Idea Brunch with Porter Collins of Seawolf Capital

Porter Collins shares learnings from The Big Short, his approach to researching companies, and his top ideas

Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Porter Collins!

Porter is currently the portfolio manager of Seawolf Capital, a long/short equity fund he launched in 2011. Before launching Seawolf, Porter worked under Steve Eisman at FrontPoint Partners and was portrayed by Hamish Linklater in The Big Short. Porter also rowed in the 1996 and 2000 Olympics and his fund returned 136%, net of fees, in 2021.

Porter, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch your own fund following “The Big Short”?

Edwin, thanks so much for having me on Sunday’s Idea Brunch. Given your work with The Bear Cave newsletter, you had me at hello.

I’m very proud of my background. At the age of 20, I became a World Champion and an Olympic athlete and pretty much everything else in my life has been gravy on top. My experience opened doors in my professional career and allowed me to take some chances.

I took a job with Steve Eisman in 2003 which at the time was paying 50% less than my current job, but I was taking a chance on myself. Obviously, that turned about to be a fantastic move. My partner Vincent Daniel and I learned a ton from Steve over the 10+ years we worked with him. Both of us could spend hours telling stories about managing capital through the financial crisis with Steve and Danny Moses. The culture Steve fostered was electric. With Steve, Danny and the other incredible personalities on our team, every day at FrontPoint felt like an episode of Curb Your Enthusiasm.

After FrontPoint wound down, Danny, Vincent, and I started Seawolf in 2011. Our objective was to take our collective experience analyzing the financial services sector and produce returns adequate for institutional pools of capital. After working together for 12 years; Danny decided to retire from the hedge fund business and it was time for Vincent and me to change things up too. Vincent and I now run Seawolf Capital as a quasi-family office and broadened our investment horizon to seek outsized returns in all industries, not just financials. The second version of Seawolf is a rejection of everything that became institutionalized. We have always said the hedge fund business is not a scale business. Shorting stocks is very hard and it requires a completely different investment approach than simply buying stocks. So far, the returns have certainly justified the change.

Do you see any parallels between the housing bubble in 2007-2008 and the markets today? Do you see another “big short” opportunity in any frothy parts of the market?

Yes and no. A bubble is usually easy to spot but difficult to time when it will burst. In my view, bubbles always possess the same two ingredients-excess speculation and excess leverage.

Fortunately, we timed the housing bubble perfectly in 2006 when we first put on our long CDS trade. Our conviction in our trade was primarily a function of credit data we were accumulating and analyzing over the course of our careers. This pool securitization data, which nobody else was monitoring, really started to deteriorate. Based on what we were looking at, losses were inevitable and material. It almost brought down the entire financial system.

I believe the current cycle is different, it is almost completely Fed-driven. They kept rates artificially too low and provided massive amounts of liquidity any time markets began to correct. Now the Fed is waving the white flag. The Fed and the MMT crowd have painted themselves into a corner with 7% inflation. The Fed’s mandate is price stability and MMT’s Achilles Heel is inflation. Don’t overthink it. Until inflation returns to a more normalized level the Fed is not your friend.

How does it play out this cycle? Similar to the bubble we experienced in the late ’90s, the excess speculation and leverage can be found in non-profitable technology-related equities. I would expect most of the non-fundamentally driven meme/momentum stocks to retrace most of their QE moves. SPACs have cracked. AMC and GME are returning to earth. Fads like PTON have retraced. ESG plays are starting to be exposed, although TSLA still has a lot more to fall. And there is Crypto. If we leave aside the leverage argument, there is no doubt Crypto was the biggest bubble of this cycle. Completely worthless coins and NFTs as far as the eye can see (think DOGE and SHIB). Bear markets have a way of washing out all the pretenders. Unfortunately, I fear retail will take a lot of pain similar to the late 90s.

In your recent investor letter you wrote, “We are now in structural deficits of energy for the foreseeable future. We are positively inclined on higher energy prices and believe the sector will experience secular ROE uplifts.” Two past Idea Brunch guests (Josh Young and Kuppy) have both predicted skyrocketing oil prices as well. With oil up 20% in the last month is there still room to run?

I will share what we said about energy from our letter: “Our aha moment in the energy sector was August 31st of 2020 when Exxon Mobil (NYSE: XOM) was removed from the Dow Jones Industrial Average (replaced with Salesforce.com (NYSE: CRM)) and just 4 months after crude oil famously went negative. The combination of Larry Fink’s crusade to increase asset management fees by creating ESG funds and the $300b lost in US Shale drilling was the final nail in the coffin for Exxon Mobil’s 92 year run in the Dow Jones Industrial Average. With oil and coal fully under attack from ESG vigilantes and uranium prices decimated post the Fukushima disaster in 2012, capital was being drained rapidly from capital-intensive businesses. It was/is our belief that we are now in structural deficits of energy for the foreseeable future. We are positively inclined on higher energy prices and believe the sector will experience secular ROE uplifts from increased capital discipline by management teams.”

These stocks have obviously run hard to start the year so I might not be chasing them right here, right now but yes, we have been and continue to be very constructive on many energy names. It’s funny to me the recent run in XOM started on the first day of the year. Some people had to wait until the calendar turned so investors wouldn’t see their 12/31 ESG score.

Our view on energy is a combination of macro, micro, sentiment, and technicals. The macro has been covered very well by Kuppy and Josh Young but generally higher energy prices are a function of favorable supply/demand dynamics. I expect demand to go back to an all-time high and the lack of investment has created a deficiency in supply. As a board member of an Oil and Gas company, Alpine Summit Energy (TSX: ALPS — CAD$ 175 million), I know the capital challenges of an energy company very well. There is simply ZERO institutional capital available to invest in drilling capital. This has created a huge moat for companies currently in the business with strong balance sheets.

Although I do expect energy prices to go higher, I don’t think we necessarily need higher energy prices to see higher stock prices. As owners of energy companies, I prefer energy prices to stay at or near current levels rather than much higher, but it usually doesn’t work that way.  The micro aspect of the O&G story is super compelling. The entire sector, whether through financial acumen and/or bankruptcy, has fixed their balance sheets and their financial returns. ROEs are roughly twice what they were in 2018 when oil was last in the $70 price range. Thanks to the bankruptcy courts and new management teams, two poster children for the shale era crash, CHK and SD, are now in a net cash positions. Post the GFC, the energy sector was the only sector that was allowed to go bankrupt and the banks have not forgotten. Similar to the cannabis sector, coal companies like BTU are almost completely shut out of the banking system.

In 2022 Energy companies’ #1 priority is returning capital to shareholders. Given the historically low leverage, I expect a combination of higher scheduled dividends, special dividends and buybacks for the foreseeable future.

Lastly, not only have the ESG vigilantes curtailed the investment in capex in “dirty” industries they have also completely shunned the stocks. Currently, both hedge fund and total allocations to the Energy sector are near record lows. This has left the Energy sector as the only SPX sector with a negative a 5-year performance. As always buy low, sell high. 

What are two or three interesting ideas on your radar now?

Since Vincent and I do a lot of risk/reward investing I’ll give you a couple risk reward names. I don’t have readily observable near-term catalysts but these names have very little downside with huge optionality. I expect most readers will probably hate these ideas: