Idea Brunch #2 with Brian Bellinger of Monimus Capital

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Brian Bellinger!

Brian is currently co-founder and CIO of Monimus Capital, an investment manager he launched in September 2020 after working at Raging Capital for eight years as an analyst and managing partner. During his tenure, Raging Capital grew its long/short hedge fund to nearly $1 billion in AUM and was well known for its eclectic long book and its short-selling acumen. Brian was previously featured on Idea Brunch in October 2021 and provided the inspiration for the launch of our publication.

Brian, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Monimus Capital?

Edwin, thanks for inviting me back to Sunday’s Idea Brunch!  I have enjoyed reading the myriad interviews over the years.  You’ve had an opportunity to speak with some great investors and I’m excited to provide your readers with an update on Monimus.  As a brief disclaimer, I am sharing opinions in my capacity as Managing Partner and Chief Investment Officer of Monimus Capital Management, and nothing that I discuss here is investment advice.  I would encourage readers to consult their own professional advisers and review our Form ADV filed with the SEC.

As for my background, I grew up in a quiet suburb of Syracuse, New York, far removed from Wall Street.  My parents didn’t work in finance and I had limited exposure to the concept of investing until I participated in a stock-picking contest in my sixth-grade math class.  I was immediately enthralled.  Much of my teenage years was spent reading everything I could on markets and investing, and my long-term goal by the time I was in middle school was to become a fund manager.

My path to launching Monimus has not been entirely conventional.  I went to college at Binghamton University in Upstate New York and while there had an opportunity to intern with a fellow Binghamton alum, Mario Cibelli of Marathon Partners.  Mario has a long and distinguished track record and taught me the ropes.  As a Spring 2009 college graduate seeking a full-time job at a fund or bank, the depths of the Great Financial Crisis proved to be an inhospitable setting.  Luckily, I had an accounting degree to fall back on and I toiled in public accounting for a couple of years, working long hours in the office and coming home to spend my nights pouring over 10-K’s and writing research.  A few years later, I was fortunate to connect with Raging Capital, a long/short investment manager based near Princeton, NJ, which I joined as an analyst in 2012.

I spent the next eight years at Raging, working for Bill Martin and alongside a very talented team of individuals.  Bill is a brilliant stock-picker, and I was privileged to spend many years honing my skillset as an investor in an environment that emphasized deep fundamental research, fostered contrarianism, and tested my mettle with the ups and downs of short selling through a secular bull market.

My goal had always been to launch my own firm at some point.  When Raging Capital began winding down its operations in the first half of 2020, I decided the time was right to launch Monimus along with several core members of the former Raging team.  Building a business from day one with an experienced and cohesive team that has a long history of working together is unique in this business, and I believe it has been an important factor in our early success at Monimus Capital.

Three years into running the fund how has it been going? What have been some of the positive surprises or unexpected challenges so far?

To say the past three years have been a whirlwind would be an understatement.  We raised our initial client capital in the spring/summer of 2020, in the peak of the pandemic, while stuck in our respective homes.  We launched a long/short strategy with short-selling as our calling card into the blow-off top of the largest speculative bubble U.S. markets have witnessed in the past two decades.  We have managed a small/mid-cap-oriented strategy through a roiling bear market (the Russell 2000 was -30% from its November 2021 all-time high just seven weeks ago).  There have been grinding market declines followed by face-ripping rallies fueled by short squeezes on numerous occasions.  Meanwhile, on a personal note, during this time I got married to my lovely (and very supportive) wife and we had our first child.  So, a whirlwind indeed.

All of the above have presented their own challenges (sans marriage, of course).  In my opinion, the pre-2020 playbook for effectively managing a long/short portfolio and generating alpha can no longer be fully relied upon.  The “game” has changed, structurally.  For better or worse, we operate in a factor-driven market with far more aggressive short squeezes and de-grossing events than we experienced historically.  The retail investor plays a more prominent role in markets, supported by commission-free trading and the ease of mobile trading apps.  While some may bemoan these (likely) structural changes, we see opportunity.

Given that backdrop, I would argue that any fund that launched over the past four years and has effectively managed risk while generating attractive returns will be set up well for future success.

One of the most significant potential challenges that I have found to be a positive at Monimus is the requirement to wear many hats as the CIO of a small investment manager.  In my opinion, it is the biggest challenge (and risk) a new manager faces when stepping out of an analyst role and into the PM seat.  Being surrounded by a talented team has enabled me to focus the vast majority of my time on research and portfolio management.  While I have an enormous amount of respect for one-person shops and those operating with lean teams, the daily tasks that are not investment-related can become daunting without a strong supporting cast.

Overall, I am extremely grateful to come into the office each day to not only do something that I genuinely love but also realize my childhood dream in the process.  For someone who is competitive and intellectually curious, public equity investing is beyond compare.  I consider myself very fortunate to have clients who have entrusted their capital with me and my colleagues at Monimus.

There are a lot of emerging manager long/short equity funds. What are some of the ways Monimus differentiates itself from the crowd?

I think it’s important to recognize that a hedge fund is an incredibly fragile business.  The failure rate – due to poor performance, inadequate risk management, an inability to scale sufficiently, and often some combination thereof – is very high.  As a steward of our clients’ capital and as an organization, the avoidance of these pitfalls is paramount.

For instance, we operate with a relatively conservative amount of gross exposure (at least compared to peers), as maintaining dry powder and being opportunistic during market extremes is core to our strategy.  While excessive gross exposure can enhance returns when all is well, it ultimately leads to sub-optimal portfolio management decisions at sub-optimal times.  We keep our net exposure in a reasonably tight band – while we aim to be “macro aware,” we are stock pickers and not market timers.  And we think about scalability, as this is a business after all.  The composition of our portfolio that we operate today, with around $100 million of assets under management, will not meaningfully change if we are managing multiples more.  That is by design.  We have seen time and again the challenges of a long/short strategy that performs well when small but cannot replicate returns at a greater size.  If our firm is to grow and consequently have more resources at our disposal, I believe we should improve as investors, not deteriorate.

From an investment perspective, I believe our short strategy is our primary differentiator.  These days, it seems like the simple willingness to have a short book may be a point of differentiation!  Unlike most funds that do short, we don’t use our short book solely to hedge, dampen beta, or enable more long book leverage.  Our objective on the short side is to generate absolute returns over the long term.  We view our short book as complementary to our long book as a source of returns. 

Our approach on the short side is also uncommon.  At any given time, 60-80% of our short exposure is composed of catalyst-driven, single-idea shorts.  We cast a wide net and rely on institutional knowledge, pattern recognition, and fundamental due diligence to identify short opportunities with the most attractive risk/reward setups.  That “core” short book is then complemented by short baskets, which account for 20-40% of our short exposure over time.  I built a process during my time at Raging Capital for identifying suspected frauds, stock promotions, and exceedingly low-quality businesses, and have been honing said process for the past decade.  While each individual basket short position is relatively small, cumulatively we expect the approach to be a meaningful and complementary source of alpha for our short strategy.

While most long/short funds focus on single-idea shorts and a select group take a basket-like approach (like John Hempton, though we have dozens of basket shorts, not 500), I believe our strategy that combines the two is rare and differentiating.

Last time we talked a little bit about your active short book and approach to biotech short-selling. Given all the volatility in the short world, has your short-selling approach changed at all?

We have made some minor modifications to our short-selling approach since inception.  Our average short position is smaller and we are increasingly nimble, covering shorts into weakness and re-shorting inevitable rallies (like we’ve seen in recent days/weeks). 

The scar tissue of late 2020 and early 2021 remains – and I think anyone willing to short a stock with a retail-oriented investor base during that period of time would corroborate.

The foundation of our short strategy, however, remains the same.  While an individual stock can do anything in any given day, week, month, or quarter, we fully expect that shorting companies with deteriorating fundamentals and low-quality businesses without valuation support will work over longer periods of time.  But it requires discipline and rigorous risk management.

Being an effective short seller also demands brutal intellectual honesty.  As you mentioned, we have run a biotech basket short strategy since inception (and, prior to Monimus, for many years at Raging Capital).  Earlier this year, we saw the opportunity set on the short side for biotech shrink dramatically.  Accordingly, we covered most of our biotech shorts and established meaningful biotech net long exposure for the first time in our firm’s history.  We leveraged our process for identifying low-quality biotech companies as an initial filter and built a process for identifying asymmetric long opportunities within biotech.  These efforts were most notably undertaken in September and October this year and, while we didn’t time the bottom perfectly, it appears in hindsight that our directional timing was correct.

In October 2021 you pitched Jakks Pacific (NASDAQ: JAKK) as your top idea. Since then, the stock has more than tripled from ~$10.50 to ~$34.50. What went right with Jakks Pacific and where do you think the stock goes from here?

As a brief refresher, Jakks Pacific (NASDAQ: JAKK — $351 million) is a manufacturer of consumer products, predominantly toys and costumes.  Having followed the company for many years, we observed transformational changes underway at Jakks under the guidance of a new CFO who had spent much of his career in senior roles at Mattel and Disney’s consumer products division.  The company had cleaned up its balance sheet, right-sized its cost structure, and worked to improve its contractual relationships with key licensing partners, such as Disney and Nintendo.  With little sell-side analyst coverage and a challenged recent history as a public company, we believed these changes had largely gone unnoticed by investors.

When I pitched JAKK shares as a long idea two years ago, the stock was $10.50 and had an enterprise value of $160 million.  Today, with shares up more than +200% since then to ~$34.50, enterprise value sits at roughly $300 million.  In my prior interview, I included a 2022 EBITDA projection of ~$50 million, noting it was a conservative estimate as the company was experiencing significant headwinds due to supply chain disruptions and elevated freight costs at the time.  Jakks’ ultimately exceeded our expectations handily and, with incremental market share gains and gross margins normalizing in 2023, we estimate Jakks’ will generate ~$90 million of EBITDA this year.  So, JAKK shares traded at 3.2x EV/EBITDA when we initially pitched the stock in October 2021; today, they change hands at 3.3x EV/EBITDA.  For context, North American toy manufacturers trade at median and average multiples of 8-9x EV/EBITDA on 2024 consensus estimates.

Meanwhile, the company’s balance sheet has improved dramatically.  At the time of the October 2021 pitch, JAKK had net debt leverage of ~1x; today, the company is debt-free and has nearly $10 per share in cash.  Free cash flow generation has been so robust that cash per share today is nearly equivalent to the JAKK share price when we last pitched the stock two years ago!

Despite shares tripling over the past 2+ years, we believe JAKK is still deeply undervalued and remains one of our firm’s largest holdings.  Based on our normalized EBITDA estimate of ~$90 million and free cash flow estimate of >$50 million per annum, applying an EV/EBITDA multiple of 5-6x (or ~10% FCF yield at the midpoint) we estimate fair value at $50 to $60 per share, upside of 50% to 80% compared to JAKK’s current share price.

I would also like to note that the other long pitch in that October 2021 interview was Zynga (ZNGA).  I mentioned at the time that Zynga, as one of only a handful of remaining independent mobile gaming companies of significant scale, would be a desirable asset for a number of potential strategic acquirers.  Less than three months later, Take-Two Interactive (TTWO) announced the acquisition of Zynga for a healthy premium.

What are some new interesting ideas on your radar now?

Well, if you asked me that question about a month ago, there certainly would be much more to discuss!  (I’m half joking.)  While U.S. markets have rocketed higher in recent weeks, we think our long/short opportunity set is robust as we head into 2024.  We don’t speak about specific shorts publicly, but I can discuss a broader long theme and an associated idea.