“The Ultimate Stock Picker’s Market”
Nightview Capital founder Arne Alsin, a forensic accountant and lawyer by training, has now been a money manager for nearly three decades. In 2012, he launched his first strategy to invest in the next generation of disruptive technology firms. Arne recently sat down for a Q&A with Nightview Capital’s Director of Research, Eric Markowitz, to share some of his thoughts on the current market—as well as new opportunities ahead. Below is a lightly edited transcript of their conversation.
Eric Markowitz: Arne, it’s good to do this Q&A with you. Let’s dive right into it. We speak with plenty of investors who—to put it bluntly—seem a bit flummoxed by the market right now. They see an economy that’s struggling and yet a stock market that’s largely rebounded. What do you make of the current environment?
Arne Alsin: First of all—it’s okay to be scared. I’ve been doing this for decades, and as far back as I can remember, there have always been times when investors have those fundamental questions: Should I even be invested right now? So, on one hand I’d say it’s normal to be fearful. On the other hand, in my experience, when it’s really scary—that tends to be when the opportunity is also the greatest.
And I do believe there is immense opportunity over the next decade. Entire industries are being reshaped and divided up by innovative upstarts. We’re heading towards a cleaner, more efficient planet. But things are moving very quickly, and I do fear that many investors will find themselves out of position if they don’t adjust their approach. It’s a winner-take-all type of dynamic unfolding, and investors need to get into position before it’s too late.
EM: What would you say to the investor who thinks the market has become “overvalued” or “overextended.” We hear that sometimes. Any thoughts on that?
AA: Again, that sounds like noise. Here’s the fact: There are some companies that are overvalued and there are some companies that are undervalued. Period. Always. An investor would do well to just say to themselves: Every company is misvalued. Say it: Every company is misvalued. They’re either overvalued or undervalued, all the time. No company has their price exactly right.
So then the question becomes how much overvalued—or undervalued—is a company. On that front, I don’t see any extremes today on a significant number of companies—there’s just pockets of that happening here and there.
One thing that might be throwing people off right now is the pull-forward effect of the coronavirus, and how this pandemic has pushed us all into a more online-based economy. The pandemic truly changed the paradigm of valuations. Just instantly. It’s like one day we were playing American rules football, and the next day we were playing European soccer. Both are sports with a bunch of players running around on a field, but the rules are completely different. And so, the team you need is also different. You know those big 300-pound guys that you have in American football? They’re not nearly as helpful in European soccer.
That’s kind of what happened in the market—and lots of investors maybe don’t know how to adjust and change their approach, so the easy way out is just to call it all overvalued.
When I take a pencil to the calculations, I don’t see anything crazy at all. All of it makes sense in context. Nothing scary or nothing surprising in all of that, but talk of “bubbles” always makes for some catchy headlines.
EM: Let’s go back in time a bit. Four years ago, we published a piece titled, “Why It’s a Great Time to Be A Stock Picker.” In it, you write: “You have to approach the market right now with a particular mantra in mind: Everything is up for grabs.” We’ve written quite a bit on our philosophy about disruption and the current Cambrian cycle we’re in, but four years later—would you say it’s still a great time to be a stock picker?
AA: [laughs] Are you kidding? I think it’s even better. The Federal Reserve’s response to the coronavirus pandemic has been to supply money at zero or near zero interest rates. It’s as if walls have gone up around the market and you can’t leave. It’s the ultimate stock picker’s market. There’s nowhere else to go. If I’m an investor, I’m not going to invest in shopping malls. Real estate? Commercial property? That’s risky. Office property? Very risky. Bonds don’t pay anything. The yields are near zero. So investors are a bit trapped in the market. In the 80s and 90s you could have run away from the market and invested in treasury bonds or money markets and made a decent return—but today, there is no running away. This is the best game in town in my opinion.
The beauty of this new paradigm is that, in my opinion, the best way to make significant returns is by simply owning the most innovative companies that are delivering tremendous value to happy customers. And ultimately, that’s how we seek to mitigate risk in this market: We mitigate risk in our investment process by making certain that the customers of our businesses are extremely happy. We want happy and fulfilled customers: that’s where we want to be positioned. And hopefully good things will happen.
EM: You and I talk about lots of different businesses pretty much every day—from cloud computing companies to e-commerce firms to software-enabled platforms. What’s the one area or industry that you’re most excited about going forward?
AA: There’s no contest—it’s the energy complex. The energy complex is so vast and it’s undergoing such a radical transformational shift. It’s mind-boggling. Over the next decade, and a few years into the 2030s, we’ll be moving from a dirty, fossil-fuel based economic production systems to a renewable, clean energy system. Think about that for a minute. Multiple trillions of dollars are up for grabs. Fortunes will be won—and lost.
Frankly, I think we will look back many years from now and see the 2020s as perhaps the greatest disruption of the modern economy. And this won’t happen in a year or two, or even three or five. It happens over several years.
Like most disruption cycles, the driving force of this shift is simple economics. As you know, it’s vastly more efficient to collect energy from the sun and wind—versus digging up coal and oil and gas.
So for the investor, the next logical question is, well then, if there’s such a big change coming, how do I participate? How do I participate in this paradigm shift? And so yes, that’s the overarching question and that’s ultimately what we compete in doing as stock pickers and spend our days researching. Every investor should be asking—how do we get in position? What companies do we want to own?
EM: If you were in the room with a pension fund or a family office or even an individual investor, what would you tell them today?
AA: When you look at your portfolio, you need to get rid of dirty companies. Full stop. And you want to own clean companies: Companies that are positioned for an all-electric, clean future that don’t emit poisons and that don’t participate in a fossil-fuel based economy. Car companies are essentially in the same position as stagecoaches more than a century ago. Combustion engine cars could very soon become an anachronism, and they are on their way out, and we don’t think many of these companies can survive this transition.
In every disruption cycle going back 20 years—and many of the case studies of disruption were written about by Clayton Christensen [ed note: See here for our interview with Clayton Christensen]—the incumbents are just too slow. The incumbents have predictably protected their turf and were too slow to change. The solutions come from young and vibrant up-and-comers who build their entire model around better and more efficient products and solutions.
Meanwhile, the old guard typically protects their assets. In the case of the energy transition, what we’ve begun to see are old guard fossil fuel companies protecting their production of energy and their cash flows.
So as an investor, just from a risk perspective, you want to think in terms “I want to own companies that are going to last, that have a long runway for growth and prosperity.” Not companies where you look down into the future and say, “Woah, these guys are going to have a lot of trouble.” Eventually the market is going to figure that out too. And you don’t want to be an owner of those companies when the market does figure it out. You want to be an owner of vibrant and thriving companies that are making customers happy and fulfilled.
EM: I suppose that’s a natural place to bring up Tesla. We’ve become perhaps well known for our research and valuation on Tesla, all of which enabled us to hold and add to our position in the summer of 2019. Beyond Tesla, though we’ve looked at dozens, if not hundreds of companies across the renewable energy landscape. Would you be willing to talk about any specific companies you’re most interested in today?
AA: [laughs] You know we don’t give out ideas for free, Eric. Look, as you know, the opportunities we’re working on today may not be investable for two to three years—but we’re getting into position and building out our deep well of knowledge, just as we did with Amazon and AWS a decade ago, and just as we did with Tesla years ago. We want to know all the players, all the technologies, all the potential scenarios of what could unfold—and we want to know it all better than our competitors.
I will say, though, that some of the most exciting corners of the energy market are in the areas of energy storage and distribution. Renewable collection is already exploding in growth—it’s just not as investable in an area of the market as storage and distribution. And let me explain— when I say collection, I’m referring to specific technologies, like solar panels or wind turbines or microinverters. Over the long-term, these types of technologies should generally become commodified and drop in price.
To us, the more exciting area is this: Once you collect all this near-free energy from the sun and wind, what do you do with it? You can’t immediately throw it onto the grid—it requires storage of some kind: short-term storage, medium-term, long-term storage, etc.
And there’s a lot of innovation in the storage area we’re working on. Same with distribution: Once you store all this energy, to distribute it efficiently is a massive software undertaking. And the future we envisage is a world in which we have two-way energy transfer. For instance, as a homeowner, we see a world in which you not only have all the solar panels that powers your home, but excess energy that can get sold back into the grid and make a little cash doing it.
On top of that distribution system will likely exist a software and a platform model that can scale very quickly. Frankly it reminds me of cloud computing back around 2010. Some of the companies we’re looking at want to essentially become the “AWS of energy.” That to me is very exciting.
EM: So, we certainly cast a wide net on the companies we’re looking at in this industry, and I agree—some of the companies are extremely compelling. But drilling a little deeper, let’s talk about developing conviction and building out a valuation framework. What would you be willing to share today about how you—and we as a firm—go about building a position in a given company?
AA: Right, so people will always ask what our edge is and what makes us different and why we think we can beat the market in a repeatable way with our specific investment process. And my answer is pretty simple: It comes down to valuation. Most off-the-shelf valuation methods out there aren’t great for capturing the true value of high-growth disruptors in a dislocated vertical. P/E ratios, for instance, could never capture the full story of a young company trying to disrupt the cash flows of a giant entrenched market—those data points are invariably backwards looking. And again, what’s the value in using a backwards-looking metric when trying to analyze the future potential in a given vertical? It makes very little sense.
Instead, in a land-grab type of environment, what we focus on exclusively is company value proposition—and what customers are actually saying and doing. Even if it’s early in the cycle, that’s the most important thing to understand—product, value proposition, customer, and company leadership and vision. This is what I think Wall Street consistently gets wrong, but that’s okay—in my experience, it tends to play to our benefit in the end.
Taking a step back though, when I launched the strategy, I built an entire valuation framework from scratch. It’s all based on a First Principles approach: We start with a blank piece of paper, we make no assumptions, and we dig. This process I think helps us get comfortable in areas of the market that others find strange or confusing. In the moment, a specific idea may appear contrarian or misunderstood. But that’s very often a good signal that you’re doing something right.
Listening to customers is key, though. For example, we’ve been involved in electric cars and transportation for several years now, and I can remember multiple legacy auto manufacturers saying
“We’re going to go hybrid” and they were basically spelling out how customers were going to buy their hybrid cars over a period of years before eventually going all electric, rather than listening to customers in the first place. And if you listened to customers, you’d know they didn’t want hybrids. They preferred all electric with all the bells and whistles that go with it—the instant torque, better safety, efficiency, etc. So that’s an example of where we stake our claim: Our investment process is built on original valuation work, independent research, and a bit of a contrarian mentality.
EM: If I had a nickel for every time someone asked about our name… Anyway. Final question, and it’s sort of an open-ended one. What do you think about the next decade of investing? What’s your message to an allocator or investor of any size?
AA: There’s always going to be reasons to be scared—there’s always reasons to worry. We invest in the market because we want to participate. We want to be part of the action—and we want to be part of the solution. And we have been. We’ve invested in wonderful areas. In the midst of it, certain investments can look messy and potentially contrarian. And in general, amid disruption, there’s a lot of chaos involved.
But you must remember, from an investor point of view, messiness is good. Change is good. When we overhaul a system, and turn an industry upside down and completely shift processes, it will result in all kinds of dislocation. All kinds of trouble for some companies—but huge new opportunities for others. And amid all that chaos, all we’re saying is that there is opportunity. Trillion-dollar industries are being thrown into this chaos—there will be big winners, and perhaps even bigger losers—especially in energy, which has me very excited.
So my belief is this: This is not the time to hold fast, to hold onto cash or own dirty, fossil-fuel based companies. Now is the time to get involved before it’s all too obvious to everybody in the market that the production and distribution of energy is changing markedly and irretrievably—we are not going back. We are only going forward into an economy that is cleaner, more efficient, and ultimately much better for the customer. I believe fortunes will be made and lost in this transition, and so yes—100%—it is the ultimate stock picker’s market.
Disclosures:
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The opinions expressed herein are those of Arne Alsin and Nightview Capital and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not an offer to sell, or a solicitation of an offer to purchase any fund managed by Nightview Capital. This is not a recommendation to buy, sell, or hold any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Nightview Capital makes in the future will be profitable or equal the performance of the securities discussed herein. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Nightview Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request.
Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. WRC-20-09
