00:10:32 · Deiya Pernas, Mikk
[00:10:32] S1: Yeah. I mean, CEOs their are very good at... You know, like, you know, they're very good at salesmanship. They're very good at... You know, the whole house could be burning down, but it... You know, they'll be like, well, you know, things are... But, you know, there's reason for optimism, and we're doing this, and we're doing that. And one of the things about being investors is understanding human nature. And at the end of the day, CEOs, they don't come from a different portal or a different planet. There are people like you and me that are trying to do the best they can, and a lot of them are scared to lose their job. And they they have the normal fear... They have normal fears that other people do. So if you think about the the average tenure for a CEO of public markets is about five or six years. I mean, lot of those people work their entire life to get in that position. They wanna stay there. They don't wanna get ousted, you know, prematurely. You know, they they wanna collect, so to speak, while while they're at the top. And, yeah, just understanding nature. They're all kind of being sentenced if they would be like that, I guess, you know, it's not it's not a surprise. [00:11:32] S0: Now how you guys think and work? You've created this motor investing framework. I printed it out. I have a bunch of notes here. So maybe you can explain what this concept means and, what it is all about.
00:11:49 · Deiya Pernas
[00:11:49] S1: I'll go ahead and you can kind of fill in some of color if you want. But basically, our whole concept of investing is that investing is about prediction. And if you want to generate excess returns, you have to anticipate what a company's gonna do, be right more often than wrong. And the way... And your anticipation of what the company's gonna do has to be variants of the market. So it's like, what's this company gonna look like in the future? And is my conceptualization of the company in the future kinda different than what general market participants are thinking. And I know when we throw the word prediction around, like, it doesn't sound robust and or precise and maybe people have qualms with it. But the the example I like to use is that it's similar to, you know, when we're all in college and we see somebody who's, like, who's studying well. We see essentially a good student who's likable and it seems like that they're going places. They're probably going to do pretty good in life economically speaking. You know, they're they're industrious. They're light pole. They're not working. They're going in an industry that's growing. There are all these kind of potential factors that are kinda coming together where you would say like, oh, I wish I could buy a piece of that guy or that gal's earning right now because because I see how how they're gonna make it look on life. And that... It's a very similar idea where you're trying to... Your analysis more... Is more around potential and less around, like, what the output is today, like what the financials look like today. It's about what are the kind of decisions being made that haven't reached fruition in financial statement? What are the capital allocation decisions? Is the opportunity set kind of expanding? And then if many of those things kind of come together, then you could say that the motor of the company is strengthening, which is the concept we use to talk about the potential of the company. Similar, if you're thinking about a bow, if you're pulling back a bow, that's like potential energy that's being stored. And that's kind of when we want to invest in a company, when potential energy is building, building. It hasn't yet translated to Connecticut Energy in the financial statement. That potential is still building.
00:14:07 · Mikk, Deiya Pernas
[00:14:07] S0: Could you give a specific example, like a recent one, which you were like, okay, this is so obvious. We should go for it. [00:14:15] S1: Sure. The second qualification is very important. The the rep... You have to kind of... What you're seeing, that potential is building has to be kinda different than than the general market is is seeing. Because if if the if the entire market agrees with you about potential of this building or whatever, then, you know, there's not opportunity to fix this return. I mean, there's a ton of examples that we could use. Dean, do you wanna talk about an example or two?
00:14:40 · Dean Pernas
[00:14:40] S2: Sure. Yeah. Capstone Energy is a company... Is a holding that we've had now for a little less than a year, I believe. We got into it late August or early September. And that was a company that had just emerged from a pre package bankruptcy, had significant amounts of debt, was losing money. And, essentially, what they do is they make microturbines. So microturbine is like a large turbine that's shrunken down. So it produces energy from the range of 50 kilowatts to a couple of megawatts, versus hundreds of megawatts. And, essentially, they've been in this industry for forty years now just losing money. I think NOL has exceeded a billion dollars at one point. So it was an industry with tons of competitors, and then gradually, they all just exited, Capstone was kinda last man standing. And then they went to bankruptcy, and they emerged and they emerged in an environment in which energy demand was just soaring due to AI, due to aging infrastructure grid. And, essentially, their solutions are great for behind the meter solutions. So you're not plugged into the electric grid. You have, you you have natural gas pipeline you could plug into and use their terpense to generate electricity. So the domain environment changing along with, new management. So, specifically, the CEO was, making just best practices. He came from GE and Siemens and just had heavy engineering experience. This cleanup shop, essentially. So essentially insourced key IP. So instead of relying on distribute... Distributors and outsourced manufacturing, he started bringing key IP in house. He did he did something called Six Sigma in which they essentially cut costs on hundreds of their of their parts and accessories. Gross margins went from... I believe it was sub 10% when we initiated the position to now an x 25%. So just really rudimentary changes that a good good operator can still mix with a demand environment that change heavily. But back then, obviously, the financials didn't show that. The financials were reflecting decisions previous management team had made, previous demand environment. And so that was one of the easier ones to to to see going forward. So we got in around a dollar or so. It's now around $555.50 a share. We still think the environment is is... The potential energy is still building for that company.
00:16:45 · Dean Pernas, Mikk
We think there there are definitely great things in the pipeline coming down. So that was that was one of the more obvious ones. [00:16:53] S0: Okay. And when when is the we see with private market companies as well, sometimes it's a it's a good idea to just sell the business. What is the what is the take from from your end when it's the right time to exit this position? What has to be true for you to exit? [00:17:13] S2: To to sell the position? Yep. Well, two... It would be a couple of things. Number one, if something happens that changes the thesis. So if if something is thesis breaking, you you have to sell. And number two, if the price is just too high. At the end of the day, we're not investors that would... Are just gonna hold on to a company if it's trading a 100 times sales. There's opportunity costs. There's other investments out there in the public space that have more attractive profiles. And so it's just... It's a combination of, number one, did anything at this break? If not, how does this... How do return profiles on a go... Going forward basis compared to other investments out there? And it's it's a combination of those two questions.
00:17:53 · Deiya Pernas
[00:17:53] S1: Yeah. I'll add to that a little bit. So you can always be wrong. Right? The the new material can present itself that you did not consider beforehand, and you're you're constantly in this game of updating your priors in the face of new information. And, if something comes along that you do consider, a change of the thesis then potentially takes time to sell. The other part of it is that maybe there was a risk that you were underwriting that came into fruition. Like, we owned, well, we still own our remittance business a long time ago that, and we knew that it was some sort of risk that regulation come down, the pipe that could really affect some of these companies. And, essentially, the big beautiful bill that, Trump had, implemented last year contains some provision that was essentially so incredibly onerous and unfair to, remittances and basically unconstitutional. So we had thought there was a huge... Way an outside chance that anything like that happening, and then it happened. So, like, sometimes you you do your analysis roughly right, and maybe there's a 2% chance of something that you're considering that happening in the company that would obviously make it uninvestable, and that thing happens. It's kinda like, you know, if you're at a poker table and, you know, you get it all in with pocket aces against, you know, pocket twos. Like, clearly, that's a good decision, but sometimes you're, you know, you're gonna lose. You know, a two's gonna show up on river and it's gonna crack your aces. So... Yeah.