Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Ryan Rahinsky!
Ryan is currently the chief investment officer of Blue Outlier Capital, a Tampa-based value-focused fund that uses long-term options in special situations to structure asymmetric risk to reward. Before launching Blue Outlier Capital in January 2023, Ryan traded his own capital, worked as a consulting associate at BDO, served as a non-commissioned officer in the U.S. Navy, and earned an MBA from UNC Chapel Hill in 2021. Ryan was previously featured on Idea Brunch in January 2023 and in January 2024.
Ryan, thanks for doing Sunday’s Idea Brunch! Can you please remind readers a little more about your background and your strategy at Blue Outlier Capital?
Thanks for having me again, this is becoming one of my favorite annual traditions. I’m from a blue-collar background with nearly my entire family being military or law enforcement. I followed the military tradition and joined the Navy at 19, serving for four years in a helicopter squadron and eventually becoming a non-commissioned officer.
After getting out of the Navy I finished my degree and worked in Tel Aviv on BDO’s U.S.-Israel Desk. From there I became a consultant for BDO before attending UNC Chapel Hill for my MBA.
I describe our strategy as traditional value investing but using an untraditional approach of exploiting inefficiencies in option pricing models to generate better risk to reward in our investments. There are several option model inefficiencies we seek to exploit that I’ve described in detail here and in my letters previously. For brevity I won’t go into them again, but anyone interested can look back at our January 2023 Idea Brunch or accredited investors can reach out to me for my letter going into detail on this.
We typically invest in small and mid-caps with high cash flow yields where the cash flow is being used for high-quality growth or to retire shares at attractive multiples. We’re often investing in asset-rich companies much below their fair value or certain special situations. We don’t invest in speculative industries or have any tech exposure. I believe this focus on valuation and protecting our downside provides us with a better margin of safety, as you can see from our outperformance in both up and down markets during the last 5 years.
You launched your fund in your 20s with little formal training or Wall Street experience and are doing great. What’s been your main learnings launching a fund from scratch and is there anything you would do differently in hindsight?
I’ve been very fortunate to have the performance that I’ve had the last five years that has led to me being able to do what I’ve always wanted since I made my first investment at 12 years old. I think I’m one of many testaments that outperformance doesn’t necessarily come from formal training or Wall Street experience, especially considering most Wall Street managers underperform. I think an obsession with the market, a thirst for knowledge, and a competitive drive can more than make up for the formal training available in many positions in the industry. Many of the fund managers I look up to consciously stayed away from Wall Street with great success.
One learning I’ve had during the last few years is the cultivation of a network for managers from atypical backgrounds is extremely important and is one of the main reasons why most managers come from the industry. I had a non-existent network when I launched with two partners and under a million dollars, but through putting ideas out on X, doing interviews like this, and attending and presenting at conferences, this has changed very quickly. Most of my current partners have been references from existing partners or other hedge fund managers that I’ve built a relationship with, which has led to growing much more quickly than I ever would have expected initially.
I think this is a testament to this industry being a real meritocracy. If you have the talent and the track record to prove it, people will find you. These professional networks compound just like investments.
What are some of the things Blue Outlier does differently or better than other funds? Do you have any unique approaches to idea generation?
I wouldn’t say we necessarily have a unique approach to idea generation outside of looking at the hated and discarded companies, but we do take an extra step of analysis that most don’t do by deciding whether ideas fit the model for something that can be exploited asymmetrically in the options market. This is after a lot of traditional fundamental work to come up with an idea of fair value and assign probabilities to our range of outcomes. Most ideas don’t fit into one of these exploitable categories and if we were to invest in them it would be through shares, but the ideas that do can make incredibly asymmetrical investments.
In your previous interviews you’ve talked about Consol Energy. They’re currently undergoing a transformative merger with ARCH Resources. How does this change the thesis and how do you feel about the deal?
Consol Energy is the best high calorific value (high-CV) thermal coal exporter in the world, and an incredibly convex and high margin of safety way to benefit from increasing electricity demand and a growing cement industry in India. They’re combining with ARCH Resources, a metallurgical coal (used in steel) producer, to form Core Natural Resources (NYSE: CNR — $12.4 billion).
ARCH was not my favorite metallurgical (met) coal producer, but due to geography and mining technique they are the natural fit for Consol and there will be many value creating synergies.
A good example of these synergies is the additional value created by ARCH cutting out their third-party buyers that previously bought their incidental thermal coal. ARCH produces a significant amount of incidental thermal coal in their met coal mines in West Virginia. This was previously seen as a byproduct of met coal production and sold for ~$20-40/ton to traders who then mixed and blended it with other coals to achieve higher prices. This will now be done internally by the combined company, who will mix this coal into Consol’s thermal product and will be able to achieve prices of ~$70/ton.
Another benefit comes from having access to more export terminals, which should unlock significant logistics savings from optimizing rail travel and export terminal capacity for the combined operations. These are large value creating synergies, with the losers of the deal really being the third-party coal traders and train companies. These opportunities combined with savings on SG&A and insurance, as well as the sharing of talent and expertise, should make the combined entity a formidable cash machine.
Despite this, I don’t think the deal was as necessary for Consol as it was for ARCH, and I would have preferred Consol to stay focused on buybacks and the high-CV thermal coal market rather than diversify their exposure. I’m much more constructive on the high-CV market compared to metallurgical coal over the next several years and don’t think the additional diversification was necessary, especially from ARCH’s comparatively lower-quality assets.
Looking at the supply/demand forecasts for high-CV thermal compared to met coal, high-CV has a much wider supply/demand gap longer-term. High-CV prices in the past few years have commanded a price closer to met coal prices with spikes above to encourage crossover sales for met coal to be used as thermal. I think this is likely to increase in the future, which would result in high-CV producers having higher margins than their met coal peers.
I think if Consol stayed focused on the high-CV thermal market and buying back shares their long-term returns would be market leading. Instead, they’re diversifying their business with comparatively lower quality assets when there’s some evidence that diversified producers aren’t rewarded in the marketplace. I still expect them to do well and be focused on buying back shares after the deal is complete, so we remain shareholders albeit at a lower exposure, but I would have preferred it if the deal didn’t happen.
Last January you pitched GEO Group (NYSE: GEO — $4.79 billion) as your top idea. Since then, the stock went up ~230% from $11/share to $35/share. What went right with GEO Group, and where do you think the stock goes from here?
The change in administration is really what went right. GEO was an incredibly mispriced opportunity that is now at an earnings inflection with the incoming Trump administration. This was one of those bimodal events that option markets have such a hard time valuing that can be so lucrative and asymmetrical. Although the stock had performed well over the last 18 months leading into the election, it was enormously mispriced even the day before for what the polls and betting markets expected.
Polls had the election as a coin flip but had underestimated Trump heavily the last two elections. He had never polled better the day before an election than this time around. Betting sites were giving the chances of a red sweep from 40-50%. Taking these probabilities and even handicapping them heavily, you could see where GEO and its options were incredibly mispriced.
I still believe this is one of the best opportunities in the market over the next few years. They have ten idle facilities that were previously an earnings drag that will likely be restarted, with utilization rates expected to rise across all facilities. Trump’s border czar Tom Homan recently said that 100k detention beds are necessary for their plans, that’s nearly a 150% increase from current authorized levels and would be significantly more than all available beds. Although now priced more fairly for the liquidation value of their real estate and traditional detention business, the real opportunity is from their high margin supervision side of the business that I discussed last year that they’re still not getting enough credit for.
Just for a quick recap, this is a business within GEO that has a monopoly on the secure monitoring of individuals across the country. They’ve been the sole service provider to ICE’s Intensive Supervision Appearance Program (ISAP) since it began over 20 years ago. This program provides an alternative to traditional detention and are based around technology platforms such as ankle monitors, wristwatches, or phone applications that monitor participants and can provide virtual case management services to immigrants. The cost of these alternative to detention programs is less than $8 a day, much less than the roughly $150 a day for traditional detention, which incentivizes their use.
Current utilization levels of less than 190k participants are historically depressed at around half of their prior peak. Even with this underutilization the supervision business still has over 50% margins, accounting for less than 14% of GEO’s revenues in the first three quarters of 2024 but representing over 23% of NOI.
I expect that the incoming administration is going to scale the use of these services considerably. The previous version of the House Homeland Security Appropriations Bill would have required the use of electronic GPS monitoring for all individuals in the non-detained docket of illegal immigrants awaiting court proceedings, which is currently more than 7 million people. You don’t need to be too imaginative to think the supervision business could eventually dwarf the legacy detention business. I don’t believe that the incoming administration can achieve their goals strictly through utilizing detention bed space, and it wouldn’t be cost effective to do so.
I think the business has never been in a better position and the stock could have significant upside from current levels in the next few years driven by their earnings inflection followed by a quick deleveraging and pivot to buybacks. Many members of the incoming administration have ties to this business including Trump’s border czar Tom Homan who wrote about them positively in his book, and Trump’s pick for Attorney General Pam Bondi, who used to be a lobbyist for GEO.