ToffCap: I'M Most Bullish On SurgePays
By ToffCap
Published:
What is your background? Tell us more about yourself.
I’m currently about 15 years in the investment business. I started out in Corporate Finance, which I consider to this date to have been the perfect school for investing. Back then, the CF team of the firm was so big that they had divided it in three sub-teams; one focussed on M&A, another on financing and the last one on valuations. I had the luck to be working in the latter, which was an amazing experience.
As you might imagine from the name, the focus was all-day long on valuation-related projects, whether company valuations, asset valuations, tax-related, audit-related, dispute resolutions, divorces (yes, divorces – when there are so many assets involved, a court might call in a valuation expert to assess the value of the assets), and so on.
Besides having a years-long deep dive in valuation and financial modeling related projects, the vast majority of companies involved were private. This was key for my future development as an investor as it ingrained in me that value and price are two separate things, often connected but regularly actually not. This is clearly obvious for any (value) investor, but the experience had a particular consequence which would have a large impact on my investment style and philosophy since: it caused a relatively high level of insensitivity to (large) price fluctuations. Even more, it made me often consider (high) volatility a good thing. But more on this later.
You are writing anonymously on Twitter. Why? What is the reason behind it?
Though I would rather not write anonymously, it is an agreement with the company I’m currently affiliated with. This way I can maintain full independence and write on whatever topic I want.
What is your investment strategy?
You might have guessed from my previous comments that my tendency is very much towards value investing. Please keep in mind that this is the classic sense of value investing, meaning that I would buy anything – and I mean anything – where I believe there’s a large discrepancy between the current price and my estimate of value, plus a known catalyst.
Which brings me to my previous point – volatility. A company’s valuation is determined by the size of its cash flows, the growth thereof and the risk of these cash flows. Consequently, I tend to find the most interesting opportunities (to me) in smaller, complex and volatile situations; companies that are cheap for a reason and that might have ‘some hair’ on it. Companies that investors might deem too risky, or where there’s too much work involved.
An example is Kingsway Financial Services (you can find a recent tweet here), a small cap situation which was so complex that I believed it scared a lot of investors; the opportunity cost is just too large for many. Sometimes just going from ‘complex’ to ‘less complex’ (i.c. higher visibility/lower risk on earnings/cash flows) is enough. The shares in these companies tend to be rather volatile, and some can even drop >30% for no reason whatsoever.
Over the years I’ve tried to implement more speculation and short-term /event driven trades in my portfolio.
But that all depends on the situation. I try to not have too much exposure to situations that I have to constantly assess. But in the end it all depends on what philosophy fits you best.
We all know by now that the most important organ in investing is not the brain, but the stomach.
You can read all (day-) trading books you want, but if you don’t have the stomach and right mind-set, you’ll never be a good speculator. Conversely, if you don’t have the patience and conviction to stick to your valuation/work through thick and thin, you can study value investing all-day long, but volatility and information overload (e.g. on Bloomberg, Twitter) will drive you to sell too early, and your investment will never reach its target price (a pitfall of many value investors).
Share with us more information about your portfolio. How concentrated is it? Which sectors do you prefer? What are the biggest positions? Do you also have some speculative positions?
My portfolio position resonates much with my ability to handle volatility.
I’ve found that my sweet spot is 8-12 core positions. Definitely not more, as I want to remain concentrated. A 2% position that doubles adds very little to the total, in my opinion. Positions have to be at least 6% and can run up to whatever I feel confident, and that depends on the timing + conviction. Also, another character trait is that I tend to be more at peace with my position if a company grows into it. Let’s say a 7% position grows to 20% of the portfolio - I have no problem maintaining that position if I remain confident in its potential. But to initiate a new 20% position - that almost never happens as I would fret too much on its size. It’s a bit peculiar, but again, it’s important that your philosophy reflects your character.
Perhaps interesting to note that over the life of a specific investment, I tend to think as much (and perhaps more) about portfolio positioning as on the initial assessment/valuation of the investment.
- How much am I already up/down on this investment?
- Is it large enough?
- Do I add if the thesis continues to improve, even if the shares performed well?
- When do I add to this investment that traded down?
- When do I sell?
I generally don’t hold until my ‘target price’ (which is a fluid concept) is reached.
If I believe that an investment should return, let’s say, 100% over two years, but it moves +60% in one year, I tend to sell; I should have other opportunities with a higher return prospect – or even positions which went down that I’m still bullish about. My core positions are generally flanked by some securities with embedded leverage, such as options/warrants.
These are more icing on the cake and never a core position. I’m also sector and region agnostic, which massively increases my universe, though I tend to focus only on DMs – that’s more than enough stocks to cover.
What were the biggest/most significant changes in your portfolio last year?
I entered 2022 with a relatively large exposure to commodities, mainly lumber, tin and oil. I’m generally careful with these kinds of positions given that the thesis can change rather quickly, but I’ve found many interesting opportunities – companies that were gushing cash while the underlying commodities were holding strong and the stocks were cheap. I’ve also kept a fair amount of cash throughout the year, around 30%. Normally I prefer to be fully invested at all times, but given my exposure to so many commodities I decided to thread carefully.
Over the course of 2022 I moved back towards my preferred positioning, i.e. long a bunch of cheap stocks, with a 2/3-year focus.
I much prefer this, given that the thesis should pan out over a few years and I don’t have to constantly keep an eye on them. This might be the case for commodity-related investments as well, but I just don’t feel the same level of confidence; and as I discussed before, I believe it’s extremely important to have a philosophy that resonates with your character. Otherwise you might end up drifting everywhere and lose focus. Don’t get me wrong, (style) drifting is fine, as long as you have an ‘anchor’ that holds you grounded. That way you’ll still be around in 20 years.
What is the best performing stock in your portfolio currently?
At this moment, since initiating the position almost a year ago, SurgePays. I’ve written a relatively recent post about it, so your readers can read up on it. I still believe this to be the best idea in my portfolio at the moment, i.e. the one with the most upside over the next year given its risk.
It’s a recurring revenue business, basically funded by the government. The company is currently in a ‘land grab’ mode, where they have to invest quite a lot to add to their subscriber base. 2022 was a year where they started from zero, but this year the subscriber base is already relatively high, so the company will have recurring revenue from their ACP business right from the start.
2023 is the year where earnings should be ramping up quickly, which we’ll probably see as of Q1. The biggest risk here is the government cutting funding to their client base (as the government is basically paying the company), but the funding was a bipartisan initiative, focussed on people in need. It’s also not a big program, compared to the US budget, so I don’t believe they’ll cut it anytime soon. But again, more info in the post.
What is the worst performing stock in your portfolio currently?
I sold that one. It was just a big blunder.
I’ve been following SPACs for quite some time and as you might know, they’ve had their moment in the sun during 2020 and 2021, but came crashing down in 2022.
I kept a close eye on these things, and given the negative sentiment, I started to short them into the deal vote. I won’t go into all the details, but in this specific case I forgot to close my short after the vote. What happens with SPACs if you short into (after) a vote is that you get ‘locked in’ for a few days, while the underlying still moves. And in this case the stock rallied like crazy given some technical aspects (super low float, pumps on Twitter, etc.). So I forgot to close the short; once I realized it, it was already too late and the underlying stock was up 200%. Ups. So while initially in the money, a stupid mistake cost me a lot.
Again what I mentioned before: I drifted, which is fine, but I went too far and lost focus. This was an expensive mistake that reminded me to stick to what I can do and feels best.
Where do you get your investment ideas?
Back when I was a fund manager I had a pretty wide mandate.
As a consequence, I’ve scanned through thousands and looked into hundreds of companies. You always keep watchlists, which I continue to do. Often good investments are found by just keeping interesting companies checked; so once it's cheap enough, you can quickly pull the trigger.
And when you’re looking at one company, you always assess similar companies, competitors, etc., which leads to new opportunities.
But there are many other valuable resources, such as blogs and platforms like Strike.Market. Twitter is a great source as well. The important thing to me is casting as wide a net as possible and seeing what holds. If you turn over enough rocks, you’ll find a few things that you’ll like.
(Look at the latest insider trading data on Strike.Market)
Which stock do you believe has the biggest potential in your portfolio and why?
So at this moment I’m most bullish on SurgePays from a risk/reward perspective.
There are other stocks that have much more upside, such as UMT, which you can read about it here, but the risk/reward profile is much different. UMT’s potential is much bigger – if the company starts to communicate better and improve its (excess) capital allocation policy. But it remains an ‘if’; though I believe a lot will happen over the next few years, it could well be dead money for a long time. Other investments such as Surgepays are just a function of showing improved earnings. That’s the main catalyst. Once they’ll do, the shares will rerate.
You also write a great newsletter called ToffCap. Where did the idea come from? What do you mainly write about?
I started Toffcap because I wanted to share more of what I did in a simple way. I’m continuously reading and analysing companies, so why not share what I do. I try to keep it simple and accessible so pretty much everyone can understand what I’m talking about. And importantly, you cannot know everything, so putting some ideas out there almost always leads to some useful comments and suggestions. The site is free and I have no intention to start charging fees at some point.
In the last couple of newsletters, you wrote about UMT, FTK, CTRM. Tell us your opinion on these stocks. Are you bullish on these stocks?
You can find the write-ups on the site, which provide way more background. I’ve talked about UMT, which is an incredibly undervalued stock. The company has no debt, almost 2x its market cap in cash on its balance sheet and is trading at a ~80% free cash flow yield. That’s just absurd. But of course there’s a reason for it, mainly the incredibly bad job the company does in communicating. Nonetheless, at these levels not much needs to happen for the share price to revert back to its old range €8-12, and then it will still be very cheap.
FTK is a classic core position. A sold-off stock with a good product and strong fundamentals. Also, there’s a lot of additional earnings potential from higher ECB interest rates. It will take some time for FTK to trade back, but I believe that just ‘normal’ operations and some time will be enough for the stock to rerate.
CTRM was a spin-off trade. The company (Castor Maritime) will spin its oil product tankers into a separate company.
If you don’t know anything about the oil tanker business, better to keep it that way and stay away; the sector is one of the worst out there.
That said, I believed that the value of the spin-off was masked by the rest of the business (dry bulk). This part has pretty bad fundamentals, while the product tanker market is enjoying a very strong period. So one could buy CTRM shares before the redemption date and sell it thereafter, with the difference the right to receive shares in the spin-off. The value of the spin-off should make up for the difference, which in this case was not much compared to when CTRM announced the spin-off.
Who are the best investors you follow? What investors do you admire most?
There are a ton of finance and investing books out there and there’s always something to read. The best books imo remain the ones I’ve read a long time ago, the classics, i.e. Greenblatt, Lynch, etc. In terms of following investors, Twitter is just a great resource, as long as you remember to always seek out what fits you.
It's easy to lose it on Twitter and start buying stuff because others like it (always do you own due diligence! 😉).
What was your biggest investment mistake you have made? And what did you learn from it?
It’s basically the one described before. An error which was totally avoidable but I still committed. If you start to make those kinds of mistakes, a vacation might be a good thing.
What is the best stock for the long-term to buy?
This clearly depends on how you invest, and in my case it continuously changes. Most of my investments have a 2/3 year time horizon, but it all depends on what happens. But you can subscribe to my blog to keep an eye out on what I’m looking at.
