Idea Brunch #2 with Marc Cohodes

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

Marc is a prolific short seller and former portfolio manager of Copper River Management. Marc has been instrumental in exposing frauds such as Lernout & Hauspie, NovaStar Financial, Home Capital Group, and MiMedx among many others. Today, Marc is a private investor and short-seller and frequently shares his thoughts with his 170,000+ followers @AlderLaneeggs on Twitter and was previously featured on Idea Brunch back in July 2022.

In conjunction with this interview, Marc and I will also be doing a public Twitter Spaces discussion at 3pm ET on Tuesday. You can listen in here.

Marc, thanks for doing Sunday’s Idea Brunch! In the last year, your Twitter following has doubled and you’ve received widespread acclaim for being one of the first whistleblowers on the FTX fraud. Can you please tell readers a little more about your work exposing bad actors and the state of the markets today?

Thanks for having me again, it is always great talking to you and makes me think back on when we first met. I always knew you would turn into something great and Idea Brunch is a wonderful forum.

I am 63 and have been doing this since 1982 which in markets is a Very Long Time. I have met some great people and bad actors along the way and the one thing I have is a memory. I have a memory for people, setups, structures, and history and when you do it as long as I have patterns exist and certain names remind me of past successes and failures. It’s not always in the numbers or on spreadsheets, it’s intangibles and only experience and getting your head kicked in teaches you this. People on Twitter love to remind me of my failures (which have been many) but that just motivates me to do better and sharpen my craft. Bad actors never go away and in today’s world with broken markets and lack of accountability, I try hard to expose bad actors and people who not only cost investors money but also mess up society. I try very hard to make a difference and I think I have done well in accomplishing that goal.

The markets today are badly broken, I have said this for a while, there is very little thinking that is done and everyone is tripping over themselves to make a quick buck. Few people, if anybody, have a “process” and that is not good at all. If people could just slow down and think, markets would be better for it. There is a complete lack of accountability in the world, markets, and on Twitter.

So with FTX, Silvergate, and Signature which some people call my Triple Crown, I knew SBF was a scam for nothing he ever said made 1) Any sense and 2) Ever checked out, so it was just a question of time... Friends used to call and text me and say “Why are you wasting time on FTX there is no way you can make money on it.” Well, I said that I am doing the world a favor and hopefully I will save people some money. I did end up helping a lot of people but I also learned a lot about Silvergate (OTC: SICP) and Signature Bank (OTC: SBNY) which I called Publicly Traded Crime Scenes, which they were. Both stocks are down 99.9% this year which I am very proud of.

You were very early in predicting the failure of two big crypto banks — Signature Bank (SBNY) and Silvergate Bank (SI). What is your view on the U.S. and Canadian banking sector today? Are there any more shoes to drop?

The U.S. Banking Sector to me is uninvestable long or short for the “Too Big To Fail” banks will get stronger in my opinion and the weak will get restructured. Canada is an absolute disaster. Home Capital Group which continues to allow dubious mortgages to be underwritten is going to be bought by Stephen Smith which to me is remarkable that Canada lets it happen. Home Capital back in the day could have been bought by anyone for a song. Given the Money Laundering Real Estate Dynamic there, I wouldn’t touch a bank.

As it relates to Silvergate, Signature Bank, and foreign crypto exchanges, I do think Binance is finished it's just a question of the DOJ and SEC building a case. I think the arrogance of the Coinbase (NASDAQ: COIN) management is also problematic for them. The markets and the government are completely broken and thus it takes longer than it should for things to get fixed or justice to be served. It also wouldn't surprise me if civil or criminal cases are brought against certain venture capital firms and their role in aiding and abetting SBF and FTX. It just takes time and people need patience. Too many of these venture capitalist actors have confused a bull market with brains when they were just overleveraged bull market players.

You have now been exposing frauds for decades and have studied countless corrupt management teams. What do you look for when evaluating company leadership? Are there any common red flags you have noticed over the years?

I always say bet the jockey and not the horse I think in this environment, truer words have never been spoken. Track records matter and who companies associate with matters, boards matter, and leopards just don't change their spots. It doesn’t matter whether you are long or short a name, these principles apply. It's very important that you watch thesis creep and if your story changes, you should probably get out of a name. Too many times people, myself included, try to rationalize a mistake when it's best to just pack your bags and leave, unless there are special circumstances that override thesis creep. This is the greatest red flag to me.

Of course, when managements sue short sellers, don’t answer specific questions, or change accounting and auditors, that matters as well.

Last year you said your two favorite stock ideas were Overstock (OSTK) and Enovix (ENVX). Since your last Idea Brunch, Overstock has gone from ~$26 to ~$27 and Enovix (ENVX) has gone from ~$10 to ~$14. Where do you stand on those companies today?

So last year when we did this, I talked about Overstock and Enovix, which were my biggest positions then and are even bigger now.

Overstock (NASDAQ: OSTK — $1.21 billion) is a $27 stock give or take and has been somewhat volatile. It has been as low as 20 and as high as 40 this past year. They recently bought the Bed Bath & Beyond brand for $21 million dollars. The Bed Bath & Beyond brand is a far better brand than Overstock and even Wayfair. This finally gives them a brand that can take market share and disrupt the online furniture business.

The street has always slept on this name and nine people follow it versus 42 for Wayfair, whose balance sheet and business model is inside out. I think street estimates for 2024 and 2025 are way too low and feel that when Overstock begins beating numbers, there will be a significant re-rate in the shares. They have seven dollars a share in cash, are generating cash, and have two significant Blockchain investments that I feel are worth the market cap of the company themselves (Tzero and Grainchain). At the company’s investor “Medici Day” the CEO of Tzero and Grainchain spoke very positively about their companies.

Tzero is a digital stock trading platform that is both SEC and FINRA-approved. ICE, which owns the New York Stock Exchange, also owns 25% of Tzero and David Goone, who runs Tzero, was the number three executive at ICE. I believe that Digital, Trading, and Tokenization are the future and at present Tzero has no competition. A year ago, the world was littered with wannabes, including FTX, who made all sorts of claims but turned out to be a criminal operation. We are entering in my view a 2.0 world where a company like Tzero with adults managing the company can thrive.

Grainchain offers Blockchain software for the agriculture industry. They enable farmers and suppliers to cut out the middleman while at the same time, putting their specific products on the Blockchain. Their business grew close to 400% last year and the software application is now being tested in other industries. There is a great interview with the CEO of Grainchain from Medici Day that I have enclosed.

In sum, Overstock has seven dollars in cash a share, two Blockchain businesses that I think are worth the entire market cap, and an online retail business that in my mind will do 2 billion in revenue in 2024 and significantly higher in 2025, with the company valued at ~$1.2 billion.

As for Enovix (NASDAQ: ENVX — $2.25 billion), it's a very controversial name with huge short interest. The company is developing next-generation silicon batteries, was a SPAC, and has all the boxes to draw skeptics to the party. I, however, think they have something and have something big. In the world of betting the jockey not the horse, I am a huge fan of executive chairman TJ Rodgers. I will go as far as to say he's the bravest man I have ever met in Silicon Valley, and I've met them all. He speaks his mind. He's honest, he's nasty, and his track record is incredible. I believe Enovix will be able to make the battery at scale, and it will be a huge stock. It carries with it extreme risk for if it can't scale the battery, the stock is probably worth 3 to 4 dollars a share, and if they can scale the battery, I believe it will be a generational situation and I've been involved in a few of those over the years. I loved it a year ago in single digits, I love it more now.

What are some other interesting ideas on your radar now?

I will give you three and they happen all to be shorts.