Chances in Kambi & Naked Wines? With Andreas Aaen Symmetry A/S

With Andreas Aaen of Symmetry A/S I was happy to discuss his approach and the world of small founder-led companies. We discussed Kambi, Naked Wines, and Where Food Comes From.

The interview was done in October 2020. We made it public now to give you more materials about our high-quality interviews at hand.

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Andreas Aaen gave his insights on the following topics:

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Introduction

[00:00:00] Tilman Versch: Hello audience. Welcome back to our live stream sessions. This time I am having a guest from Denmark here. Andreas, hi! It’s very nice to meet you.

[00:00:12] Andreas Aaen: Hello. Hi!

[00:00:15] Tilman Versch: I already asked you this question, but I want to ask it again publicly. How do you spell your last name?

[00:00:22] Andreas Aaen: It’s called Aaen, so double-A. In Denmark, it’s Andreas Aaen.

[00:00:27] Tilman Versch: That’s cool. Germans might spell it differently and also English-speaking people might spell it differently, so it’s good to know that.

[00:00:38] Andreas Aaen: They normally call me Ian.

[00:00:40] Tilman Versch: Yeah. I want to show a disclaimer before we go into details so we are safe here on the legal side. The main message of the disclaimer is that you have to do your own research and your own work. What we are doing here, even if we are mentioning certain stocks or securities, is just a qualified talk. It isn’t a recommendation. So, please do your own work.

You will find the link to the disclaimer below if you want to read it. It’s also on the website, GoodInvesting.net.

Without further ado, I’m happy to get into our conversation. I’m happy to invite our audience as well to ask questions during our live stream. If you have questions, please type them in the chat and I will have a look and try to integrate them into our talk.

The Danish stock market and its companies

Maybe let’s start with Denmark. What is interesting to know about the Danish stock market and what are other interesting companies besides the well-known name Novo Nordisk?

[00:01:53] Andreas Aaen: I think one of the main things with the Danish stock market is that it’s normally a little bit of a safe haven for some investors because there’s a lot of med-tech companies, medical companies, and stuff like that that are producing really stable returns there.

If you look back at the last 1-3-5-10 years, it is actually one of the main exchanges that have performed the best in the whole world there. But that is also a cost, because of the safety and the good corporate governance – in some of those cases.

If you look back at the last 1-3-5-10 years, it is actually one of the main exchanges that has performed the best in the whole world there.

I would say that on the other side is that the Danish stock exchange is mostly large companies there. The small-cap space in Denmark is quite less sophisticated and developed there. That’s not the same culture in Denmark for investing in small caps like there is in Sweden or Norway or some of the countries they compare us to.

[00:02:55] Tilman Versch: How many small-cap companies are there in Denmark and how big is the universe?

[00:03:01] Andreas Aaen: I’m not sure, but I think a few hundred of them. At least what I would call real small caps. Then there are some small property companies – football clubs and stuff like that. But a few hundred are what I recall small caps I could invest in. They really differ in size and sector, things like that. We have a few banks also and stuff like that.

Andreas’ investing focus

[00:03:31] Tilman Versch: I know you are talking about your more global investor. Would you say you also have a regional focus?

[00:03:42] Andreas Aaen: As most investors, I started looking at my home market when I was a young investor or when I started up. Basically, when I launched the fund, we were maybe 50% Danish or something. I think today it’s 0% in Denmark. We have mostly been in Scandinavia throughout the fund. I think today it’s still between 40% and 50% in Scandinavia. We really do the whole of Europe and also the US. I would say our comfort zone on where to go develops over time.

Early path to investing

[00:04:20] Tilman Versch: How did you find your way into investing?

[00:04:23] Andreas Aaen: Actually, I did read books when I was younger and stuff like that. Basically, when I was 14-16 I remember I tried out different things like technical analyses and chart patterns. I really liked it. I was into different kinds of options there. I remember when I was younger I could do it myself. I was speaking to my father a little bit about my, you know, it’s not a trust fund like you have in the US but some savings they put aside for children in Denmark. It’s a small amount. I spoke to my father about what to do with it.

It was only when I started as a trainee in a big accounting firm that I really hit it there. I got the connection between what I learned from accounting to investing. I learned that I could actually read the financial statements and things like that. I learned that I can use that to make money at stock markets. That way I got introduced to Warren Buffett and people like that. I basically developed myself from there on.

I got the connection between what I learned from accounting to investing. I learned that I could actually read the financial statements and things like that.

Investment strategies

[00:05:33] Tilman Versch: How would you describe your investment style currently? How did it change over the years?

[00:05:40] Andreas Aaen: I think there is also some natural development there. When I started off, I was what people would probably call a deep-value guy. I love quantitative stuff like price to books, price to earnings, free cash flow yields, and stuff like that. I really looked into that.

In Denmark, there were a lot of really small cheap stocks on those metrics after the financial crises that have not gone up a lot. We made a lot of money on some of those smaller names. I would say that over time I have been more into looking at stronger business models, psychology in investing, management teams, and stuff like that. It takes much more time to learn how to evaluate a management team than to read a financial statement. So, that is something you need to be comfortable with. It has taken time. It is something that I still keep and still try to develop.

It takes much more time to learn how to evaluate a management team than reading a financial statement.

Insights on a more qualitative approach to investing

[00:06:43] Tilman Versch: Were there certain insights that made you shift your style to a more qualitative approach?

[00:06:49] Andreas Aaen: Sometimes when you find a cheap stock with six times earnings that will eventually go to 10 times earnings, you made like a 50% return there. I was hitting some companies that also grew a lot. I made 10x returns on some of those stocks there. I was maybe lucky to get into some of those because they were both cheap and growing a lot, so I got both effects there.

But then, I could really see that the way I make a lot of money is not to do multiple upward thrusts but more to do what I call timed upward thrusts and good compounding stocks. It was also more of what I read and what investors I looked into are doing. In the beginning, I looked a lot at Warren Buffet and Benjamin Graham. The more I grew, I got into Joel Greenblatt, Charlie Munger, and stuff like that. I think there was a natural development there in the approach I took.

Evaluating management teams

[00:07:54] Tilman Versch: I already saw that there are some questions coming in. I will work them in during our talk. Thank you already for the questions, my audience. If you like the content now, you can also leave a like.

Back to our conversation. You said that evaluating management teams is something that isn’t that easy. How are you going forward with this? How has the way you evaluate management teams changed throughout the years?

[00:08:28] Andreas Aaen: I think there are two aspects to it. The first one is just learning by mistakes. I did plenty of mistakes early on with the fund. Even if the returns have been quite consistently good, there were a lot of mistakes that I learned from.

I would say one good example is a UK-based company called Globo. It has a Greece origin that turned out to be a total fraud. I actually went to London to visit the management team. I was asking them questions. The CFO just looked into my eyes and totally straight answered all of my questions. Three weeks later they put out a release that it was a fraud and the stock was worth zero. Then I got back and looked at what are the red flags I should have looked at.

The CFO just looked into my eyes and totally straight answered all of my questions. Three weeks later they put out a release that it was a fraud and the stock was worth zero.

I think some of that is just experiencing building up to know what to look at and what to ask. I would say another important thing about evaluating management teams. Normally, when I meet or talk to management teams, I always come back thinking “Wow, those guys are really good there.” It was really seldom I came back and thought “Those are really bad management teams.” So, then I just learned that the management teams I think are good are probably average. It’s only the ones that I think are really, really good that are probably good there. I just heightened the bar for what I think it should be. If you come to think of it, you will only become the CEO if you are also good at sales also. Even average managers are quite good at talking to investors.

[00:10:14] Tilman Versch: That’s an interesting point. I’ve already heard this from another investor that I would call a very good investor.

[00:10:20] Andreas Aaen: I like the comparison.

Personal investing style compared to other investors

[00:10:23] Tilman Versch: That’s a thing to take away, I think. Management, they really have to impress you to be really good. They are meant to be high quality.

Investors often compare themselves to other investors. How would you describe your style in comparison to others? What do you do differently?

[00:10:43] Andreas Aaen: I would say, in the beginning as I said before, I tried to do a little of Warren Buffet but one of the investors I was really into in his younger days was David Einhorn. Especially, the way he managed a long-short fund as I do. I think a lot of what he did when he was a much smaller investor and the early returns he had, I think there’s a lot of comparison as to what I do today. That’s definitely one guy that I was really impressed with.

Of course, he made a lot of mistakes in the last few years. I think one thing I try to do differently is that it seems he got a little stubborn into this long value short growth thing and got burnt a bit by it. I try to be a little more adaptable to the market situations we have out there. But I would say the way he structured it, it’s definitely someone I respect a lot.

I try to be a little more adaptable in the market situations we have out there. But I would say the way he structured it, it’s definitely someone I respect a lot.

[00:11:38] Tilman Versch: So, you’re shorting as well?

[00:11:39] Andreas Aaen: Yeah, I would do as well. Not to the same extent that we are on, but we do short and I would say we have quite good success over time. It is hard to do, especially in a market we have had in the last few years but it’s something I do to create alpha in the portfolio. It’s been quite good but I’ll also say it just makes me a much better long investor.

When you’re short, you need to be right on the research, you learn to cap your risk and stop losses, and close positions when it doesn’t work for you. You look for all the bad signals because when you’re short you can lose indefinitely. You need to be really tight on your risk controller. I definitely think that makes you better on the long side also.

I definitely think that (shorting) makes you better on the long side also.

Ideas for long and short positions

[00:12:27] Tilman Versch: What is your way to generate ideas for long and short positions?

[00:12:32] Andreas Aaen: Long positions is really something I could call “pound the rock investing”. It just turns a lot of rocks. There is not one source I would say where I get all the ideas. I have a big network of other investors I talk to.

In the early days, I did a lot of screens and things like that but I mostly don’t do that anymore. I look at Twitter and talk to all investors. Also, sometimes when I research one company, I ask them “Who’s your greatest competitor?” If three of them mention the same company, that’s probably a company I should look more into.

So, there’s not one source I would say I get most of the ideas from. It’s really just having your eyes open and being really good at cutting off the noise and trying to build a worklist of the greatest companies I can find.

Researching companies

[00:13:32] Tilman Versch: How much did you travel to research companies and how much do you take talking to management into account?

[00:13:41] Andreas Aaen: I would say there are companies in Scandinavia, London, or even some in Germany, where I have tried to travel and meet them in person. And of course, it’s easier.

In London, I can set up eight management meetings over three days because everyone is close there. Also, I can also do that in Stockholm and Copenhagen, and so forth. When I’m researching US companies and stuff like that, it’s mostly Zoom calls and something with management [inaudible].

I probably can’t think of a stock that I haven’t talked to the management. Maybe some of the bigger ones, it’s not CEOs or IR guys. But normally, I would at least have a Zoom call or something with them.

Normally, I also follow companies a minimum of 6-12 months before I buy them. I try to look for good companies even if they are overvalued. I do some research on them, I put them on the watchlist. I just keep following them. And then at some point, I get comfortable with them.

[00:14:48] Tilman Versch: Yes, that’s a good way to handle that.

[00:14:51] Andreas Aaen: Yeah.

[00:14:52] Tilman Versch: How do you research companies for 6 to 12 months?

[00:15:00] Andreas Aaen: I would say, of course now because of COVID, I just recently started traveling again to Stockholm. Norway has been the only one in Scandinavia.

Normally, I try to do quite intensive research when I learn about a new company. Maybe spend like two to three whole days on it. But then normally I would put it off a little bit because what I learned is what normally happens is that when I look at something, I get really excited about it and say “Oh, this is such a good company. I don’t really care about the multiples. I just want to own it.”

[00:15:35] Tilman Versch: I know the feeling.

[00:15:36] Andreas Aaen: But if I just take one week to cool off and take it back again, I will say “Okay, maybe it was not that good. Maybe I got a little excited there when I was doing all the work and I wanted to justify the hard work I did there.

But if I just take one week to cool off and take it back again, I will say “Okay, maybe it was not that good. Maybe I got a little excited there when I was doing all the work and I wanted to justify the hard work I did there.

Normally, it’s good to do tight research and then just follow it a little from the sidelines sporadically for a few months, then talk to management maybe one time after the learnings call. And then, maybe when it becomes cheap or there is some time that makes me want to invest, I speed the process up again a little bit.

[00:16:10] Tilman Versch: There is one question from the chat coming that seems to be urgent. I will ask it in a second, but before that, I also invite others to ask questions. They are very welcome. The question is, “What’s your view on FII and DII manipulation?”

[00:16:31] Andreas Aaen: Oh, FII and DII?

[00:16:35] Tilman Versch: I hope it’s FII. Or, it’s FLL or F11.

[00:16:41] Andreas Aaen: I don’t really understand that question, sorry.

Kambi

[00:16:43] Tilman Versch: Maybe the person who asked can write out what these short names stand for. We also want to take a look at three ideas you currently find interesting. Maybe let’s start with the most popular idea. Even for guys that hang out on Twitter and are interested in investing: Is Kambi somehow linked to Barstool Sports. What is the link there?

[00:17:21] Andreas Aaen: Yes. Kambi is a premium B2B sports provider. They are basically the technology supplier. They do all the API integrations to an operator. They do the trading, the odds compiling, everything that’s really the backbone of driving a really good sportsbook.

What Barstool, DraftKings, or some of the big US guys, in Europe like UniBet and LeoVegas and some of the guys we know here, do is they build the frontend themselves, or Kambi can also help them do it, then they integrate all of the odds feeds and the lines from Kambi and Kambi trades for them.

They do all the customer acquisition and customer support. Kambi really just collects a rib share on their part. I think it’s a really good business model because they have extreme network effects. For example, the Tour de France, only have to trade the odds once. If they have eight or 12 operators, they only need to do it one time. They can really just invest all their money in building the best product. And then, the more operators that connect to them, they just collect the revenue share on it. DraftKings or Barstool grow income with them.

I think it’s a really good business model because they have extreme network effects.

[00:18:44] Tilman Versch: That’s interesting. I would want to show some charts of this company as well so we can get a certain idea. It’s from the very interesting tool, Ticker. If you want to try it out, I will link it below. I think it’s a very interesting tool for fundamental investors. There we go. If you want to add something on the revenue and profitability development in the past years of Kambi, maybe certain stages and why you became interested in this company.

[00:19:19] Andreas Aaen: Yes. You could see that it was already a very good business over the past few years. I think the compound of the revenue was around 25-28% CAGR in the first five years after they spun out of Unibet. There was a spin-off from Unibet of what is called Kindred Group now.

I think what’s really interesting is the US story now. They have been taking the first bet in, I think it’s something like 11 out of 12 states in the US. On their first move in all the states there, they have between 18% and 30% market share in each state.

In Pennsylvania, the power, I figured something like six out of nine operators now. They have huge market shares in the US. There are strict regulatory requirements in the US compared to Europe. So, operators really want to partner with the best teams. They have a good advantage there. What we see now is a state by state-by-state regulations. While more and more states open up, the revenue will just expand.

It’s really grown exponentially now, like 28% revenue growth that will just explode here I think. There will be some setbacks from time to time but I think it’s a really good setup.

There will be some setback from time to time but I think it’s a really good setup.

The last thing I think I should add here is that what we will see and what I don’t think the markets there realize is the margin potential. We have seen that with a company like GAN that went from 10% to 50%. We saw an evolution that went from 20 to 60 now or something. So, that margin expansion happens extremely quickly in companies like this.

[00:21:15] Tilman Versch: Is it founder-led?

[00:21:18] Andreas Aaen: Yeah, it’s still founder-led. The background of it is that it was really the internal sportsbook for Unibet that’s owned by Kindred Group. But then at some point, the founder of Unibet called Anders Ström and the director of what is called Kambi now, Kristian Nylén. They sat down to think “Okay, how can we use this knowledge to get external operators to come into this network and build more scale to develop an even better product?” So, they decided to spin this company out of the Kindred Group. And today, Anders Ström still owns around 20% of it. He sits on the board. Kristian Nylén is still the CEO today and has, I think, 3-4% of the shares also. And all of are executives, the CEO, the CTO, CFO have been there for between three and 10 years. It’s definitely still led by the people that started it.

[00:22:17] Tilman Versch: There’s one question coming in that I want to add to our conversation. What kind of potential is there for Kambi in South America in terms of size versus the US?

[00:22:29] Andreas Aaen: I would say both markets are still hard to quantify right now, but one thing that is quite important if you look at South America is that there are some of the same characteristics as in the US. They give land-based casinos what they call scheme slide. They can partner only with a few people, so there’s a limitation on how many brands can come online.

The first market that introduced regulations was Mexico. Columbia came in and so far, I think Kambi is saying that they have taken 60%-70% of the market in Columbia through the partnership with Corridor which has a brand called BetPlay, and through Rustview International has a brand called RustBet in the Columbian market.

Columbia came in and so far, I think Kambi is saying that they have taken 60%-70% of the market in Columbia through the partnership with Corridor that has a brand called BetPlay, and through Rustview International has a brand called RustBet in the Columbian market.

That’s one example of how huge a market share they take there. They can do the same thing in Brazil and Argentina and some of the bigger markets that will be revigorated now this time.

[00:23:28] Tilman Versch: To help me understand better what they do because I have no clue, they are some kind of software for all this betting?

[00:23:39] Andreas Aaen: Yeah, it is software but it is people-driven. Basically, when you go to Germany, you download a Unibet app. If you want to play Manchester versus Liverpool and then you see there’s a 1.8. If you bet on Manchester, 2.2. If you bet on Liverpool, maybe a 3 on the X. But Unibet doesn’t decide that, it’s Kambi that makes those lines.

But then if some players are tweeting a lot on Manchester United, “Should we change the line? Should we cut the people off? Maybe he has some insider knowledge.” So, they set the lines, move the lines, and then do the trading on the back internet. This is something that requires algorithms. It calls for manual traders that know because if you have a second-level football match in Denmark, it’s good to have a good algorithm but you need to know if the best players are sick at the match. It tips the point a lot there. You need some knowledge and there are some traders that can do that. Kambi is by far the leader in it. Kambi is not well-known because consumers don’t see the Kambi brand. They see the DraftKings, the Unibet, et cetera. But I think Kambi is the more valuable part because that’s really the engine that runs through this.

Kambi’s moat

[00:25:09] Tilman Versch: So, their moat is also legally protected? Because if they apply it to the legal standpoints, it’s hard to get in?

[00:25:18] Andreas Aaen: It’s more as I recall the scale and the experience of adventure. They have spent 20 years building the technology around it. They have built the knowledge and all the people around it. They have a thousand people now. It’s really hard to get in there because you need the revenue to invest in the people but you cannot get the revenue before you have the people to do the work, so there is like a little bit of the chicken and the egg thing there. If I wanted to start competing with Kambi tomorrow, I need one guy that needs the Tour de France, one that knows basketball. They have 300-400 odds compilers there. And then I need all the revenue and the technology around it so it’s extremely high to come in and compete with them there.

It’s more as I recall the scale and the experience adventure. They have spent 20 years to build the technology around it. They have built the knowledge and all the people around it.

[00:26:06] Tilman Versch: It’s interesting. There’s another question in the chat. What sizable sportsbook operations could they win in the coming years? Is the pipeline strong enough to offset losing DKNG/888 ebitda in 2022?

[00:26:27] Andreas Aaen: Yeah, so what we have seen so far at least is that they do keep signing new operators. They signed some big ones in Churchill Downs recently, the BetAmerica brand that migrated from one of their competitors called Esprit. Then a big potential for them is also to sign the Tribes in the US. They already signed three Tribes there. But in some states like California or Florida, it could be the Tribes that could get a monopoly there. So, for Kambi to have a good spot with the Tribes is really important. And then, we still have to see how it turns out with DraftKings and others. There are not a lot of proceedings for a big one migrating off a platform, so we will have to see how that turns out. Also, Barstool is still a new brand even though they signed in more than a year ago. It’s still sometimes a new brand because they just recently launched and will now expand through the US.

[00:27:34] Tilman Versch: Maybe as the last question on Kambi. Where do you see the company in 5 years?

[00:27:39] Andreas Aaen: I think it’s really wide outcomes. It’s actually still our largest position, so we think every outcome is really good there. It’s just a matter of how good it’ll be. In some estimates we see in the US market, we see that in three to four years it will be between 15 and 30 billion dollars in revenue there. So, if Kambi can just take 10% of that market, and just to summarize they have between 40 and 60 now, even if the market share declines to 10% and they keep a 10% revenue share on it, they would get US revenue of around 300-400 million there. And the current revenue is around 130. They could triple or quadruple their revenue in just three to four years still. I think that’s a huge potential. And the margin will expand from 15-20 to +40, I think.

[00:28:41] Tilman Versch: That sounds very interesting. There are some arguments why you make this a large position.

[00:28:46] Andreas Aaen: Yeah, for sure.

Naked Wines

[00:28:50] Tilman Versch: We also have Naked Wines and Where Food Comes From on the list. As there are already some questions on Naked Wines, I want to start with that. How are you thinking about the potential subscriber base Naked Wines can get in five to 10 years?

[00:29:05] Andreas Aaen: I think what most people miss is that they think it’s just a COVID beneficiary and they will turn away again. But what most people don’t understand is that they were already growing quite nice before COVID. They were growing between 15% and 25% a year for like 6-8 years before COVID. It was not a bad business before COVID, they were growing really high rates there. But now during COVID, they are growing 100% year by year really. So now it’s just a matter of where will that grow front house again?

They were growing between 15% and 25% a year for like 6-8 years before COVID. It was not a bad business before COVID, they were growing really high rates there. But now during COVID they are growing 100% year by year really.

But for me, they can grow the substantial base still. To be honest, it could be between 30% and 50% a year for the next few years before it maybe turns to more normal levels. I think there’s just a huge potential for them to kind of build higher attention and like more engagement on the platform and stuff like that. There’s a real network fixer, you know? The engines want to be where there are most winemakers and the winemakers want to come to the platform where there are more buyers.

There’s a real network effect, you know? The angels want to be where there’s most winemakers and the winemakers want to come to the platform where there are more buyers.

[00:30:18] Tilman Versch: Maybe you should take a step back and I would invite you to maybe define what Naked Wines is doing and what their advantage is against other players in the space.

[00:30:30] Andreas Aaen: Yeah. I think the biggest thing to understand about Naked Wines is that it’s not an online shop to buy wine. That’s what most people are missing. It’s not a subscription club where you just pay some money every month and get a predefined case of wine. Those subscription businesses are online wine shops, there are thousands of them. There is huge competition.

What Naked Wines do is they’re basically a crowdfunding platform for independent winemakers. They have what they call Angels who every month deposit between £20 in the UK or $40 in the US into what they call a piggybank. It’s not a subscription, where they lose the money. It’s like a deposit they put into like a bank account in their own name.

Naked Wines uses that money to crowdfund independent winemakers. They could basically call a guy that makes some really good wines at a famous winemaker and ask “Do you want to have your own winery someday? We can help you with marketing and bottling. We also have the customers that want the wine.” They convince people to get out on their own and start producing real exclusive wine there.

There are real benefits here because if you want to produce wine and you’re good at that, what don’t you want to do? You don’t want to spend time selling it. You don’t want to spend time on marketing. You don’t want to spend time on labeling, corking, bottling, all the logistics, all that stuff.

Naked Wines has that model where they will have the customers and the angels that crowdfund you and then they have all the logistics around it so that the winemakers should only concentrate on one thing and that is producing the best possible wine there. And then, I think the real thing is that they are really creating engagement, a community, about wine lovers here.

Naked Wines has that model where they will have the customers and the angels that crowdfund you and then they have all the logistics around it so that the winemakers should only concentrate on one thing and that is producing the best possible wine there. And then, I think the real thing is that they are really creating engagement, a community, about wine lovers here.  

The people that go onto the Naked Wines sites to buy wine, don’t get in on a comparison site, spend two minutes, and then choose what the cheapest wine is. They spend hours on this site reviewing wine, doing virtual tastings, corresponding with the winemakers, and getting feedback. There is a real connection in the community they are building around it.

Taking advantage of insider trading

[00:32:54] Tilman Versch: I want to switch the topic for a second because there is someone urgently trying to ask the question again that we couldn’t answer. How do you detect insider trading and take advantage of that?

[00:33:10] Andreas Aaen: I would say it’s something I was a little more focused on in the past. When you say insider trading, company insiders buying or selling a stock. That’s how I interpret the question.

Of course, if I’m into a company and the CEO is dumping all his shares in the market, I pay attention to it and vice versa. In the last months with Naked Wines, both the CEO and the CFO bought more shares. The stock has doubled and then they buy even more shares with their already taxed money. So, of course, I see that as a positive signal and vice versa.

If Kambi’s CEO tomorrow would dump all his shares, I would be quite nervous I would say. So, I look into it but I would not call it a big factor. It’s something that intrigues me, yes.

Naked Wines: Customer satisfaction and company relevance

[00:34:04] Tilman Versch: Then let’s go back to Naked Wines. You mentioned the customers. How happy are they?

[00:34:12] Andreas Aaen: I think the best way to measure it, as I said, is that the truth is in the pudding. You can look at the retention rates they have. It’s a really good retention rate for a consumer company that’s trading online. The best thing to compare them to is food box companies or clothing companies, something that you can build cohorts online. They constantly have above 80% retention of their customers. Even if you look at the more mature cohorts, they are turning more towards +90% yearly retention there. So, if you buy a customer and 90% keep coming back year after year after year, that’s basically because they love the community, they love what they get through it. So, I think that’s the best way to look at it. They rate the wine. They spend time on the site and stuff like that. I think that’s the best way to look at it.

So, if you buy a customer and 90% keep coming back year after year after year, that’s basically because they love the community, they love what they get through it.

[00:35:12] Tilman Versch: I want to take another question from the chat. Why would it not be obvious that the best place for consumers to buy wine would be at Costco under the Kirkland house brand label?

[00:35:27] Andreas Aaen: I also get this same question a little bit related to Amazon and now it’s Costco. The thing is that in the US, just to take their example, there is this rigid distribution system that for most states, retailers in the US and Amazon is a retailer because they own Wholefoods there. They have to buy their wine through the distribution system, so that’s through independent distributors. That’s like a different line that comes in there. Amazon can’t sell it through the marketplace around it, but that’s another question.

I think the difference with Naked Wines is that they fund independent winemakers. It’s exclusive wine that you can only buy through Naked Wines. I think what Costco and Amazon will come in and compete with over time, it’s more the comparison sites, the generic online wine shops where they sell all the same wine like everyone else.

I think Amazon and to some extent, Costco could take over that market. But I think there really is room for a niche player like Naked that can really attract the really strong wine lovers, the ones who learn about new exclusive wines that they cannot buy on Amazon.

Naked Wines management

[00:36:49] Tilman Versch: That’s interesting. I want to combine two questions from the chat. One is directly on Naked Wines. What are your thoughts on the new CEO, Nick Devlin? And another one is also related to this: What are some of the questions you ask management that determine how good they are? And maybe what question did you ask the new CEO to determine how good he is?

[00:37:16] Andreas Aaen: Nick is based in California. I actually never met him in person but I have had several phone calls and Skype calls with him. With the talks I mostly have with Nick, I think that he understands the long-term play here. He really understands what drives LTV, the lifetime value of the customer, how they can buy them, and how to generate more and more networks into the platform. He understands that his job is not to please the ebit numbers next quarter. He understands how to build something that is really, really valuable over time here.

He really understands what drives LTV, the lifetime value of the customer, how they can buy them, and how to generate more and more networks into the platform.

I think that even though he is a new CEO, he was COO before. And even before that, he was in charge of the US business. He got into the US business when it was in a little trouble. I think it was four or five years back. And then he quickly turned around the US business and made that the profit rival or the growth rival for the business. Then he became COO for the whole business and now the CEO. He has a really long track record inside the business, even though he is new in the US CEO position.

I would say one of the things about Naked Wines is that they have a strong culture and they have a really strong model. They don’t need to change the model that much. It’s better to hire a guy that knows it from scratch then he can keep improving it.

[00:38:46] Tilman Versch: And what are the questions you use to determine if management is good?

[00:38:53] Andreas Aaen: Of course, one thing is not something you ask. One thing is how you track them. They do what they say they do. If they say something on a conference call and the next conference call they say something else, you track the track record. Both on the financial side but also just on what they say.

Sometimes I try to learn about the management team a little bit also. Like, where do they live? What are their interests outside of the business? Just to understand what type of people they are. That’s something I look into.

And then, it’s more to judge how much they understand the business. Are they more focused on selling me the stock? I really try to look at the passion that they have for the business. The times I have talked to Nick, he just loved wine and finding new smart winemakers. He loves to see the angels crowdfunding for a new winemaker and they have some interactions on the site. It seems like he just enjoys building the community around it. I really like CEOs who really go for the product and the customer than just for the financial side. Of course, they also need to understand how they can create value for shareholders. But to my extent, you only create value for shareholders in the long-term if you create value for the customers. To see how they know the customer proposition is really important.

I really try to look at the passion that they have for the business. The times I have talked to Nick, he just loved wine and finding new smart winemakers. He loves to see the angels crowdfunding for a new winemaker and they have some interactions on the site. It seems like he just enjoys building the community around it.

Naked Wines: Single transaction versus subscription offering

[00:40:29] Tilman Versch: Interesting. I want to go back to Naked Wines because I think we still have one question open. If the market for wine subscribers proves to be smaller than expected, do you think Naked Wines could focus more on single transactions in addition to the core subscription offering?

[00:40:48] Andreas Aaen: I think they really like the subscription offering and not so much the transaction side. Like, if someone just buys a voucher or a coupon or stuff like that. There are two reasons for it. One thing is when people automatically put money into this piggy bank, they have the tendency not to pull it out again. So even though they don’t use the money, I have seen examples of people that go for a year without buying any wine, they just put £20 into this piggy bank. And then they suddenly remember “I have this £240 in my bank. Should I take them out?” No, they go in and buy wine for £240. So, there is repeat retention in that element.

Another thing is that is something that really separates Naked Wines. Even Amazon wanted to compete with them all the time. They have this work so well that they can use the funding from the angels to fund the winemakers. If you look at Amazon’s model, it’s all about extending payables to their suppliers. But here, the suppliers need money upfront. There’s a huge difference in the way that Amazon won’t go in there and do it the other way. So, I think it’s quite important for them to have this model.

Naked Wines market possibilities

[00:42:01] Tilman Versch: With the next question, we’re doing something dangerous. We’re mixing beer and wine. The question is, “If Naked Wines could be successful in spirits or craft beers as well?”

[00:42:14] Andreas Aaen: I would not rule it out but I think they are so much into wine and the potential market in wine is so insanely big that I think they should just keep focusing on what they are good at. It’s not something management has mentioned to me so I could not rule it out if it would happen at some point. But I think at least for now if you have a really good business growing at 80% growth last quarter, even if it’s just 20 or 30%, you should just keep your head straight and do what you’re good at.

[00:42:45] Tilman Versch: Maybe to sum it up here and move on to the food. How big is the wine market?

[00:42:55] Andreas Aaen: The wine market is insanely big. In the US and also in Europe, most of the wine is still bought in supermarkets. People still go to the supermarket and buy a $5 wine or something. The thing is, there is really no wine in that wine because the bottles are there, the taxes are there, corks and label and distribution and logistics. All that stuff is in that bottle. When you go to Germany and you pay €5 for wine, there’s probably less than €1 wine in it.

What Naked Wines can do is cut all the middlemen and actually create good wine. This is the same for everyone else in all the industries. It takes a long time for something to move online. The share moving online will take a long time. Think about it. Why do people want to go to the local grocery store and have really heavy bottles of wine taken at home when they can have it delivered to their front door? It doesn’t make sense. And this is what we are seeing with COVID. The neighbors are seeing those Naked Wines bottle in front of the neighbor’s door and say “Oh, what is this? Can I also try that one?” So, there are a lot of possibilities there.

The neighbors are seeing those Naked Wines bottle in front of the neighbor’s door and say “Oh, what is this? Can I also try that one?” So, there’s a lot of possibilities there.

[00:44:23] Tilman Versch: Do Naked Wines use labels of Where Food Comes From?

[00:44:27] Andreas Aaen: No, they don’t. No.

Where Food Comes From

[00:44:32] Tilman Versch: So, we’ve moved on to Where Food Comes From. What is interesting about the company and what is it doing differently than other companies?

[00:44:44] Andreas Aaen: What I really like about Where Food Comes From is that they are running with so many tailwinds. They’re in organic food. They’re in traceability. They’re in antibiotics, non-GMO, gluten-free, animal welfare, and environmental welfare. They’re just into all the super trends. They’re just really supporting all of that.

What I really like about Where Food Comes From is that they are running with so many tailwinds. They’re in organic food. They’re in traceability. They’re in antibiotics, non-GMO, gluten free, animal welfare, environmental welfare. They’re just into all the super trends. They’re just really supporting all of that.

For someone that does know what they’re doing, they’re really an independent verifier of sustainable food. So basically, in Europe, it is mandated for cows to have those ear tags so you could trace what their age is and how they are sourced and what their background is if they are moved. Or if they get sick, you can trace them back to the farm. That is not mandatory in the US. But what has happened over the past few years is that the US wants to export a lot of its beef to China and Europe and they demand that traceability.

So, what Where Food Comes From does is they both sell the ear tags, but then they also do the on-site farm audits. So basically, they send people to go to the farm and say “They have different standards.” Do they test if they do treat antibiotics in their food? If they say it’s gluten-free, is it really that? I would compare it more with an audit or a financial company. We have someone come and check once a year if the numbers are accurate. And this is the thing here. They are just the trusted party that does that.

[00:46:33] Tilman Versch: I don’t want to talk about ear tags favorably, but how sticky is the business?

[00:46:39] Andreas Aaen: They sell ear tags for around 6-8 million dollars a year. They have an 80% market share. That says a lot about how small the market is. But the good thing is that when the market is so small and they have such a big market share, it doesn’t make sense for anyone to come in and compete with them because why would someone try to innovate this technology and go out to convince the farm to use their products if they can only win a $2 million business? So, it’s really good that it’s so sticky and still growing there. That’s the good thing with it.

[00:47:18] Tilman Versch: And the logo business they have?

[00:47:21] Andreas Aaen: They don’t really do logos. That should probably have an explanation. What they do is they have Where Food Comes From label. Basically, what the retailers are doing is they could put this label on the food and put it into the grocery store. And then, all of the people would look at the beef there and can see the Where Food Comes From the label, and then they would know that this food has been verified, this piece has a source and age verification, it’s not treated with antibiotics and stuff like that. They try to build a consumer brand here in the US. We have this is in Denmark, it’s a different brand. You know that if you buy cleaning materials, there’s not something allergic to it.

They try to build like a consumer brand here in the US. We have this is in Denmark, it’s a different brand.

They basically try to build that with food. I think the biggest revenue driver for them now is that consumers want sustainable food. So, when consumers go to Burger King, they want to have beef that has good sources and age verification. In Walmart during COVID, all the groceries like organic food and stuff like that were thrown out of the grocery store. They couldn’t get supplies enough.

So, what Walmart and Tyson Foods and some of those really big chains are doing now, is that they go to the farmer and say “We have a huge demand for organic food. Can you please source some more organic food?” But Tyson Foods or Walmart need to know that when the producer says the food is organic, it is really organic. So there needs to come to a middle man. And that’s where Where Food Comes From comes in. They need to be the verifier and put a stamp on it that this is really this way. There are a lot of tailwinds when big companies go to the suppliers and say “You need to do this and you need to use Where Food Comes From.” Then, they will do it.

Why invest in Where Food Comes From?

[00:49:33] Tilman Versch: I want to show the chart of the stock price for the last years because it somehow went nowhere in the last years. It raises the question, why do you see an interesting point in investing in them?

[00:49:51] Andreas Aaen: I would say that at one point it was extremely overvalued at some point. Can you try to take a 10-year chart there?

[00:49:59] Tilman Versch: Sure.

[00:50:01] Andreas Aaen: Then you can see how much it went up before that. So basically, the stock went from 0.3 to 3. It was up 10x two years before that. So, the Ebitda multiple went from something like 8 to 80. So, of course, the stock was extremely overvalued at that point. We only started buying it last year, I think when the valuation has come down a lot over the last few years. But now we’re at the point where the valuation is actually quite cheap again. It’s not like single-digit earning. This is a really high-quality company but you’re only paying 15 times free cash flow in the next year or eight times Ebitda for a business that has a compounded revenue and Ebitda of +20% a year for 12 years in a row without any down year. So, it’s a really high-quality company with so many tailwinds that you buy from what I would say is a quite low multiple now. And this is a stock that if you look at the stock market today, it seems like every stock has just gone to the moon. This is a stock that, as you say, has gone really nowhere for the last time. I think it’s really still underappreciated. That’s probably because it trades on the OTC market. It’s a little elite. There’s a big spread in the stock. The CEO owns 30% of it.

So, it’s a really high-quality company with so many tailwinds that you buy from what I would say is a quite low multiple now.

Growth strategies of Where Food Comes From

[00:51:28] Tilman Versch: How do they grow?

[00:51:31] Andreas Aaen: They grow really by adding more farmers and selling more ear tags, the hardware, and then by upselling to existing customers. If you have a customer that is already doing non-GMO treatment, then they can also add an animal welfare stamp on it or an environment-friendly grown stamp on it. Existing farmers add more stamps because the more stamps they have, the higher price they can get for their food and the more channels they can sell it into. It’s really about adding more farmers and upselling. Then they’re building software solutions on top of that. They do solutions so that Walmart can track all the suppliers into a channel. And all this reporting is still done manually, so basically, the order comes out with an 80-page PDF that he has to fill out on site. They try to invent a lot of software solutions around this process they can upsell.

[00:52:34] Tilman Versch: Can they raise prices? Do they have pricing power?

[00:52:38] Andreas Aaen: They do raise it a little bit, but they also know that most US farmers have not killed it or have not made too much money over the last few years, so they have been a little protective to not squeeze money out of someone that has not made a lot of money. I think they have some on-tab pricing power, but I think they will wait to use it until the farmers are making a lot of money again.

[00:53:05] Tilman Versch: Interesting. I had another conversation with another investor who was invested in the company a few years ago, Travis Wiedower.

[00:53:15] Andreas Aaen: I know Travis Wiedower.

Where Food Comes From: Cash compensation and management

[00:53:18] Tilman Versch: He said the conversation is a bit tricky in this case. How do you see it?

[00:53:24] Andreas Aaen: I think the cash compensation is quite high for such a small company. The thing is, if you compare the total compensation to other companies, it’s actually not that high. But that’s because in other companies the CEO and other management get a lot of stock options. But here, the management team doesn’t get any options. They only have the share price and they get the cash and maybe a small bonus.

I would say that the compensation is maybe a little high with what I’m comfortable with, but it is nothing accelerated or anything like that. And one of the biggest shareholders is a hedge fund called Yorkman Capital. They have something called Rain Graham that sits in the board room and he’s on the compensation committee. So, it’s like if the second-largest shareholder is deciding the compensation and he runs the hedge fund, he is mandated to not pay too much to the CEO, so he probably decides what’s fair for the CEO there.

It’s not like the CEO just takes whatever he wants. There is a third party that has real money on the table that decides it. And also, the two big shareholders are the CEO and his wife that is the president. So, they work together here really.

[00:54:55] Tilman Versch: Maybe let me add two questions. Wouldn’t it be better if they were paid in stocks because the interest is higher?

[00:55:04] Andreas Aaen: Yeah, but they own so much stock. They own 30% of the company. The stock is not so liquid. If they were only paid really low in cash, they don’t pay dividends because they grow so much. So, then they would have to sell stock on the market to finance their personal spending. I would say it would also be quite bad if they keep selling stock in the market to finance that. I would rather have they didn’t sell any stock as they haven’t done, but then get a little more cash so they don’t need to sell stock.

[00:55:40] Tilman Versch: And how do you see the quality of management and owners in this case?

[00:55:44] Andreas Aaen: I would say, the one word I would put on John, is passionate. He founded this company from the ground up while his wife Leann was working in the industry. She made an income for the first three years so they could support the family while the company was making nothing. Then, John just ramped this thing from the ground up. When Leann joined the company, she already had a lot of connections in the industry that she could use to push it even more. It really is family driven. It’s what I would call purpose-driven. It’s a management team that understands that they should build a much bigger company in the end.

It really is family driven. It’s what I would call purpose driven. It’s a management team that understands that they should build a much bigger company in the end.

They have been quite good at capitalization. The acquisitions they have done have turned out quite well, I would say. They’re good at bundling and investing and different stuff. They also lack some things also. I think it’s not run as efficiently as a company. I think there are some costs that could be taken out. I think they could do a little more communication. They had some internal control issues a few years back. There are some ways to improve, but I would say that the thing we like is they work a lot of hours to create a much bigger company and they burn for it.

Where Food Comes From: Future prospects

[00:57:07] Tilman Versch: Where do you see the company in five to 10 years?

[00:57:11] Andreas Aaen: The one thing I would say is much larger than today. And one thing people think is that this is a small listed company. They have a huge margin potential. As you said, there is somehow high compensation to the management and to an office building that they need to keep and also just the auditors. When you’re such a small company, that’s a big expense. But when you grow the revenue and the margins there will be a lot of high scalabilities when they keep growing there. So, I think the margins will expand a lot. And then, they just have a lot of tailwinds there. As long as consumers want to have organic food and environmentally grown food, they will keep growing.

And then, they just have a lot of tailwinds there. As long as consumers want to have organic food and environmentally grown food, they will keep growing.

Position sizing and selling

[00:58:02] Tilman Versch: Thank you very much on Where Food Comes From. I want to make a call to the audience that if there are more questions, please type them in now so that I can ask them as well. There is one question on position sizing and selling and buying. How do think about sizing and eventually trimming or selling your positions?

[00:58:27] Andreas Aaen: I would say that we normally try to build positions a little slower. When you start buying, we normally don’t go for zero to 15. It will be more gradual as we get more comfortable with stock and as we see events play out, we want to increase it more. We’re not afraid of buying higher and higher and higher in stock as long as they keep doing well.

It will be more gradually as we get more comfortable with a stock and as we see events play out, we want to increase it more. We’re not afraid of buying higher and higher and higher in a stock as long as they keep doing well.

Kambi stock has been going up a lot in the last year or so, but we actually kept buying on the whole way up as events played out. We will decrease the company if it gets too big in the portfolio. We have some really small positions in Kambi just to make the size inside what we think we are comfortable with. It’s still a large position today even if it’s up this much.

I think in the past what I did too much was that I saw the winners too early and then I came on to the losers. That is something I really learned from now that I think I became much better at cutting the losers early and then the winners compound and grow. I think that’s quite a valuable point to make.

Red flags when it comes to stocks

[00:59:39] Tilman Versch: What is some red flags that will make you avoid a stock completely?

[00:59:44] Andreas Aaen: If it’s outside my comfort zone. If they do something I don’t understand, it could be industries that I don’t understand. But then it’s also if there are a lot of external factors. If some companies depend on only one customer or if some companies have a lot of commodity risk or interest rate risk or currency risk. Something that could come from the outside and crunch the company. That is something I worry about a lot. And then of course I try to spot red flags in the customer proposition. One thing I have done in the past and I have tried to not do anymore is I really look if this product makes sense to the consumer and if it actually does create value for the consumer. If the management is credible and the business makes sense, then I think it’s a go.

And then of course I try to spot red flags in the customer proposition. One thing I have done in the past and I have tried to not do anymore is I really look if this product makes sense to the consumer and if it actually does create value for the consumer. If the management are credible and the business makes sense, then I think it’s a go.

Interesting smaller stocks: GetBusy

[01:00:47] Tilman Versch: I want to raise the last question that is highly awaited. But before that, I would ask the audience to leave a like. If you like the content, this supports my work and helps me get more viewers, which is also important here.

[01:01:01] Andreas Aaen: It definitely is important.

[01:01:03] Tilman Versch: Thank you. The question is if you currently find a very interesting stock that is too small or too illiquid for your fund?

[01:01:22] Andreas Aaen: Not something I hadn’t bought, I think. I can mention one stock that I actually own that I can’t buy more of because it’s too small. It’s a UK company called GetBusy. We own already 3% of the company already. Just below three. We can’t really buy more because then we have to flag it to the authorities and stuff like that. It’s sized as big as we can so I can mention it here. But that’s a really nice company. Its recurring revenue software growing at 25% a year. We’re trading it at two times RR in London. I think that is a really interesting company that people should look at.

The number of positions and sectors Andreas is investing in

[01:02:13] Tilman Versch: As you mentioned this, another question came up. How many positions do you hold and what is the rough split on sectors you’re invested in?

[01:02:22] Andreas Aaen: I normally hold between 12 and 18 companies, I would say. Now I got my first employee a few months ago, so I think we could go a little higher in position size now that we are two people. That’s my comfort zone. I would say probably around 20 is my comfort zone. Some are really small companies. The biggest companies are between 14% and 18% of the fund. We are quite concentrated on the best ideas there. What was the second question?

[01:02:56] Tilman Versch: What are the sectors you’re invested in?

[01:02:58] Andreas Aaen: We really do everything. I would say we don’t do bombs and pistols. I’m not too much into this EST, whatever people talk about, but I would say there are some sectors I don’t want to touch. Mostly, I try to avoid stuff that I can’t understand like biotech or even some shipping and oil. I think it’s too volatile. I don’t understand it so I try to avoid that. But then everything is really a go for me. I would say software is something I do a lot in. I do a lot of what I would call B2B suppliers to other companies, where I can track unity economics, understand the customer proposition, and stuff like that I think is really interesting.

I would say software is something I do a lot in. I do a lot of what I would call B2B suppliers to other companies, where I can track unity economics, understand the customer proposition and stuff like that I think is really interesting.

Outro

[01:03:52] Tilman Versch: Then at the end of the interview you have the chance to add something we haven’t discussed.

[01:03:57] Andreas Aaen: I can’t really think of anything. I write newsletters on my website. I think people should read them. I think there’s interesting stuff there. I try to really put out what I think are interesting topics when I write them.

[01:04:16] Tilman Versch: Then I want to say thank you to you and as well to the audience for the good questions. Thank you very much for joining us tonight. I want to ask you to stay on for a second.

[01:04:28] Andreas Aaen: Yeah. Thank you for having me.

[01:04:29] Tilman Versch: It’s time to say bye to the audience. Thank you very much for joining us.

[01:04:34] Andreas Aaen: Thank you for listening.

[01:04:36] Tilman Versch: Bye bye.

Disclaimer

Finally, here is the disclaimer. Please check it out as this content is no advice and no recommendation!

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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