Last updated on February 14, 2023
Leo Schmidt of River Eddy Capital Management rejoins the podcast to discuss the coming credit crunch, its impact on stock market sectors, and where to invest to protect one’s portfolio.
Content Highlights
- So-called “unicorn” companies, or the darlings of the VC crowd, and others that cannot generate cashflow, will face a tough reckoning (3:17);
- Undermining this is “a complete change of psychology” in terms of velocity of money (6:27);
- What if the Fed reverses course? It’s not so simple (8:52);
- Oil is a short: “Oil is the ultimate liquid commodity” but there is a place for pipeline stocks… (11:38);
- What stocks can thrive in this type of environment? Look first to medical company spin-offs (19:13);
- Another area to look: Business development companies, or BDCs. This is a risky part of the market but there is at least one BDC making first-lien loans, which are the safest part of the capital structure… (26:23);
- Quick epilogue on China’s latest Covid lockdown. There are ways to play the move away from supply chain issues that result (35:58);
Quick Highlights From Our YouTube Channel
Transcript
Nathaniel E. Baker
Leo Schmidt, of River Eddy Capital rejoining the podcast here, we are going to talk about this coming credit crunch. And we all know about inflation, and how the cost of goods is much greater today than it was a year or two ago. If you don’t believe me just go fill your tank with gas. But we that’s all been well documented. And we’ve talked some what on this program about what to do to protect your portfolio against inflation. But Leo here has a bit of a more nuanced view view on that, and also a little bit more of a, an expansion of it. And so, basically, he, I mean, you know, what, I’ll just shut up and let you let you introduce your idea here later, and then we can take it from there.
Leo Schmidt
Nathaniel, thank you. And thank you for having me on. Again.
Nathaniel E. Baker
Thanks for coming on.
Leo Schmidt
I love the title of your podcast. The Contrarian Investor. And because it’s a special place.
Nathaniel E. Baker
Indeed.
Leo Schmidt
So let’s jump into it. So we were talking briefly before we started, and one of the things I was mentioning, is that we’re going to have a credit crunch. And so things like the unicorn companies are all going to go away, they’re all gonna blow up. If you don’t, if you can’t manually generate cash, and you know, you’re gonna, you’re going to be gone, who is not going to be cash, because the Fed is going to take away excess liquidity. And without a shrinking of liquidity, there’s going to be all sorts of credit crunches. And so the question is, where do you go with that? And so of course, you know, the unicorn companies are down a huge amount of companies like Shopify are down 50%, and they’ve touched 60 bounced off a little bit, you know, so those are easy to see that with the discount factor of coming to be you know, with a higher interest rate, you’re gonna have a discount factor that makes near term cash flows much more valuable. Okay, so that’s pretty understandable. The question is what?
Nathaniel E. Baker
Yeah, let me let me just interrupt you real quick and put a little, you know, Monday morning quarterback or add some cynicism here? It’s good. So what is the that these companies do generate cash, like Shopify? These aren’t like your dot coms.
Leo Schmidt
Yeah.
Nathaniel E. Baker
So Shopify, it’s not gonna go away.
Leo Schmidt
I mean, it’s gonna go away, just gonna have a tremendous amount of competition.
Nathaniel E. Baker
Sure. Okay.
Leo Schmidt
I mean, the company does okay. But there’s not. I mean, it’s not a company that is they like to call themselves a rocket ship. I mean, they’re basically trading where they were before the pandemic.
Nathaniel E. Baker
Yeah, those days are over, right? The days of these growth stocks.
Leo Schmidt
And so and it’s not, it’s going to be anything that kind of had a pandemic run up. And I get, that’s actually something maybe we should run through a little bit. Because what happened before the pandemic, we were having rising interest rates, we’re having a bit of a credit crunch. Companies were feeling a bit and then we had the pandemic and, you know, the spigots will open bite fully. So in my opinion, I mean, we this pandemic, was pretty, we hadn’t seen anything like this probably in my lifetime. Right? So they opened up the spigots not just the Federal Reserve, its fiscal spending, Trump administration and the Biden administration, and they were very creative. So they gave I think, the Federal Reserve $500 million, which they can leverage, like, I think eight to one, and go make loans. And they and the Federal Reserve did they spend money like crazy. Smart move, kept us afloat. So the problem is, we kept doing that after we came out of the pandemic, right. And so that we’ve waited way too long. So we may remember this time last year with and we had inflation starting and was all temporary, right? It’s all going to be transitory, right? And so, now that we’ve been are finally, a year later we realize is not transitory. It’s 7% to 8% stuff we haven’t seen since the early 1980s. And we were late to take away the Punchbowl. And so as the Fed takes away the Punchbowl, there’s just a tremendous amount of liquidity in the system. And part of that is because we were fighting the last war, we were fighting the great financial crisis. And so when you had banks that were in a credit crunch and busting up, you had to supply a tremendous amount of liquidity and you didn’t worry about it because people were hoarding cash. In the great financial crisis. We’ve ordered cash banks voted crack cash, individuals hoarded cash. And now we’re not when the opposite point of view The best it’s a tremendous psychology change. Banks are making loans like crazy all over the place for mortgages. People are spending money, you know, we have a complete change in psychology. So the velocity of money is running up again, if you think about the velocity of money is the demand for money. It’s how fast we trade. If you hoard money, you know, you’re demanding a lot. If you’re spending money, you want to get rid of it.
Nathaniel E. Baker
Okay, so yeah, so let’s take a take a go back to these pandemic winners here the, you know, your Pelotons your Zooms your — who are suddenly the big, big winners? And you see all you don’t see any hope for any of these, at least not for this cycle?
Leo Schmidt
I think we’re gonna have a tremendous revaluation and we change and Shopify’s growth rates going to dramatically shrink. So you know, with a valuation that’s, you know, a heading for, you know, phenomenal growth that goes on forever, ain’t happening. So that’s going to be revalued. And then you’re gonna have a revaluation because of the change of interest rates. So cash flow today is going to be worth more valuable than cash flow on the come. Just all those companies is going to be revalued for a variety of reasons. And then you’re also going to realize, you know, that, you know, there’s just lack of capital and liquidity, and it’s going to happen, all through the credit structure, especially high yield. In 2007, and eight, before the great financial crisis, we had short term interest rates at five and a quarter, I believe. Right. So that’s probably what you’re getting now for high yield bonds. Not too far away five and a half, six, I mean, think about that you having a 10 year bond with a five, you know, five, you know, it’s while it’s changed now, because interest rates, but a year ago, we were at five and a quarter, right? So now we’ve had a rethinking of credit, and you’re not as credit dries up, you’re not going to be able to refinance like you used to because money was flowing. And when you don’t have the money to flow, you’re going to have a credit crunch. And you’re going to be either not finding money, or you’re going to have rates that are through the roof.
Nathaniel E. Baker
Yeah. And to your point mortgage rates for the 30 year mortgage fixed rate just crossed 5%. Yesterday, as we record this,
Leo Schmidt
yeah. And will keep going in all likelihood, right?
Nathaniel E. Baker
Let me throw something at you here. Now, what if the Fed reverses course? And what if they decide after a couple more of these 25 basis point increments? And they run off their balance sheet or something? And the market goes against them? They say, Oh, wait, you know what, we think that we need to help out the economy here again,
Leo Schmidt
we need to accommodate the economy
Nathaniel E. Baker
Because they did that once before, right?
Leo Schmidt
Oh yeah.
Nathaniel E. Baker
I mean, in late 2018, the same fed. Powell reversed, you know, the market went against him. And he was like, oh, you know what, we don’t need to tighten anymore.
Leo Schmidt
But let’s run with that thought. So the way you’re gonna have a couple of events that have to, you’re gonna have to have a deal slowing down on the economy, and you’re gonna have to have in the Feds mind and exogenous event. Right?
Nathaniel E. Baker
okay
Leo Schmidt
An outside event, like the pandemic was something that was outside of the economy, right?
Nathaniel E. Baker
There was no exogenous event in 2018.
Leo Schmidt
Well, what are we talking about the way yes, the raising of rates were happening because the economy was beginning to cook like crazy. And we place a low inflation and low unemployment, and then the inflation rate was starting to go up. The employment rate was, you know, down around what three and a half something, I mean, record lows. And what I like to follow the use six was crossing way below 6%,. But when it goes below that we’re really what I would consider full employment. And so, you know, we started to raise rates, right, and that was starting to have a slowdown. And we were having, you know, we had a few remember, there was some jumps around in the in the overnight funding market, right? No, yeah, it might. So we were having, we’re beginning to get this slowdown and, and you know, and then we had the pandemic, and that changed everything. You know, that was an exogenous event that was so that would be something completely different, then, you know, so if we’re going to look at the Fed, saying we should slow down, this is not an economic event. This is an exogenous event. So you can say maybe it’s an oil crisis because of the Ukraine. Yeah. Right. So the Ukraine is going to create this shortage of oil, it’s going to push up the price of oil, it’s a short, we’re going to accommodate our way through that. We’re going to, you know, help the people you know, so if we do that, then there’s going to be more inflation, right? Because you already have too much money sloshing around. And that will create more inflation, which means the pain that comes later, will be even more intense. But how about we look at this, we have too much money sloshing around. And we’re going to have fiscal spending. We know we just need the money that was spent on these, you know, bills that will pass for infrastructure, it’s just getting spent. And so that again, pushing all this pressure To push up prices, goods resources, the thing about the Ukrainian oil crisis is, and this might be, again, a contrarian view. But oil is the ultimate liquid commodity. It sloshes around. So just because Russia is no longer selling it to Europe, natural gas oil, it will go to China will go to India, it’s going to go those places in the world where this will be find a market, you know, if they have to ship it out, and you know, transport food to three or four different ships, so that it doesn’t look like it’s Russian oil, it’s going to be it’s going to find a place to the market. So people who are accommodating oil, because the price of oil, they think it’s going to continue to go up. I think it’s I think we’re, you know, yes, it could go, it could go higher, but it’s not going to go higher for ever, probably a short term event, which again, is a country. And last time I was speaking to your same goal on oil, which was great. Now I actually think it’s a short. Okay, because I think everybody’s looking at Ukraine crisis is going to be prolonged, but oil just finds a home. Okay. It’s, you know, you can transfer it from one ship to another, so no longer looks like a Russian flag ship. You know, and there’s plenty of places in the world where that will happen, oil will find a home
Nathaniel E. Baker
Where does that leave oil majors and oil stocks?
Leo Schmidt
Oil stocks have kind of reflected the skepticism. I mean, they haven’t gone they they’re kind of reflecting 70 $80 barrels, which I think is, you know, probably right. So they’re not they’re not screaming buys are not screaming sells. For oil itself, which is, you know, then, you know, there there is a place in the energy complex that I think is really interesting. It’s pipelines in the United States natural gas pipelines. So those are really interesting, because natural gas in the US, we’re all going to Europe, and we need to build more. And in particular, there’s one I like, which I think we talked about last time was equitrans, which was the mountain valley pipeline. It’s been brought up because there’s, you know, yet they felt they had all their ducks in a row. And yet there’s another environmental challenge, they get the last 20 miles, we will, I’m pretty sure this company will survive the delay. But the question is now, anyway, that’s a good place to invest.
Nathaniel E. Baker
Okay, so coming back here to the Fed. So And to your point, your previous point, I guess, if inflation is 7%, the Fed can’t really lower rates into that, that would be completely insane.
Leo Schmidt
But we’ve talked about it, but think about it, we could, we could consider that. Because we’re having slowing down, we’re having, you know, we’re going to have political pressure, and they’re going to be pushing us to accommodate this higher oil price of oil price is going to be pretty squiggly, and it’s going to be high. And then we’re going to have all the US producers, you know, coming online, all the alternative sources that the shale plays are gonna come on. Well, that’s gonna, you know, oil will stay high, but it’s not going to walk through the you know, it’s not going to go to 200.
Nathaniel E. Baker
Yeah, yeah. Anyway, as far as like economic pressures, though, and if there is an economic slowdown after after the Fed does a couple of rate hikes. You don’t think it’s feasible that they’ll reverse course?
Leo Schmidt
Oh, I think it’s possible. I just don’t think so. That’s the big question. Yeah. So what does the Fed how does the Fed take a look at this? They look at this historically, are they still fight the last war? Are they’re still fighting the great financial crisis and trying to accommodate every little hiccup in the economy with with looseness in the monetary policy? And that was going to add to the inflationary pressure. And so that’s the question how does the Fed think about the see the age why can remember inflation? And that many people do anymore? Yeah. Right. So that’s a whole thing. It’s it’s a psychology and that psychology. You know, in some ways we have what was happening in the late 60s We have in 70s, we haven’t we have a war, which is Ukraine. It’s not the US war, but it’s war in the in the world, great superpower. And we have a constraint on oil and gas. It feels very similar. And, you know, we have a gold gold economy, which was you know, what was happening in the late 60s and the nifty 50 or during the gold gold thing. And you know, when I was uniform, so we now have a unicorn land where economics doesn’t really matter, so that it will matter. And the question is, how and when and how do we kind of find our way through it? What we’re seeing now is the beginning of, you know, really pretty nasty inflation seven 8% is pretty nasty. And we have one we always set, you know, the 10 year treasuries to 50 Yeah, I mean, 10 years in your fight, you know, 5% below the inflation rate. I mean, you’re losing money. You know, On a real basis, it’s it’s hard to conceive. So you have to think that inflation is going to drop like a rock to get there. And to get the drop like a rock you got to have, you know, given the amount of money that’s been pumped into the economy, to drain that is a different thing. And so what we have, in my opinion, is, everybody’s thinking about the last war. It’s like, you know, France making the Maginot Line, we’re going to defend ourselves against Germany, German just kind of doesn’t end around. We’re fighting a war that is no longer being fought. And that’s what with how I think about inflation. And so that to me is my as my biggest thesis, which I think we talked about earlier, is the whole thing is you need cash flow today is going to be worth more than cash flow tomorrow, right? Cash flow that can withstand credit crunches, and the economy, economy slowing down.
Nathaniel E. Baker
And there are some companies that you think can do that, right. Yep. Okay. Let’s talk let’s come back and talk about that. But let me first take a short break here, have our sponsors say their thing. If you are a premium subscriber, you will not get the break. So don’t touch the dial. We’ll be right back. And if you want to become a premium subscriber, visit the website contrarianpod.substack.com or contrarian.supercast.com. And sign up.
Nathaniel E. Baker
Welcome back. Leo Schmidt River Eddy Capital, we’re talking about these companies that can withstand this credit crunch. So let’s hear it what are your ideas here?
Leo Schmidt
So we talked about a couple individual things, and let me touch Let me save the business development corps for point two
Nathaniel E. Baker
Sure
Leo Schmidt
But point one is what I like medical companies that are spun out of some of the big like, Merck and Pfizer have to spin outs that are just throw single digit P E, they generate cash, they’re at, you know, 10%, free cash flow yield or 7789 10%, free cash flow yield. And they have a tremendous amount of debt. So yes, and they they’re unloved because they’re not going to grow. But that cashflow strong, steady, and you now have companies that you know, that were orphan companies, part of a bigger company. So they were, you know, the cashflow cow for Pfizer and the cashflow cow for Merck and another one’s gonna be spun out of GlaxoSmithKline. And these all have single digit P E’s in a world of you know, 1819. Market PE, and they have cashflow yields are through the roof. Yes, they have a lot of debt. And so they’re gonna pay down the debt, they’re gonna make acquisitions. And they’re going to have a management team that’s now incented to grow their companies and make some smart investments, smart acquisitions, smart r&d development, where before all that money was just pushed up to the parent company.
Nathaniel E. Baker
Okay, what are the names?
Leo Schmidt
So, the Viatris, VTRS, which is the spin out of Pfizer, it was merged with myelin Labs, which I actually kind of like the generic manufacturing, it’s the Pfizer Upjohn company, one of the things that’s going to happen is all the myelin products are going to go through the Upjohn international distribution. So that should be a little growth. It’s been clobbered, because they sold off their biotech unit. And that was the growth machine. So their growth now is being rethought. It’s a phenomenal idea. It’s, you know, the cash flow is like it’s over 10% free cash flow. Okay, another one is Organon it’s a spin out out of Merck, OGN, and Organa on is, you know, they have a woman’s health business, that’s pretty nice. Again, they have a tremendous amount of over the counter generic drugs, which I particularly love. Because these are cashflow machines, it’s branded drugs, you know, it’s stuff that you use over and over again, and they have lots of them. So it’s a steady cash flow, yes, it may go down in a recession, because you don’t buy that extra of whatever, you know, for your ointment for your finger. But you know, you need this stuff. And it is again, a cash flow machine, and they have a woman’s health business that they’re going to really try to grow. So this may not be a rocket ship, certainly, you know, but it will be something that has high free cash flow, and you’re gonna see just increasing cash flow as they pay down debt. It’s a real simple story. They they have the ability to improve the credit metrics, just based on their own cash flow. And that cash flow is really tremendous value in a world that we live in today, where cash flow today is is worth much more than the cash flow on the future. I mean, it’s always a good idea, but it’s going to become particularly important. There’s another one that’s going to be spun out of GlaxoSmithKline in the second quarter of this year might fall over to the third quarter, you can buy GlaxoSmithKline now it’s an interesting idea, but you could wait till till the spin out. And then what happens is spin out portfolio managers has two pieces of paper. I own Glaxo because I like to whatever their cancer drugs, but I have this other piece of paper that’s this slow glowing over the counter. You know, I didn’t really like it that much. So, but typically what happens is the portfolio manager dumps the ugly duckling. And that ugly duckling gets really, really cheap on the spin out, and then you, you buy it. And you know, it used to be in the 90s. It was like shooting fish in the barrel, I bought tons of these and they were every time the ugly duckling goes down, you buy it just gets a you get a bounce. But typically you have management, that’s folly incentive to grow the company, instead of just pushing cash to the parent. We used to call them orphans, we call them orphans, you know, the orphan company. And
Nathaniel E. Baker
so we don’t know what’s what the spin is going to be what’s going to be called yet?
Leo Schmidt
I don’t know what it’s going to be called yet but still in the second quarter, which is, I think, a phenomenal idea. I mean, when I just I think it was gonna pass put into that the vaccine business.
Nathaniel E. Baker
Yeah.
Leo Schmidt
Which is a really interesting business, because it’s difficult to do you have a lot of FDA issues, because you’re injecting directly and so the manufacturing process has to be exceptionally pure. It’s difficult to do. And, you know, that’s it’s a it’s a nice little business. Viatris has the Mylan business, which also has injectables, right? So that’s No, there’s a couple of these companies like, like Viatris has an epi pen issue because epi pens from Mylan and it’s they have legal overhangs. All that stuff is noise. Take a look at the cash flow and take a look at how steady that is in the multiple sources that it’s coming from. It’s not that one drug, it’s many, many, many small drugs. I think the GlaxoSmithKline company has 1900 $1 million rands that they generate, I mean, these all companies, it’s just they have tremendous cashflow. Anyway.
Nathaniel E. Baker
Those high levels of debt are not a concern here, especially with interest rates rising?
Leo Schmidt
Viatris is going to divest, I think roughly $6 billion of companies, they have $24 billion of debt, they’re going to divest. And they’re going to, you know, roughly $6 billion. So we don’t know which ones yet. So that’s always a concern, we don’t know. But you know, that’ll knock it down to 80. And, and you have $6 billion of EBITDA, 6.5. So that’s, you know, that’s going to be a three times multiple on a steady cash flow. So it’s borderline investment grade. And it’s a well known as the management was known would definitely be investment grade, and they’re gonna knock it down to two and a half, and that will take another, you know, year, two years to get to that spot. So in the meantime, they’re going to pay dividends and buy back stock. And, you know, once you get to that, you know, two and a half times leverage, you got all the cash.
Nathaniel E. Baker
Yeah, yeah, no question. All right, now, let’s talk about these business development companies. BDCs
Leo Schmidt
BDC. So what’s really nice about business development companies are kind of like you kind of wandering into the teeth of the Beast why? Because you’re looking at companies that have leverage and are making love the making leveraged loans to high yield you know, entities. So, you know, typically when you have a P E Company, making an acquisition, they need first lien loans, so then they can issue they can buy the company with this, first lien loans, they put in a drop of equity, they get a first lien loan, they issue high yield debt bonds, you know, 5, 10 years out, and then, you know, you they pay off some of that first lien loan. And, of course, you know, that bank is so it’s a place banks used to play in banks used to do this. At the end of the great financial crisis, banks were kind of prohibited. So there’s all these companies that have gone up for business development corpse they are, you know, making this CLOs all these credit loans, you know, collateralized loan obligations, which then get you know, packaged off in securitized product and, you know, that is a good bit of, you know, the same craziness that led to the great financial crisis, all these mortgage products that all got bundled up and people you know, took a look at
Nathaniel E. Baker
Doesn’t sound particularly safe Leo, I gotta tell ya —
Leo Schmidt
It’s not! But the question is, so when you find the right manager, you have the first lien loan. So first lien loan means you’re standing in line, you’re the number one person so even if the company goes bankrupt, You still get you own the whole company in essence, you, the company becomes you. So you capture the whole value of the company. So the question is, are you making a good loan to a good? So yes, the the financial leverage might be too much. But you don’t really care if you’re standing first in line.
Nathaniel E. Baker
Yeah. So there are BDCs that make these firstly loans or whatever.
Leo Schmidt
GBTC if I looked it up, not too long ago, a couple weeks ago, they have like 90% of their portfolio and firstly, loans. And so you have a very low risk plus the very good managers they’ve been doing it since 1994. Take a look. I think they have like a seven or 8% dividend.
Nathaniel E. Baker
Right? Yeah. current prices. It’s actually almost 8% Yeah. And so Okay. And now there’s no chance because there’s a lot of problems as you know, if you invest in like say a hedge fund, and it has a good strategy sometimes the manager starts to do other strategies but there’s and with this obviously it’s all loans but there’s no chance of the deviate from this
Leo Schmidt
they’ve been doing this since you know, for 30 40 years
Nathaniel E. Baker
and all of his first lien loans and never gone up the risk spectrum?
Leo Schmidt
All of it first lien loans. There’s others who do not quite do the same level of first lien loans. But if you look for areas, capital does a pretty decent job, right? expensive, more expensive. There are certainly managers that have higher yields. But they’re taking more risk. I like Gollum, because I take the believer that not at 8%. It’s sort of it’s like a REIT. So BDCs are forced by law to dividend out like 90% of whatever they take in. So we, but it’s not a weed. It’s a that’s making or company that makes loans to other companies.
Nathaniel E. Baker
Interesting. And Golub, they have not recaptured their pre pandemic highs yet. If I look at the chart here, it was up to February of 2020. It was right around 1750. And it hasn’t approached 16. Briefly, barely, maybe. But right now it’s around 15. So, yes, so quite a big discount to the pre pandemic level.
Leo Schmidt
Yeah, the audit is a there’s a group of them out there.
Nathaniel E. Baker
You like this one best GBD
Leo Schmidt
I like this one my favorite because they have they have the highest percentage of first lien loan, which means when the credit crunch comes, which we’ve been talking about, these guys stand in line. So you actually in some ways, it’s vulture investing at its best, you buy a company, you’re getting a loan for whatever. And then you know, if they if if you if your equity sponsor goes bust, you get the whole company. Yeah. Which, you know, maybe a bit of a strange way to buy a company, but it’s a clever way. And then that cash flow comes to you. So the question is, have you bought or have you lent to good businesses, and these guys are pretty smart managers.
Nathaniel E. Baker
And this would then be passed on even to the public shareholders, they would get the Yeah. Okay, so this doesn’t look like this company. How long have they been public?2011. Okay. I thought that might have been around during that crisis.
Leo Schmidt
The managers have been doing this kind of loan
Nathaniel E. Baker
got it. just not as a public company.
Leo Schmidt
They’ve been doing it for you had to be, you know, an accredited investor, whatever. Yeah, yeah.
Nathaniel E. Baker
And you’re not worried at all about private equity. The fact that I mean, they would be kind of a risky thing here.
Leo Schmidt
private equity is crazy. But this is kind of, in some ways, taking advantage of the private equity, craziness, and you’re getting to be paid. Well, because private equity is somebody to put up the money. Sure. interest. So in some ways, you it’s it’s taken advantage of and then these guys, because they’re good that night, so they have avoided most retail, they were typically do loans for medical practices, you know, again, picking and choosing where you make a loan and investment. Banks believe they have about 250 separate, you know, investments. And that’s the kind of thing that, you know, gives you roughly a well diversified portfolio that generates cash. Yes, they have leverage. But you know, the ability to serve as the leverage is the question. It’s not the amount of leverage it’s oil is the 100 average, but its ability to service, the stability, the cash flow. And that can you do have a Christian to cover that and these guys have been good, they’ve done it through a number of crisis’s. And so, that is a that is a interesting place for me to generate income and cash flow and you know, have, you know, relatively low risk although when you think about it, it sounds terribly risky.
Nathaniel E. Baker
Yeah, but like you said, if it’s their first lien loans and the farm apart, I mean, that sounds like something like that with a cash flows. I mean, it sounds like healthcare in general may not be a bad idea. Health care can be a really great place, especially now because you know, these staples, right things that people are gonna have to buy.
Leo Schmidt
Yeah. And ironically, you know, so and these are kind of unland on loved healthcare because the low clouds, right, low growth is better than nothing for sure. Yes. Yeah. And cashflow today is worth a lot more than cashflow tomorrow. Right. These don’t have the pattern cliffs that a lot of companies have. Right, right. Right. We have to keep reinventing to the next No wonder drug. All that is takes a lot of the risk off the table and investors have been paying for growth at almost any price right now. And that that will change in my opinion.
Nathaniel E. Baker
Yep. Very interesting. All right. Leo. Schmidt. Thank you so much for joining me contrarian investor podcast today. In closing, maybe you can tell people about how they can find out more about you. I know you have a Twitter that’s been dormant by the way.
Leo Schmidt
Yes, I do. I don’t really use Twitter, LinkedIn a little bit. You know, I have okay, I in poop. And I’m in the semi retirement mode. So I don’t necessarily need to find investors, although, you know, if you really want to dig me or ping me on LinkedIn, and I’ll get back to you.
Nathaniel E. Baker
Okay, fair enough. Cool. And you’re and you’re still upstate? Was it a carefree?
Leo Schmidt
Yeah. So I have I have my place up to date. I’m looking at the Delaware River. And we’ve been going back and forth to New York. I have a loft in midtown Manhattan. And nice to come back to finally they have restaurants in the Little Theater. Yeah,
Nathaniel E. Baker
I’ve noticed that as well. Yeah, things are slowly coming back. Yeah.
Leo Schmidt
That’s a whole nother question about what’s happening with the pandemic, but
Nathaniel E. Baker
Right. Right. We’ve had several, you know, false starts before there. But yeah, but it does look like New York is
Leo Schmidt
New York is crazy. Yeah. I hate to say it that way. But you know, we’ll having people not understand immunology, or viruses, creating public policy. So that’s, that’s a sad state of affairs. Right? That’s actually I don’t know how much time we have. But that’s an interesting theme to push on China with China, China’s doing a lockdown. And in that lockdown, they are going to destroy any chance of having this, you know, if you have a supply chain in China, you must be looking like crazy to find an alternative source. So companies that help do that will be interesting, because a number of them that I own, on the DMS electronic manufacturing service companies like Jay Bill Celestica, sent Mina, they’ve all done well. They may get hit, but I own them now. It’s probably fair. But um, when they when China is going to create a tremendous problems, everybody’s supply chains, these guys are nimble, they’re going to be able to relocate and resource that supply chain and put it into other locations. And that’s going to be really important because China is I mean, they’re doing as much I mean, the idea that you can lock down and keep out the virus is insanity. I mean, everybody’s gonna be exposed and running around. So it’s gonna be like a common cold, right? So it’s trying to lock out the common cold. I mean,
Nathaniel E. Baker
let’s not go there. But the point is, you have these companies and what are these companies? Do they manufacture in their room?
Leo Schmidt
Yeah. So they manufacture. They are contract manufacturing. Apple uses Foxconn. I’m sure a Chinese company, but I would you know, these other direct competitors. But in basically they have four sworn cell phones, most of them and they do much more high end kind of manufacturing. So Celestica does all sorts of things for the Defense Department. They do servers, they might be doing servers. What
Nathaniel E. Baker
are the tickers again?
Leo Schmidt
CLS. Celestica. JBL. And San Mina, which is SANM.
Nathaniel E. Baker
Got it? Very cool.
Leo Schmidt
Those are all great things for the for the China supply chain, because that’s going to be that’s the big issue with what how fast do people move out of China
Nathaniel E. Baker
Yeah, I saw an interesting piece the other day, actually yesterday about Mexico being a big winner of the of this whole and it’s not just because they’re people going to manufacture there, but as they as companies move to manufacture more in the US, they need to acquire stuff from Mexico. And so they’ll or they’ll do like the early stage like you know, labor intensive manufacturing, and then the more technical technological stuff will be done in the US in Texas or wherever.
Leo Schmidt
Yep, yep. A couple places Eastern Europe, even with Ukraine will become an important place. And India and Indonesia will also be
Nathaniel E. Baker
interesting. Interesting. Yeah, Indonesia was the subject of a podcast about a month or two ago. By the way, from a different perspective, that was I think, pre invasion. But anyway, that’s where we are today. Great stuff. Leo, you’ve given us a whole bunch of really cool ideas to talk about. And we’d like to come back and revisit these. Yeah, as you you did just last week.
Leo Schmidt
Do that again, it’s like how dumb was I? But I wasn’t
Nathaniel E. Baker
no, no, you’re You were pretty good. And your stocks all made money. With one exception.
Leo Schmidt
We forgot. Yeah, we forgotthat I was talking about Nokia and Ericsson. Guys also, on the list Ericsson in particular, because they got clobbered lately, and those are really good place because Huawei is no longer going to be eating in Europe.
Nathaniel E. Baker
Interesting.
Leo Schmidt
Samsung does, but it’s a weak player. But Ericsson and Nokia are the two places for 5g.
Nathaniel E. Baker
Right, very cool. All right. Awesome. Great stuff. Well, thank you so much for coming on the podcast. Leo. Really appreciate your time. And thank you all for listening. And we look forward to speaking to you again next time.