Last updated on February 15, 2022
Welcome to the Contrarian Investor Podcast, we give voice to those who challenge a prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. Guests were not compensated for the appearance, nor did they supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed. Listeners are urged to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E. Baker.
Nathaniel E. Baker 2:03
Siddharth Singhai of Ironhold Capital hedge fund here in New York. Thank you so much for joining the Contrarian Investor Podcast today. You’re here because you have a some views that are that are quite contrary, affecting a couple of different sectors of the market and of the economy. And these are two sectors here, auto manufacturing, and semiconductors that are cyclical. And if you’ve been paying any attention at all, to the economy, as we all know, the COVID crisis has kind of exacerbated and maybe accelerated the end of the business cycle, some would say to where a recession is effectively now, just just about a priced in, and the question very much becomes how we can get to grow again, In the future, and how long it will take before we attain any levels of growth that would positively affect these cyclical industries. Yeah. So from that perspective, it’s quite contrary. And I’m quite happy to have you on and talk a little bit about this. So let’s maybe start there and tell me why you like these particular industries.
Siddharth Singhai 3:20
Yeah, just to begin with. Thank you for having me on the show. It’s a wonderful podcast. I’ve watched a few episodes. And it’s my pleasure to be here. Thanks for inviting me. So if you look at the macro situation right now, with COVID. I don’t think it’s actually priced in yet. Right. We had a drop of 30% drop roughly, and it’s come right back up. When you look at the economy, the macroeconomics of the economy, just the unemployment rate, and itself is the greatest we’ve had since the Great Depression. So it is not as if the market has surprised the recession in I think it has price recovery in but that is Recovery hasn’t happened yet. So if you look at just the number of people I meet who have been laid off, or have had to take Baker, it’s just astonishing. And I think the unemployment numbers are like 15 or 16%. And that’s understating it because of the way they counted. So I don’t think that this is that we are. And this is obviously, with a grain of salt, because any macroeconomic predictions are just just predictions, really, there’s no way in which we can describe either the timing or the magnitude of these things. That being said, if I were to look at the economy right now, I would think that we would be down 50 60% but we are not. It’s almost as if the market brushed it off. Nothing has happened. And I think that could be dangerous. For a lot of investors who think that it’s over. And we saw that with Mr. Buffett, he did not buy into the debt. And he he’s seen all those numbers that being handed out to him on a monthly or quarterly basis by those 900 businesses that he has, and story doesn’t look so good. And I think investors who I mean, some investors got lucky. I mean, I myself personally did really well during the correction, but it I would attribute that to sheer luck, rather than any sort of brilliant foresight.
Nathaniel E. Baker 5:41
Okay, so all of which makes it even more contrarian to be bullish on something that is so cyclical, right. Yeah. So then why, what is the case for these sectors that you like?
Siddharth Singhai 5:56
Well, if we think about cyclicality is just naturally a part of almost all businesses. Some businesses are more immune to it than others, like Google or Facebook, the more immune to it. But we always have these credit cycles, booms and bust cycles in the economy. So that’s cyclical, semiconductor, especially a basic level, they have these capital expenditure cycles, where firms like Texas Instruments, AMD, Intel, and Micron, they do a bunch of capital expenditures in anticipation of becoming demand. And I think we are there. Obviously the magnitude of how long it will take for them to really recover. So it’s uncertain. But typically the cycles have been every three, four years in the past, so there’s gonna be a recovery eventually and I think semiconductor equipment suppliers, right? They have converted positioning that enables them to benefit from that the traditional semiconductor companies, their earnings have been slow with the cycle, right a lot. For suppliers. It’s not they’re not that affected because they have a competitive advantage that because it’s a commodity semiconductors and memory is all commoditized there’s fluctuations that suppliers don’t. So given the macro. I mean, the only time value investors really benefit is when we get something for less than what it’s worth and the time we had that in the past few months, and we might have it in the future as well. And that’s where you have to jump into great businesses that temporarily are failing Right. And so I think that’s where the convenience ism comes in. Yes, long term prospects of the business are fantastic, I would say in a few cases, but we will have to come in at a valuation that also makes sense. So this macroeconomic environment will allow us to do that.
Nathaniel E. Baker 8:21
Fair enough. So, so basically, you say it’s a good time to be building positions in these companies.
Siddharth Singhai 8:29
Well, three months ago, or even one and a half away was a fantastic time.
Nathaniel E. Baker 8:35
Siddharth Singhai 8:37
Right now, I would be a little skeptical. I mean, yes, I mean, it’s already pretty cheap. Pretty much all the semiconductor industry is pretty cheap right now. But then again, it’s tricky because we don’t know when the market will turn on the macro. But I would say within the next year or so, we might see some opportunities. Because eventually the economy and the market will have to reconcile with each other. And we don’t know when that’s gonna happen. But I would personally hold on to more cash right now.
Nathaniel E. Baker 9:22
Right now. Okay. And what about the auto manufacturers? what’s what’s the case there? Is it the same situation? You’d say?
Siddharth Singhai 9:30
It is. Auto hasn’t been growing at all over the last almost a decade, I would say but especially the last three or four years —
Nathaniel E. Baker 9:41
With one exception Tesla, but okay, go on.
Siddharth Singhai 9:43
yet. That’s a wonderful exception. But the industry fall look at the overall demand for the industry. It’s 2% 3% overall, over the last three or four years, it’s been a negative 2 or 3%. Which is sort of silly when you look at especially in the US, we have, as you mentioned Tesla. We are transitioning to electric gas eventually. So there’s going to be so every six to seven years people buy another car. And that’s typically the cycle you look at on aggregate every six years, you do away with the previous models to last generation of cars, you move on to the next one. whenever that happens, this demand that is not satisfied by the suppliers. And in this case, we will have that we will have a bunch of electric car manufacturers trying to satisfy the demand by jumping into the market. And I think that in itself fully do handsome revenue slow night won’t be so extraordinary, I think, but depending on if it’s just an IC engine model, I would not expect it to do much better than three or 4%.
Nathaniel E. Baker 11:13
Siddharth Singhai 11:14
Well, if it’s electric gas, yeah, this very little penetration, we look at the overall car market for electric cars. So there’s a considerable room to grow.
Nathaniel E. Baker 11:29
Would that also help the semiconductor industry? Because if these cars are going to have, they’re all going to have if they they already do have chips and such. The electrical ones have I think even more, so that would be something else. Some other another tailwind for that industry, right.
Siddharth Singhai 11:46
Yeah. That is actually one of the bigger tailwinds. One was obviously consumer devices seanad phones and tablets, right and desktop PCs. Second, big wave of demand is going to come from auto manufacturers. And that’s why I’m bullish on semiconductors in the long run. Right? Because you look at that industry. Just everything will have a processor in it, eventually. Everything you just watch us watch us have processes now that are far more advanced compared to a decade ago. They can process audio video, and they can process graphics and they can process dimensions and navigation. So I think as far as demand is concerned for semiconductors, I think they have a long runway of growth. And yes, auto is a big part of that
Nathaniel E. Baker 12:51
I should have mentioned that you have some specific stock picks here and both of these two sectors that we’re going to get to in a bit. But let’s, let’s first take a short break and then we’ll come back and I want to ask you some other questions about how you got to where you are. So let’s do that right?
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Nathaniel E. Baker 13:52
Okay we are back Siddharth Singhai of ironhold capital. This is the segment of the show where Our guest tells us a little bit more about himself or herself, how they got to this stage of their career. So yeah, why don’t you tell us a little bit about your background?
Siddharth Singhai 14:12
Yep. So I did my undergrad in mechanical engineering from India. And after that, I work for about two years as a lead equity research analyst for a financial advisory firm in India. And after that, I came to New York to pursue Master’s in global finance from Fordham University. And that’s where I met my business partner, Paul, and we were both interested in our own venture entrepreneurial ventures. And for us, the logical progression was starting our own investment fund. And so that’s what we are doing and we got it on hole capital. So we typically have Two portfolios. One is prime real estate portfolio where we have two or three big commercial real estate opportunities a year that we look into. And the second one is the equity portfolio, which is sort of where we differentiate ourselves. So we call it global deep value, okay. And we invest both in us and India. And we typically take hundred 50 to 300 stocks in both of those countries combined. And these are high quality businesses employ a little or no leverage that we’re buying for 60 to 70 cents on the dollar. And the unique thing about GD we is that in India, you only have about less than 500, mutual funds and hedge funds combined, but you have 5000 public list of securities in the US you have 3700 listed securities roughly, and more than 10,000 mutual funds and hedge funds combined. So for a value investor, the less followed us stock, the greater the probability that it will be cheaper on the value. And so India sort of resembles us off to 60s 70s. Before we had Bloomberg, we had news all the time on TV, financial news, and you could trade in and out of positions quickly. To call up your broker you had to he would give you the information for the stock, it would be sent to your house when we had that, it allowed people like Mr. Buffett to just go through moody manuals and find stocks selling the lesson. And we can sort of find those opportunities in India right now. Not so much in the US because of the just number of eyes on those particular.
Nathaniel E. Baker 17:12
Yeah, of course this begs the question, if you have any ideas in India that you’re open to discussing too?
Siddharth Singhai 17:18
Sure. In India, I think the biggest I was in the most profitable industry would be asset management. Okay, the future just looking at the regulations, there’s a huge barrier to entry. They get regulated by SEBI, which is India’s version of SEC. And the way strict, you have to have a certain a un, you have to have, you have to comply with a whole bunch of regulations. And it’s a high barrier to entry. If you want to get into that mutual fund industry in India and that sort of natural resource In an oligopoly type structure, few firms, so we’re seeing many customers. And in addition to that, when we look at just the number of people who actually invest in the stock market in India, less than 6% of India’s population actually invest in the stock market, compared to, I think, almost 50% in the US. So, that will change, because India is also the fastest growing economy, when, typically the GDP of a country doubles, the disposable incomes grow by 10 times it’s an exponential increase. And I think over the next two decades, we will see a lot of money going to going into asset management and, you know, financial advisory services that we don’t see right now. So, just in terms of the runway for growth for asset management in India, it’s wonderful. And so that’s one industry. Other one I would say is manufacturing and more or less especially energy, energy production. And that, I mean, the big bottleneck that India had compared to China was the power grids one does develop. And so if you were to start your own business, it was manufacturing heavy, you won’t be able to get electricity, the boss supply load factors were not up to the mark. And it just wasn’t available 24 hours a day and in a lot of places still isn’t. So, I would look into that sector in India, because to now it was monopolized. It was just one One company was supplying 90% of the bar to Coal India. It was a monopoly now it’s no longer a monopoly and people can actually they had captive minds, that other people will now come in and no stop production there. So, that sort of allows for better competition and better pricing. And obviously, better technology, US companies will bring to India to the I think the two I mean, broadly speaking, that the most attractive industries that I see in India,
Nathaniel E. Baker 20:41
Very interesting is now you think may be a good time to invest in India. I mean, it’s a little bit less connected to the global kind of supply chains than China is, you know, the economy. Obviously, no more than about less than I do. But, but the unlike China’s economy, which is very much has been historically geared towards manufacturing as a factory to the world, India has been a lot more self contained, and also as an importer of energy, which might be a good time now with energy prices a little cheaper. So is this a good time to be investing in India even?
Siddharth Singhai 21:18
It’s a wonderful time to be investing in India because of a few things. One, the markets are really inefficient. penetration of financial services isn’t as high. So you got a few eyes looking at nominal stocks. Second is the regulations. So I think that’s the accounting standards in India. At least in the mid cap, and above the mid to large cap are pretty, in my view, exceptional. They’re almost on par with what we have in the US. So you get great accounting. You also get financial information quickly. And you also have a market that is inefficient after that. India’s growing at 6% 7% GDP growth, you add to that inflation that’s almost 12 13%. After dividend you have one and a half 2%. The Indian market will grow at 15 16% and has historically. So I think right now, especially if you are a value based investor, or even if you’re not even if you’re a growth investor, I think it’s a great way to get returns. Especially when we look at the US. We look at I think we’re looking at 8%, seven to 8%. Over the next decade, two decades, right. Over the next decade, especially, I would not expect higher returns at all, but terrific returns over the past decade. But I think anytime the market grows much faster than the GDP it then eventually has to the both of those things have to be in equilibrium. So slow down, and we’ll have to catch up.
Nathaniel E. Baker 23:10
It’s interesting. I’ve been to India actually and partly to cover in an attempt to a cover to cover hedge funds there. And as you know, there’s not many there and the ones that are there are very small, but there are many that are offshore that trade India, in Mauritius, of all places and in Singapore also, there are a lot of them. Is that some and it is partly because of the very regulated Asset Management industry.
Siddharth Singhai 23:37
Yeah. You Nailed it.
Nathaniel E. Baker 23:38
Yeah. Is that changing at all? You think? Or is that still just Is it still just very high barrier to entry?
Siddharth Singhai 23:45
Yeah, I mean, just to give you an example, we don’t have, I mean, the name we have for hash ones in India is PMS right. And if I were to start a PMS would need a net worth of $700,000 need to pay a fee of around converted to USD it would be in excess of $15,000 every three years. No, that’s the application fee and then you have to pay another fee every two years, two years, keep your registered renew registration and just and then you your minimum investment in the fund is I think 50 lakh rupees which would be around 70,000 US dollars now for for a population with, you know much lower per capita GDP wealth. I think that combination of those things, it just makes it very difficult for anyone to get started with an industry see huge barrier to entry. Yeah. which is unfortunate because it’s sort of also excludes people like me who do have, who do want to do it, but just can’t do it. So essentially, you have to practically be a millionaire to actually start a PMS.
Nathaniel E. Baker 25:15
Siddharth Singhai 25:16
And that’s why a lot of people go to Singapore, Mauritius, if one to one wants to break into the industry, you would have to satisfy the capital requirements. The AUM requirements and those are sort of hefty especially if you are looking to start your own mutual fund. You already have to be established. So I think fidelity. Just the top three or four big mutual funds would be able to do it. They aren’t there yet. They’re on there. Because the other that’s why it’s an interesting industry. We already have someone like HDFC MC which one is the premier one ICICI is one So they already have achieve economies of scale. The fee. net of everything I think is like 0.9% management fee. I as a new player coming in. I don’t have that benefit of scale, they can just slow it down. Obviously, it’s regulated, the fee is regulated. You can’t keep cutting it. But it still is a sizeable barrier to entry. But that is also subject to change. I mean, deregulated. So it’s sort of a natural oligopoly within the mutual funds.
Nathaniel E. Baker 26:38
Mm hmm. But then those could make for interesting. I mean, those two companies, which I think until recently were, they had adrs, but in the US in the HDFC. And they may still, I can’t remember.
Siddharth Singhai 26:50
Yeah, I don’t think the Asset Management Division had it.
Nathaniel E. Baker 26:54
Right. Just the bank right
Siddharth Singhai 26:55
bank. Yeah, right. Okay. Yeah.
Nathaniel E. Baker 26:57
Okay, cool. Well, that was that was an interesting segue. But let’s get back to When we were talking about at the outset these companies Yeah, so let’s have it then what are what are the companies that you that you like, here now?
Siddharth Singhai 27:09
I think for semiconductors that would be pretty much all of these suppliers so LAM Research, Tokyo electron, ASML Holdings, Applied Materials. I personally like LAM Research the best, okay? Mainly because they have. So their moat really is that they’ve been doing it a long time diseconomies of learning the manufacturing process of those equipment for semiconductors very complicated, just the, the air has to be so pure that you can’t even breathe into it. It has to be like I think 1000 times more sterila than an operation table and then it’s all in all these machines operate on radio Tiny measurements, nanometers. So just the barrier to entry based on that is pretty high, then they also have switching costs. So if I have to build out, if I’m AMD, if I’m Intel, and I’m getting my equipment from them, it’s not like they’ll send you the machine, they’ll have to come in there, install it, make sure the temperature and the air and everything is correct. Otherwise, it just interferes with the production process. So it’s the way integrated way of working with their customers. So it brings up the switching costs, be hard for them to go to some other supplier that hasn’t made its name yet. The other great thing is economies of scale. If you look at LAM Research, they need maybe three to $400 million a year. They have to invest back into the business, capital expenditure working capital. And they make like $3 billion on that investment, look at the incremental return invested capital. It’s an excess of 1,000%. For the average firm, it’s 10%. That to be is in addition to just the long runway for growth they have it just makes them a solid candidate, I would say for compounding your money. And also, in my estimation, are trading at 30 to 40% discount right now. Yeah, so it’s, it would be similar to buying Google 30% of a discount. And so I think it’s insane valuation.
Nathaniel E. Baker 29:58
Very interesting. Yeah. tickers, LRCX and you say that it’s 30% discount is trading near its all time high. I think we’ll get around $300 and some, almost three. Yeah. $327 as we speak here on Thursday, July 9, that is fascinating. Yeah, that’s it. There’s a dividend there, which is I think, pretty unusual for for for a stock like this, right? Yeah, pretty sizable, actually. Well, 1.3% at current prices, but yeah, okay. That’s that’s an interesting, that’s very interesting. Why is it that they have such a monopoly I guess, on on these on their suppliers, or on their clients, their customers?
Siddharth Singhai 30:48
It’s all of those things combined. So semiconductors is you have incrementally. You have incremental improvements in technology so they get faster every year. They get more energy efficient every year. So the Moore’s Law used to work until I think way recently when we moved to five nanometre where it sort of stopped working, so you have to make it. If I’m the competitor, for lamb, I’ll have to make it cheaper and not have to make it better than them. Which, if you look at the economies of scale, just the fixed costs for lamb are tiny, compared to just the revenue, they have $400 million of fixed costs, and they generate billions of dollars of revenue on allows them to do a really cheaply don’t really fall down to the cost curve. combined to that, the switching costs, but just the way you have to produce this equipment in a very, very complicated way beyond And you have to work closely with the customers. I think those few things put together put them in a really strong competitive position.
Nathaniel E. Baker 32:14
Cool. All right. What about the other one? The automotive front?
Siddharth Singhai 32:18
Yep. So Lear Corporation. They are automotive seat supplier, and they supply to practically all major OEMs. The great thing about a it’s not to me as good as land, but it’s still trading at a huge discount. We look at the earnings field. I think they make around seven to $800 million normalized and the trading for $6 billion dollars. That’s almost a 15% yield 13 to 15% yield and so, if you look at the market, which is discounting it at 10% the trading at around almost 50% discount. So there’s 100% upside. And the yield is really strong the other rating maglia is that there again, an oligopoly. fullier there’s only one real competitor and that’s Magna International. Apart from that, I mean, even if you compare the margins, Leah has better operating margins, net margins, then Magna, far better downloads of capital than Magna. And even for Lear, the return invested capital is in excess of 50%. and has been for a long time ever since they came out of the restructuring after the Great Recession. So yes, it’s not a great I mean, they also have a When in terms of they have electrical division that supplies electrical components for automotives, so only about 25% right now, but that has some tailwind to it. Yes, the core seed business is not going to grow very rapidly, just going about three or 4%. But just just how cheap it is compared to how high quality that businesses give me it’s a great investment.
Nathaniel E. Baker 34:31
Yeah. And and there the entry point may be a little bit more advantageous then with that then with LAM, it’s trading around 107.5, whatever it is, but I’m sorry 102. As we record this, which is well down from its highs, that set was up near 140, I guess earlier in the year or late night. Last year maybe. So yeah, so it’s not as low as it was in March. But then what is right what is right? So yeah, it’s very interesting. Okay. And you figure that electric or gas or whatever. self driving, you’re still gonna need seats in automobiles one way or another. So
Siddharth Singhai 35:19
yeah, that is actually, yep
Nathaniel E. Baker 35:23
There’s probably some some stickiness there one would think, hmm, very cool. All right, Siddharth Singhai, thank you so much for joining the podcast and in closing, how can our listeners find out more about you are not active very much on the social media. Are you? I know you’re on LinkedIn.
Siddharth Singhai 35:43
Yes, um, we are active. We actually have a podcast of our own calling business and investing. Okay, and people can reach out to ahnold capital at non capital.com. We have a page that they can reach out to And we can they can find us on YouTube to a YouTube channel short is viewed as in business and investing.
Nathaniel E. Baker 36:08
Okay, cool. I have a YouTube channel too. Oh, that’s neat. Wonderful. Awesome. Well, great. Well, this is wonderful. Well, thank you so much for joining us. Thank you all for listening. And we look forward to speaking to you again next time.
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