Idea Brunch #2 with Marc Werres of Hinde Group
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Marc Werres!
Marc is the founder and managing partner of Hinde Group, a San Francisco-based investment firm that manages a concentrated portfolio of publicly traded equities. Most of Hinde Group’s investments are in the equities of great businesses that are out of favor, misunderstood, or underappreciated. Hinde Group also selectively invests in special situations. Since the firm’s inception in 2015 through September 30, Hinde Group’s portfolio has achieved a 609% return net of fees — 21.3% annualized — compared to a ~281% return for the S&P 500. Marc was previously featured on Idea Brunch in November 2024.
Editor’s note: Sunday’s Idea Brunch is looking for more great investors to interview. Please send nominations for talented, off-the-beaten-path, high-integrity investors to edwin@58research.com. Small and new funds welcome!
Marc, thanks for doing Sunday’s Idea Brunch again! Can you please tell readers a little more about your background and why you decided to launch Hinde Group? Any big updates since we talked last year?
Thanks for having me back, Edwin.
I’ll try to be a little bit more succinct this time around. Anyone interested in the blow-by-blow account can check out our first interview from last November.
Long story short, I’ve been fascinated by financial markets and investing since I was 11 years old. I heard about how George Soros “broke the British pound,” making over $1 billion in the process, and was instantly hooked. I have had it in my mind that I would one day run my own investment firm since then.
That aspiration led me to do my undergraduate studies at Stern. After graduating from Stern in 2002, I started my career in investment banking at Houlihan Lokey Howard & Zukin focusing on creditor-side financial restructurings and sell-side distressed M&A. I left Houlihan Lokey to join Vardon Capital, a consumer-focused long/short equity hedge fund. Vardon had about $250 million under management when I joined and peaked at around $750 million.
After leaving Vardon, I started an investment firm with a friend of mine. We ran that firm from 2010 until the end of 2014. While we generated good returns overall, we ended up having differences of opinion on individual investments and overall portfolio management that held the firm back from fully realizing its potential. My former partner and I agreed to split up amicably, and each started our own investment firms.
Hinde Group is the firm I founded in 2015. The firm’s strategy reflects the evolution of my investment approach over my career. Most of the firm’s investments are in the publicly-traded equities of great businesses that are out-of-favor, misunderstood or underappreciated. The firm also selectively invests in securities involved in event-driven special situations, such as spin-offs, restructurings, litigation, and mergers & acquisitions.
Hinde Group has continued to deliver on its mission — helping people prosper — since we last spoke. The firm has a long runway of growth ahead of it from just continuing to execute its strategy a little bit better each day.
Last year you pitched your largest position, Interactive Brokers (NASDAQ: IBKR), as a top idea. Since then, it is up ~60%. What went right with Interactive Brokers and does it have more upside from here?
For those who are not familiar with the company, Interactive Brokers (NASDAQ: IBKR — $104 billion) is a highly automated global securities firm that specializes in routing orders and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 160 electronic exchanges and market centers in 36 countries around the world. Interactive Brokers custodies and services accounts for individual investors, introducing brokers, registered investment advisors, fund managers and proprietary trading groups. More than two-thirds of IB’s 4.2 million customers are based in Europe and Asia and an even greater share of its new customers come from those regions.
When I pitched IBKR last year, the Fed had just taken its first step toward normalizing monetary policy after its historic tightening campaign to reign in the post-pandemic bulge of inflation. On September 18, 2024, the Fed cut its targeted range for the federal funds rate by 50 basis points, from 5.25% - 5.50% to 4.75% - 5.00%. IB’s net interest income benefits from higher rates. Many market participants were uncertain about — or misunderstood — how lower rates would impact IB’s net interest income and earnings. Other market participants may have simply shunned IBKR based on the belief that the stock wouldn’t “work” during a rate-cutting cycle. For all those reasons, the looming normalization of monetary policy excessively weighed on the market price of IBKR at the time.
Over the past year, the Fed has progressed toward more neutral monetary policy. The targeted range for the federal funds rate is now 150 basis points below its recent peak. Financial markets expect the federal funds rate to be about 75 basis points lower by the end of 2026. In other words, the market believes we are about two-thirds of the way through the current rate-cutting cycle.
The impact of rate cuts on IB’s net interest income and earnings is no longer a point of fear, uncertainty, and misunderstanding, but rather something everyone can observe. Over the past four quarters, IB’s net interest income has grown year-over-year at rates ranging from 3.1% to 20.6%. Excluding income from securities lending, which adds some noise to the numbers related to fluctuations in demand for hard-to-borrow securities, IB’s net interest income grew 6.9% year-over-year in 3Q25, down from 19.5% year-over-year in 3Q24. Lower rates have been a modest and temporary headwind to growth in IB’s net interest income, nothing more.
Much of IBKR’s strong performance over the past year reflects the stock climbing the so-called “wall of worry” created by fear, uncertainty and misunderstandings about the impact the looming normalization of monetary policy would have on its business. IBKR has also benefited from continued strong operating results more generally.
Hinde Group has held its position in IBKR since inception with some trimming and adding along the way. I haven’t sold a share since 2018. It continues to be Hinde Group’s largest position. I expect IBKR to deliver at least mid-teens earnings growth over the next seven years. The dividend yield and modest scope for multiple expansion push the prospective annualized return on the stock somewhat higher than the earnings growth rate. The prospective return IBKR offers at the moment isn’t as high as it was a year ago, but it is still quite attractive for such a great business. IBKR would need to trade over $100 to get down to a market-level prospective return, in my view.
Even though Hinde Group is a relatively small fund, it seems that most of your investments are in large-cap stocks like Interactive Brokers, Uber, Alphabet, and Netflix. Given the conventional wisdom that small-caps are the most mispriced, why have you decided to focus your investment research on larger rather than smaller companies?
In theory, the likelihood and magnitude of mispricing should be inversely correlated to market cap to some extent. That relationship is real, but it explains only a tiny part of why material mispricing occurs. In my more than 20 years as a professional investor, I’ve never come across a stock I felt was materially mispriced because no one is paying attention. Never. That is not to say it doesn’t happen, it is just not the type of situation I look for and have had success with.
Stocks mainly become materially mispriced when they are out-of-favor, misunderstood or underappreciated in some way. That is usually precipitated an event or development affecting the company, its industry or the economy, not by anything related to the number of investors and analysts paying attention to the company. In fact, having more investors and analysts pay attention to a company can in theory exacerbate a mispricing by adding force to an information cascade. You can far more confidently refute a misguided narrative about a company if there is only one analyst promoting it than if there are twenty, in other words.
In practice, I have consistently found incredible investment opportunities in some of the largest and most high-profile stocks in the market. Whatever relationship there may be between market cap and mispricing, it is just not strong enough to even factor into my sourcing process, much less justify excluding large cap stocks from my consideration set.
The market cap profile of Hinde Group’s portfolio is largely a passive output. It is primarily a function of the opportunity set of mispriced securities in the market and which of those securities make their way through Hinde Group’s sourcing process.
Northeast Bank (NASDAQ: NBN — $725 million) is the company with the smallest market cap — a little over $700 million — in the portfolio at the moment. Its market cap was under $200 million when I initially made the investment in 2017. There is nothing that would prevent all the positions in the portfolio from looking like Northeast Bank in terms of market cap at a given point in time.
The only slight bias toward bigger companies that might exist has to do with Hinde Group’s first criteria for What Makes a Business Great. Hinde Group’s investments fall into one of two buckets: Compounders or Special Situations. Compounders are great businesses that are out of favor, misunderstood or underappreciated. Hinde Group has six specific criteria for What Makes a Business Great. The first criteria is Meaningful & Durable Market Power. At a high level, there are only two ways a company can have market power, favorable differentiation or cost advantages. It is a lot easier to analyze and gain confidence in the meaningfulness and durability of cost advantages than favorable differentiation. Within the cost advantage category, supply-side economies of scale in particular have a special place in my heart. A caveman could tell you which company will thrive in an industry with significant supply-side economies of scale. Point at the big one and grunt, “Big.” While that may analytically push me toward bigger companies for Hinde Group’s compounder investments, mid and small cap companies can still enjoy decisive economies of scale in niche, developing and international markets and supply-side economies of scale are just a preferred source of meaningful & durable market power, not the only one I am willing to consider.
What are some of the things Hinde Group does differently or better than other funds? Do you have any unique approaches to idea generation?
Last time we spoke, you asked me a somewhat similar question: what differentiates Hinde Group? The short version of my answer was that it is the combination of i) advantages from an unusually long-term orientation and ii) advantages from the firm’s unique ways of gathering, processing and analyzing information. To answer your question, I’ll elaborate on the second point a little bit more. I’ll give you two examples.
I believe Hinde Group uses alternative data differently and possibly more extensively than most firms that invest with a long-term orientation. To be clear, I am not talking about using alternative data to “nowcast” financial metrics and key performance indicators with the goal of making short-term trades into events like earnings releases. That is a hugely competitive game in which Hinde Group has nowhere near the scale to compete. Instead, I am mainly talking about using alternative data to answer research questions relevant to a long-term investment thesis. It is hard to say how broadly and well that is done by other firms, but it has been a consistent source of insights for Hinde Group.
An analysis I did recently on Portillo’s Inc. (NASDAQ: PTLO — $384 million) provides a good example. I was evaluating Portillo’s Inc. class A common stock as a potential investment for Hinde Group in late 2024. Portillo’s is a restaurant chain serving Chicago-style street food. It has a cult-like following in the greater Chicago area. Its stores there generate incredible sales volumes and returns on capital. A key question for the stock was what sales volumes and returns on capital would be on new units as the company expanded into new markets in the sunbelt states. In investor presentations, management periodically provided cohort-level performance data suggesting new stores were meeting their pro-forma targets. I wanted to independently confirm and monitor the performance of the company’s new stores. I used store-level location intelligence data from Placer.ai to model and monitor monthly foot traffic by store for all stores opened since 2021. Using that data and some information about individual store volumes disclosed by the company, I was able to estimate individual monthly unit sales volumes. That analysis made it clear that the cohort-level averages that management was touting were made up of one or two highly successful units and many others that were trending well below pro-forma targets. Moreover, the units seemed to be losing ground relative to their pro forma models as the months went by. The insights I took away from that analysis led me to pass on the investment. PTLO is down more than 50% since then. While I am sure there are some other firms that were doing similar analyses, the work I did there with alternative data to answer a research question gave me a meaningful advantage over most other market participants.
I also believe Hinde Group uses regression analysis an order of magnitude or two more extensively than other firms with similar, long-term oriented strategies. That is related to Hinde Group’s greater use of alternative data, but it also extends beyond alternative data. There may be other firms that do the same things I do on that front, but I have never heard about it. The regression analyses I do are a consistent source of insights, which makes me think I am doing something different or better there.
Many of your investments are consumer-facing. How much time do you spend interacting with and evaluating the consumer product (e.g., looking at Netflix’s content selection) and how important is this in your research process?
If you are going to invest in a business, you absolutely need to understand its products or services from a user’s perspective. It is usually easier to do that for consumer products than for business products. Most consumer products and services are at least somewhat relevant to each of us in our personal lives. You usually start with at least some inherent understanding of a consumer product, if not direct experience with it as a user.
If I’m interested in a company as an investment, I’ll spend however much time is necessary interacting with and evaluating its products to thoroughly understand them from a user’s perspective. The amount of time depends on how well I inherently understand the latest version of the product and how complicated it is. Even for products I understand well, using them periodically is definitely helpful.
What I try to avoid doing is making value judgments about a product or service based on my personal perspective as a user. Trust me, I am no tastemaker. My opinion about whether a product is good or bad or better or worse than another product is no more important than any other user’s. Most consumer products are targeted at particular consumer segments. Highly successful products can be downright unappealing to consumers outside their targeted segments. For value judgments, I rely primarily on user reviews; generative AI models do an excellent job of quickly summarizing and analyzing user reviews.
With respect to Netflix in particular, I have been a subscriber for more than a decade. I probably watch an hour or less of television each month, though. My two kids are the main Netflix users in my household, followed by my wife. I don’t always watch Netflix’s most high profile pieces of content. I haven’t watched KPop Demon Hunters, for example. I understand what it is, and I don’t think my opinion of it would be that informative beyond what I know from reviews, engagement statistics and news articles. Moreover, no one piece of content is all that important to Netflix. I did download and play several of Netflix’s mobile games a while back when Netflix began ramping up its investments in that genre. Going through that process – combined with my existing knowledge about how the mobile gaming business works – gave me some insights into the barriers Netflix faced in driving engagement with its mobile games among members. I also watched the Jake Paul vs. Mike Tyson fight in part to better understand Netflix’s live events strategy. Basically, I think it is important to check out any significant new features or genres in order to fully understand them, but I don’t feel I need to watch every big piece of content Netflix puts out.
Portillo’s provides another good example of how I engage with a consumer product for research purposes. The Dallas market is one of the most prominent new markets in which Portillo’s is expanding. My wife’s family lives in Dallas. While we were down there visiting her family, I ducked out a few times to check out a few of the Portillo’s locations and try some of the food. I had never been in a Portillo’s before. I had only seen pictures of the locations and food and diagrams of the restaurant formats. There are tons of details I picked up from those visits that helped me better understand the business and that I couldn’t have gotten any other way. For the record, I’m a fan of the food, but again, I don’t give that much weight in my analysis.
What are some interesting ideas on your radar now?
A new large-cap position for Hinde Group added last quarter is: