Behavioral biases

Many of the inefficiencies that Findell trades are explained by behavioural finance, which Finn encountered as a Harvard undergraduate in 2005: “I realized that my own sometimes impulsive risk taking seemed to be guided by unlearned instincts. I started collaborating with a doctoral student at Harvard Business School and we put together a book that outlined how evolutionary psychology has created innate behaviour patterns that lead to all sorts of irrational decision making in the financial markets. For instance, herding makes sense from an evolutionary perspective – if all your fellow hunter gatherers dart in one direction at the same time – you should probably follow. But herding in financial markets can lead to folks buying a stock simply because others are buying it and can create huge deviations away from fundamental value”.

These sorts of behaviours are called heuristics and they systematically create dislocations in the market: “Selling losers is an example of recency bias, so we screen for new lows. We also screen for news stories because people over-interpret headlines due to representativeness. Binary situations may scare away many investors because the pain of loss outweighs the pleasure of gain. A portfolio of very skewed risk/reward investment should work regardless of the market environment as long you do the work on the idiosyncratic risk factors”.

Post-bankruptcy stocks are another source of inefficiency because the new shareholder base is more plugged into, and anchored to, the debt markets. “Every offshore oil driller save Transocean went bust during the long oil price decline since 2014. It takes a while psychologically for investors to recover from that. All the post re-organization holders of the equity were debt guys who did not want to own the equity, so they were natural sellers,” points out Finn. 

There can also be technical situations such as spin-offs and index ejections that force sales. Novelty and lack of coverage can make IPOs mispriced after they float.

MiMedx was a good example of technical and behavioural factors combining together to create a perfect storm of dislocation. “A vicious campaign from short sellers led by Marc Cohodes led to the share price going from $18 to $1 as the stock went on to pull its financials and be delisted. Cohodes had made some true claims and a lot of nonsense claims, tweeting at various points that MiMedx had no revenue. There were no financials to rely upon, but we found third party data sources that showed little change in revenues from the prior year, disproving most of this thesis,” says Finn. The stock more than tripled from 3 to above 10, when Findell took it off. This is typical; the trading style is to take profits after the catalyst and re-rating has occurred.

The approach is relatively sector agnostic and has worked across industries. Findell selectively talks about selected investments on social media, including webcasts and Twitter, and has become formally publicly activist on one position. 

Occasional activism

Findell’s first public letter was written to subprime lender Oportun Financial, which provides short term loans of one or two years to mainly Hispanic borrowers who want to build a strong credit score. The fundamentals are strong, but the share price has been dragged down by excessive costs and poor capital allocation. “This is an egregiously mismanaged company, run like a fiefdom by the CEO who has increased costs by hiring far too many highly paid senior managers. All of his FinTech initiatives have failed and are a distraction from the core business of making specialty loans to underbanked people. Oportun has underperformed its peers for years and is not being publicly called to account by the board. They need a new CEO and board to look after shareholders. The stock could be worth 5 or 10 times as much,” argues Finn. Findell established his position at $3 and has continued to add as the stock approaches $7. 

Another microcap holding, a med tech company, also has governance issues. “There has been dysfunction at the board level for years – it was so bad former employees commented on it. This year, the CEO and chairmen tried to vote off some board members in a Special Meeting. Those board members then unilaterally fired the CEO and Chairmen and took control of the company. This is a great example of how incentives matter – the three board members who led the coup were unemployed/retired and owned practically no stock in the company. They were incentivized to keep their board member paychecks and seemed indifferent to the effect their actions had on the company’s stock price and operations – both of which tanked,” says Finn.

“As Berkshire Hathaway Chairman, Charlie Munger, says – show me the incentives and I’ll show you the outcome. Now, while these holdovers are still on the board, they are outnumbered by new board members who were brought on in May. These members have skin in the game and one of them, Taylor Harris, became the new CEO. Taylor Harris will be highly motivated to make this work. His past experience of generating multi-baggers as a CFO three different times gives him a lot of credibility to do the same here.”

“It is going to be a lot of wood to chop given how many self-inflected wounds the legacy board members left him, but he has a great product in AviClear and a great base business. We think over the next three years, he can get the stock back over $50 from $14 today.”

Macro awareness

Though Findell majors in bottom-up research, Finn is cognizant of macro risks: “A rising interest rate environment is bad for Software as a Service (SaaS) companies where most of the value lies in the terminal value. So even if you find a potentially interesting situation in that space, now might not be the time to invest in it”.

Equally, Finn has identified niches that can thrive amid challenging sector dynamics: “In oil drilling, supply shortages in offshore floaters and jack-ups have helped them to outperform over the past year despite lower oil prices”.

Net long exposure has ranged between 50% and 85% and averaged 70%. Longs can reach 20% position sizes but are usually in the 5-10% range. Shorts are sized around 1-3% and are also shorter term in focus. Findell has shorted alleged frauds and was once sued by one of them – Alpine4 – over a short report. 

The story of this lawsuit was later featured in an article in Bloomberg titled – The Stock Market Reaches Late Stage Fanaticism. Finn received death threats and hate mail from the various pumpers of the stock but was vindicated in the end as the stock fell 95% from the date of the short report’s publication. 

Value resurgence

In Findell’s August 2023 investor letter, Finn described the valuation differential for growth versus value as being at a 99th percentile. A long-term force behind this has been the rise of passive, ETF and index investing, which has funnelled more capital into large cap, growth and momentum-oriented approaches. 

Any small or large mean reversion towards value or small caps or both could provide a substantial tailwind for the style and factor exposures in the Findell strategy. Finn also expects that inflation might stay higher for longer due to higher prices for oil and other commodities such as copper, and doubts whether AI innovations such as ChatGPT will solve inflationary pressures. 

At the same time, the track record shows that Findell has been able to extract idiosyncratic alpha even when value and small caps have been unfashionable. 

Long-term aligned investor base

Finn has all his liquid net worth in the fund. Findell has grown to assets of $100 million without any seed or acceleration capital deals but has recently attracted a $100 million ticket from a leading UK hedge fund allocator, taking total assets to $200 million.

The fund offers share classes with either a one- or three-year soft lockup; earlier redemptions are possible with an exit fee paid to the fund. Findell seeks longer term investors to align fund liquidity with that of their small cap investments. It can take months or years for the valuation discrepancies to play out and dealing with monthly redemptions would be a distraction, especially in situations that may require engagement with management and occasional activism. Investors should be able to weather some volatility for these exceptional long-term returns.