Idea Brunch with Justin Dopierala of DOMO Capital
Justin Dopierala shares his research process, his top ideas, and why he invested in GameStop in 2019
Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Justin Dopierala!
Justin is currently the portfolio manager of DOMO Capital, a state-registered investment advisor he founded in Germantown, Wisconsin. Firm assets have grown from a few hundred thousand to over $50 million as of November of 2021. Since its October 2008 inception, the DOMO Concentrated All Cap Value Composite has returned 20.4% annualized net of fees compared to 14.3% annualized for the S&P 500 Total Return Index through Q3, 2021. DOMO Capital is up over 64% this year net of fees according to its most recent investor letter.
Justin, how has your experience been launching a state registered investment advisor, and what has contributed to your strong performance?
Using a separately managed account structure as an investment advisor to run an investment strategy/composite is the future, and we feel lucky to have been early in that trend by starting the company back in 2008. Unlike hedge funds that take custody of client assets, we’re able to replicate our strategy for each client in an account in their own name. This creates a lot of efficiencies and also eliminates a lot of risk to the client since TD Ameritrade is the custodian, not DOMO Capital.
Our strategy is based on the belief that diversification is riskier than concentration as long as you do not equate volatility with risk – which we do not. We believe the reason that so many mutual funds cannot outperform the index they measure themselves against is because they have their assets diversified across hundreds of stocks. There is no way that they believe their 100th or 200th idea is as good as their top ten ideas and yet they’ll have roughly the same amount of capital allocated between them. We believe that allocating capital towards investments that you do not have as much conviction in simply to avoid volatility is a flawed concept.
We typically only invest our clients in our best five to ten ideas and if we can’t find any opportunities, we’ll hold cash and be patient. We view volatility not as risk, but as an opportunity to rebalance our positions and to add to stocks during periods of time that the market is overreacting to news in the short-term that doesn’t impact the long-term thesis.
You were prolific in writing about GameStop’s potential. In early 2019 you advised management to buy back stock and correctly predicted that a new console cycle would help the company. What happened at GameStop why did the market get the company so wrong?
You’re right, we were prolific in our writing, and this will actually be featured in a theatrical documentary that should be released fairly soon. In short, GameStop didn’t have a revenue problem, they had an expense and footprint problem. Management was doing a very poor job of managing S&A and they needed to aggressively reduce the store footprint.
What the market didn’t see was that a lot of GameStop’s losses were non-cash losses due to write-downs and that most of the revenue declines were actually due to asset divestitures (which were actually a great thing and occurred at levels much higher than the market expected).
I’m not sure if the market necessarily got GameStop wrong, but the media and the short sellers certainly did. As short sellers shorted over 100% of the shares outstanding, they drove the stock down to incredibly unrealistic levels. At one point we were buying GameStop near $2.60 per share. At that price, GameStop was trading at half of its net cash position! They could have paid off all of their term debt and still had $5 per share in cash. We have no idea what the short-sellers like Melvin Capital were thinking or what sort of due diligence they did. Some sites, such as Seeking Alpha, had authors constantly talking about a shift from physical to digital games, but most of them didn’t even understand the statistics they were quoting. Statistica was the main source they used, but they didn’t realize that the major shift was simply due to Statistica starting to include mobile downloads/games into the mix. In other words, there wasn’t actually a major decline in physical games, there was just an increase in people playing free games on their phones. At the time, the vast majority of gamers preferred physical games for use on their consoles. If the short sellers had done a deeper dive on console-only sales mix their conclusions would have been completely different which we highlighted to our readers repeatedly from 2019 to 2020.
An accounting rule change is another thing that may have confused the short-sellers, not only on GameStop, but on other retail stocks as well. Within the last couple of years, leases were suddenly reported as debt on the financial statements, making it appear that retailers had much more debt than in the past when in reality, nothing had actually changed. One of the things that made GameStop a no-brainer is the fact that most of their leases were expiring within 2 years. This gave them incredible flexibility to downshift fast in the future which is the exact opposite situation that occurred when RadioShack went bankrupt due to their creditors forcing them to keep a large store footprint.
I’m not sure if people also understand how many assets GameStop still owned. They were able to sell their corporate jet and they also owned a lot of their own facilities which they eventually were able to sell and leaseback. If management had been more competent at the time, they would have listened to their investors and sold their international division as well, but once COVID hit that became impossible.
You’ve developed a 40,000+ Twitter following and seem to have a knack for understanding the “Wall Street Bets” trading sentiment. Can you tell us a little about that?
We’re not sure that DOMO Capital has ever been associated with “Wall Street Bets.” As you noted, we wrote prolifically about GameStop and when we created a Twitter account people remembered that and followed us. Therefore, it is true that a lot of our followers have found us through our GameStop research and are likely “retail” investors. We do our best to be honest and transparent with our followers, and I think that is actually what they appreciate. Our followers appreciate that a professional investment firm is willing to call out the media when they distort the facts (several news organizations had to change their news reporting on GameStop after we called them out, such as Bloomberg), and they appreciate that we are willing to engage with them in a relatable way. DOMO Capital was built on the back of retail investors. 99% of our clients are retail clients with our single institutional client being Concordia University Wisconsin, my alma mater. Now that we have cracked $50 million in assets under management, we think that gaining institutional clients in the future will become easier as our AUM was always a sticking point in the past despite our incredible performance. However, we’ll never forget our roots, and we’ll always be on the side of retail investors and willing to share our knowledge and expertise when we can.
What are one or two interesting ideas on your radar now?
A couple of our favorite ideas right now are Alto Ingredients (NASDAQ: ALTO — $341 million) and Pitney Bowes (NYSE: PBI — $1.17 billion).