This episode of The Investor's Podcast features a mastermind discussion on four stock picks for Q4 2019. Toby pitches i3 Verticals as a short, citing high multiples and liquidity concerns. Preston recommends Biogen, a biotech firm with strong cash flows and a potential Alzheimer's drug catalyst. Stig suggests Allstate, a stable insurer with a low multiple and high buyback yield. Hari presents Graftech, a graphite electrode manufacturer with secured contracts and Brookfield's backing. The group debates valuation, risks, and position sizing, with Toby owning Biogen and Stig confessing a large Graftech position. A listener question on growth projections is also answered.

Main Topics: Short Pitch: i3 Verticals (III V) (Priority: 4/5): Toby short-sells i3 Verticals, a payment processor trading at 153x EV/EBIT with high debt (5.5x EBITDA). He sees a liquidity squeeze requiring capital raising. The stock rose 50% in 70 days but had previously dropped 40%. Stig notes high growth fueled by cheap debt, questioning the short. Hari and Preston express skepticism due to volatility and manufactured roll-up growth. Long Pitch: Biogen (BIIB) (Priority: 5/5): Preston recommends Biogen for its IP, high margins ($4.4B net on $13.4B revenue), low leverage, and 10% IRR. The stock is down 5 years despite strong fundamentals, now cheap at ~8.5x EV/FCF. Toby holds it in his fund; Stig likes the metrics but worries about patent challenges for key drug Tecfidera (42% of revenue). The Alzheimer's drug is a potential catalyst. Long Pitch: Allstate (ALL) (Priority: 4/5): Stig pitches Allstate for its low 10.1x TIP multiple, 6.7% buyback yield, and stable cash flows. 85% of revenue is from property/casualty insurance, with 50% from auto. He models a 10.2% return. Toby agrees, noting it's still cheap at 11x his metric. Hari questions downside protection vs. Berkshire; Preston suggests using momentum stops at $93. Long Pitch: Graftech (EAF) (Priority: 5/5): Hari presents Graftech, a graphite electrode leader with 65% of capacity locked in take-or-pay contracts at high margins until 2022. Brookfield owns 80%. The stock is cheap (~5x earnings) but volatile (60% annual vol). Stig confesses an 8% position, citing limited new supply and EV demand. Toby likes it as a commodity play with asymmetric upside. Listener Q&A: Projecting Growth Rates (Priority: 3/5): Stig advises using management track records, industry reports, and common sense, emphasizing conservatism. Preston highlights analyzing competitive advantages and asset stability, comparing projections to a hurricane's cone of probability.

Key Arguments: i3 Verticals is overvalued at 153x EV/EBIT with high debt and a cash squeeze looming, but the market rewards its SaaS narrative and roll-up growth. Biogen is cheap at 8.5x EV/FCF due to patent cliffs and regulatory overhangs, but strong cash flows and the Alzheimer's drug provide upside. Allstate offers a stable 10% return via buybacks and insurance float, but auto insurance is cyclical and earnings dropped 80% in 2008. Graftech has locked-in high-margin contracts until 2022, limited new supply, and growing EV demand, but is a commodity play with China risk. Toby's Acquirers Fund uses equal-weight 30 long/30 short positions, rebalancing back to equal weight. Stig models growth conservatively, using a 50% probability of -2% growth for Allstate due to auto exposure.

Data Points: i3 Verticals EV/EBIT: 153x - Current valuation multiple cited by Toby for the short thesis. i3 Verticals Debt-to-EBITDA: 5.5x - Indicates high leverage from acquisitions, per Toby. Biogen Net Income: $4.4B - 2018 bottom line on $13.4B revenue, showing high margins. Biogen EV/FCF: 8.5x - Current cheap valuation per Toby, down from 40x five years ago. Allstate Buyback Yield: 6.7% - Trailing 12 months, contributing to Stig's return estimate. Allstate Combined Ratio (implied): 92% - Example given by Stig to explain underwriting profitability in low-yield environments. Graftech Gross Margin: 70% - Locked in via take-or-pay contracts until 2022, per Stig. Graftech Annual Volatility: 60% - Preston notes this is like cryptocurrency, making valuation difficult. Biogen Revenue from Tecfidera: 42% - Patent challenge risk highlighted by Stig.

Pivotal Quotes: "It's one of those things where I'm like, heads I win, tails I don't lose much." — Stig Broderson: Describing the asymmetric risk/reward of Graftech, echoing Pabrai's phrase. "Things don't get cheap without a reason." — Toby Carlisle: Explaining why Biogen has been flat for 5 years despite strong fundamentals. "It's hard to make predictions, especially about the future." — Stig Broderson: Opening the listener Q&A on growth projections, emphasizing estimation over precision.

Implications: Value investing remains viable in 2019 despite market extremes, but requires concentrated positions, patience with volatility, and skepticism of high-multiple growth narratives. Graham-style screens identify opportunities in unloved sectors like pharma, insurance, and commoditized industrials.