ValueWalk’s Raul Panganiban interviews Kevin Smith, CFA, Founder, CEO, and CIO and Tavi Costa, Partner and Portfolio Manager at Crescat Capital. In this part, Tavi and Kevin discuss the global debasement of currencies and the opportunity in buying gold, shorting the Hong Kong dollar, the opportunity on the activism side, their hobbies during quarantine and working from home. Check out the full interview on ValueWalk Premium.
Q2 2020 hedge fund letters, conferences and more
Raul Panganiban: Yeah the global debasement of currencies I find interesting. Yeah, 'cause you can see, with China with the big credit bubble, and are deteriorating fundamentals here in the US and so you find more comfort in gold outperforming?
Kevin Smith: For us the you know there's three three major legs that that we have to express and to capitalise on and actually make money people say oh Crescat your themes are also negative you know that you know you know everyone's just going to want to go to cash, well no that's not the idea here there there are three major things that people can be doing if they want to capitalise on the macro imbalances today and play the recession to actually make money tactically and it's what Toby has called the macro trade of the century it's been short the the Chinese currencies that you want in the Hong Kong dollar, being short. Us overvalued US stocks and being long precious metals including undervalued precious metals, mining stocks and That there is exciting absolute returns we believe to be made and massive alpha as from those those major three legs as this global economic downturn plays out.
Tavi Costa: Oh no, I agree with Kevin. I mean, it's, it's, you know, not only gold and silver is also an incredible opportunity at the historic double bottom when you look at silver relative to Russell 3000, which is just a broad way of looking at equities, this whole idea of buying gold and selling stocks and the multiples that you get in the mining space relative to now a lot of the leading sectors in the economy today here regardless if it is attack or the consumer discretionary whatever that is, I think that that's it's still incredibly valuable to look at those mining stocks today. I think, you know, mark my words there. I think that when the Robin Hood trades you know traders have finally learn about the gold and silver penny stocks. I think a lot of those could go parabolic here. But you know, we're excited. I think that that's very, very much like Kevin said, I think that that's there's a lot of opportunities. It's a, we have bearish themes in the economy. But there's always a bull market somewhere. And I think that the bull market this time is going to be in precious metals, and probably has just only started now this this year and get started a little bit in 2019, as well. And, you know, goes back to the whole thesis that we started with, which was the yield curve inversions. Remember that research, which was an empirical analysis that we did, when you reach a certain level of yield curve inversions in the system. It's time to buy gold and sell socks. That is the by far the best allocation of assets that we saw that would actually perform the best during that period for the next two years. And actually, if you look at gold To s&p 500 ratio, it has performed incredibly well, since then. And I think it's only going to continue, especially if you can get add the next leg, which was, which is the short remember and short Hong Kong dollar, I think that those two, add another level of asymmetry to this to this trade. So the three legs I mean, we're very, very excited about this this this themes going forward.
Raul Panganiban: And then in terms of portfolio management, do you want to take these opportunities in a basket approach, and keep it fairly diversified or try to concentrate on some of them?
Tavi Costa: We've always done that I would say answering for Kevin this one, which is the whole purpose of using models that help us to select a basket of companies and rather than betting on one or two or very, you know, so active, more of a small number of companies. I mean, that's the whole thesis is is using those models to support us. And really be able to mix a tonne of sectors and especially on the short side, which there are so many opportunities, which I guess we can find the most overvalued companies in the world and then even figure out some macro themes from those, you know, why are those sectors or companies in industries in different places of the world being, you know, pointed out by their by our models as an issue in the valuation part. You know, so many times a lot of our macro themes have risen because of those analysis that we do in our macro in our equity fundamental models that Kevin was referring to before. So yeah, on the on the gold side as well. I mean, it's it's a mix of senior producers and junior producers and explorers and a very junior explorers too. I mean, all those look interesting is just an allocation across the board that we're doing in precious metals is not only gold and silver as well. It's not only China is in terms of the currency shorts is Hong Kong dollar. It's right now we have a short and the Australian dollar and Canadian dollar. So there's quite a lot of things going on in the portfolio. But it kind of sums up to those three major themes when you when you want to sort of conclude.
Raul Panganiban: And for the activists approach that you're taking to those companies, you utilise a basket as well for those?
Kevin Smith: We do because the, the opportunity on the activism side, excuse me, is really in the junior exploration. Those are in the end because the companies are really small capsules, in some cases, you know, real micro caps. We, when crass guy comes in, we're going to have a big percentage of the outstanding stock and that's some, so we need to diversify across a basket of them. Fortunately there there are are enough of them and quite in hand he's been in key and helping us identify them. I mean there's something like 2000 precious metals and mining stocks all over the world and that are public and but the truth is that that 90% of them are garbage and so really you know, having the the geologic and technical expertise to be able to identify those that aren't. You need someone who's an insider into the industry that that's what led us to quit and we wanted to find out who the real experts that have have made that the key discoveries in the past and they're using, you know that they have the technical background and they're using the exciting new new generation, geophysics and drilling to to find the to find the gold because finding gold is difficult and and And producing gold is extremely expensive. So, if we can, if we can focus on the exploration side of it, which also happens to be, you know, deeply undervalued at the same time and and often micro cap companies, we can come in and get a significant stake and activist stake, have and actually get capital to put it to work, deliver capital to these companies that they can put into the ground to advance these, these deposits with the right with the right guidance from the from the right geologic experts in the field. And, and so, identify, you know, of those 2000 companies that are out there, there's, there's probably, there's probably, you know, 30 or 40 or 50, juniors that are that are sitting on, I mean, Junior explorers that are selling on something with extraordinary potential, so So we're trying to identify those, those stocks those companies and get a significant stake, get them to capital and get them the technical expertise that they need to really advance those deposits. So, so we can find the next foster Ville, and hopefully, and hopefully find a bunch of them.
Tavi Costa: And also, I think that the taking an activist stake goes to show what's the timeframe we're looking at on those investments, which in our view, is those are very long term investments. And for this secular bull market for this whole space. We want to be in those companies for a while. And our goal is to hit some home runs, like Kevin said, and a lot of those exploration potentials. And I think I think we could definitely do that with especially with Quinton's expertise. We couldn't be more excited to work with him and he's truly, you know, in my view, the smartest guy in industry.
Raul Panganiban: And then taking the basket approach. That's a result of that, you don't want to rely on picking the exact ones, but to hopefully have a handful of winners within there, and then also that you're building positions in these companies and that you can't take too much of the company or put too much capital into one company that would create too much ownership that you don't want?
Kevin Smith: That is that is true. And, and so, you know, fortunately there are enough, enough of these companies out there that we can that we can have a basket and there are literally, you know, 10 or 15 already that we've identified that we think could be 10 baggers, in this next in this bull market for gold that we envision, from the current valuations, and so, and if only two or three of them end up being 10 baggers, I think we still can do extremely well.
Tavi Costa: Well, and the great part is, is that regardless of if we're not in the secular bull market, if some of those companies actually end up, you know, discovering a bigger deposit that then before was perceived by the markets, you know, they still can rise significantly here and become 10 baggers, even in a bear market for gold, we've seen that even since 2011. I personally believe and Kevin does as well, that the entire industry should be rising, along with gold prices going forward in the next in the next years here. I have but you know, if we're able to also align with that, hit those home runs, I think that would be a perfect scenario and could really help us to continue to grow our business.
Raul Panganiban: All right, and just wanted to switch over to some personal questions here. What are your hobbies during quarantine?
Tavi Costa: Kevin want to go?
Kevin Smith: I am crazy because I've never been working harder in my life than I have since quarantine started and a lot of it is these activist deals that we've been doing. But you know, we you know, we bought some dumbbells and so so we do in home workouts and and, and then I like to go out and get a break on the every now and then on the on the balcony as well with some listen to podcasts or whatever but and then we know we do walks a lot of walks around the neighbourhood too. And we still get up to our place in the mountains where we can play golf now that summer has started and is reasonably close enough. So that's what's going on here.
Tavi Costa: Yeah, definitely seems like there's no separation from work and home when you're working from corn on the quarantine situation. I feel the same way. But uh, yeah, running with the mask has been sort of my challenge recently, which is you know, that's not the greatest but I love running and I'll do whatever I can do to continue to do that. So I guess that's one thing. Well, one successful thing is being like the other day and did my own pizza dough. I've love pizza and so cooking is, well I don't cook a lot, but definitely that was a plus and reading probably been reading more than usual. But like Kevin said, it's been pretty busy. So but you know, not ideal to be working from home as much as from the office, but we'll see. I guess hopefully, things will get better here soon.
Raul Panganiban: Yeah. And I want to know, yeah, working from home, how do you guys, if you enjoy it or if you find it productive to be at home?
Tavi Costa: I think it's almost as productive. Maybe you know, the setup of being at work is a little bit better. I mean, even, it's funny, but it's a small things, you know, dressing up to go to work and all that mean it does adds up to your productivity my view a little bit. And, you know, I've been even trying to do now more recently because I think that that helps me to work a lot harder. It's funny, but it's true. And but in terms of being efficient, I think Kevin and I know pretty good when we communicate all day. So we can just call each other and have, you know, conference calls pretty much all day. We just mute ourselves and talk to each other as we go. So in terms of that as being just fine. I think it's been great to actually be communicating a lot more with prospects through Zoom calls and conference calls. And I think that has been helpful for the business, which before we used to have to travel to New York or Miami or other places to meet with investors and prospects, and I think that has been more helpful in terms of the time management here. But I hope that that changes going forward. I think that that has been helpful for all of us.
Kevin Smith: Yeah. For me, there's no question that all of the you know, learning to use all the technology that goes with working out of the home, I think it's going to improve our overall productivity for the business. I know that Zoom has become incredibly popular. It also trades at something like 70 times revenues, by the way, so be careful on you know, that we've actually been been learning to use Microsoft Teams. And so a lot of times, Tavi and I will just talk on Microsoft Teams or we'll get the whole we'll get the whole staff on on the phone on Microsoft Teams. And, and it's, you know, it's like all being on the trading floor together. We it can be very powerful. octave and so, um, you know, I, you know, even this, this radio podcast that we're doing today, we, um, you know, we've been able to use talking are using our audio technica microphones, you know, rather than just the phone and so we, you know, I've taught you already knew how to do that, but I've at least figured out how to do that and, and so that's, you know, one good thing about about this whole, you know, sheltering in place or whatever that we've had to adapt to, it's helping everybody learn how to use technology better. I think, you know, what, you know, we're short a bunch of office reads because I think a lot a lot of those companies you know, a lot of businesses are going to learn that there are people can work remotely and they don't, they don't need all that office space as part of this so on there, you know, that is one of the creative just destruction things that that's that's happening, but I think it's been way over done in terms of the the value on some of these software companies and we are short a number of them, including Zoom.
