Scav Enger

I write on Savenger’s Neglected Stocks substack. Day job pays the bill; this is for the thrill. Not financial advice.

[kache @yacineMTB]

you can outsource your thinking
but you cannot outsource your understanding

[The Redheaded libertarian @TRHLofficial]

Modern problems require modern solutions.

[Scav Enger @Scav_Enger]

@atrupar Sir, $100 to $600 is a 500% rise

[Scav Enger @Scav_Enger]

Wrote a little more here. Link in bio

[Scav Enger @Scav_Enger]

this resonates.

I see people cheering software companies taking on a large amount of debt to buy back stocks. I am not sure that is so bullish. For example, when some companies were announcing aggressive COVID-era buybacks, many people liked it. I didn't. I thought it was a character test for management team's judgement on risk taking. During Covid, it wasn't just a valuation collapse due to a market correction. The market plummeted because there were very real near-term risks of the economy and supply chain breaking down. Sure it is a good idea to buyback your stock when there is a drawdown due to a market-wide valuation correction. But you don't use up the ammunition on buybacks when times are uncertain due to a potential existential crisis that is causing you to dramatically change your business model.

I think similarly here. While we as stock pickers should definetly look for software companies that would benefit from this AI-narrative driven drawdown, I am not sure I like $CRM or $ADBE taking on debt for buybacks. The AI-narrative isn't just causing valuation drawdown for the sake of "repricing the valuation." There are real near to medium term risks that could be existential.

How does AI affect the sales cycle? What about the pricing model? If companies shift from seat-based to consumption-based pricing, what happens to the margin? Will gross margin collapse because these software companies will need to pay LLM companies a big comission chunk? $CRM and $ADBE used to be the primary platform and a price maker. Will they now become price takers? Will they be able to service their future debt at a favorable term? Or will the banks demand much tougher terms due to the heighted perceived or real risk?

A lot to think about with no clear answer, which is why the market is now rerating not just on the narrative but on the business fundamentals like growth rate, sales cycle, margin, debt cost, and terminal value of these software giants. Similar to the COVID era, buying back at this price may turn out to become the generational move. $CRM or $ADBE could be AI-winners. But I don't like what this tells me about management's thoughts on risk using up the capital as they are massively changing their business model

And of course, I have been buying a software company and am seriously contemplating buying another (both in regulated industries) lately that recently announced a buyback. So here we are...

[Mojo @MrMojoRisinX]

The Phone in the Limo is Busted

The "buy the dip" mentality floating around software right now feels a lot like pattern matching to the wrong cycle. This is not meant to be or sound like a generic bear porn take. I am attempting to share my observation about the quality of information available to make that bet, and the reliability of the signals people are using to make it. I've written about the private markets mechanics and the credit backdrop separately (use the twit search function for more background). In this post I am going to attempt to bring it together a bit more...

Let's start with the mosaic. The BTD ("buy the fcking you dip, you fcking moron - https://t.co/bgfQVq7w5d) crowd isn't necessarily wrong about any single piece of this. Slowing growth alone, 'seems' manageable. Multiple compression alone if history is any guide (I don't believe it is...), potentially an opportunity. AI disruption narrative alone, maybe overblown for specific names (feels that way, but I can't prove it...can you?). Rising debt alone, depends on the asset. PE overhang alone, slow moving but they are actively playing defense in lights. But when I take a step back, you have all of them simultaneously, and you're weighting them selectively to support a position you already want to have. Essentially, I see cherry picking one name that checks two or three boxes is not the whole picture.

The signals people are leaning on to support that rationalization are broken.

Let's start with the obvious one...management guidance. The visibility that made SaaS guidance reliable is genuinely impaired right now. AI impact on renewal rates, expansion revenue, customer behavior, nobody has clean line of sight on this. Management isn't lying. They just don't know either. The confidence required to extrapolate forward from the last four years hasn't been earned by the situation.

Next let's address buybacks. FinTwit loves pushing buybacks as this panacea. Borrowing money to retire shares is not a vote of confidence in the business from my perch. We are witnessing 'earnings per share management', SBC dilution control, and in some cases financial engineering to hold a stock up that is doing real operational work as a retention and recruiting tool. Next, when the terminal value question is genuinely open, levering up against an uncertain denominator is a wild risk to take. The buyback benefits the people making the decision more directly than it benefits you the investor (good for the traders).

One of the most oversold narratives in investing is insider buying. I mean, don't get me wrong, I like when insiders of the companies I am involved with buy stock. I privately encourage insiders, who have a great feel for their forward looking prospects to get ahead of it as a signal to market participants, and for their own wealth generation to buy stock before the path is obvious to others... But keep in mind, that many of these executives are already wealthy (I could give you some great stories about encouraging insiders at Nexstar to just do this before several material earnings inflections).

Let's address something and just say it directly...seat risk and livelihood risk are not the same conversation. A $1M open market purchase when you have $40M in stock and options is an extremely cheap signal to send, and the market treats it like something big/game changing that costs something real. The asymmetry between what it signals and what it actually costs them personally is too wide right now to carry the weight people are putting on it. Get your mind right.

I am not here to shit on the sell side. The research space is a tool, that's it! But let's discuss sell side estimates. The models were built for a world of predictable recurring revenue and stable competitive moats. The adjustments being made to those models are just educated guesses about something with no real historical precedent. I am genuinely not making a criticism of the analysts making the estimates and revisions call or changing the price targets after the stock or sector gets walloped, but its their job and they have the incentive structure to match that seat.

There are also a lot of narrative violations occurring with large PE sponsor(s) commentary in the press. When Thoma and Vista are making the media rounds reassuring everyone about portfolio health, that is the only lever they have left, and I don't really see this as a datapoint with a lot of merit. So as of now, they aren't walking away from their companies, and why should they? They are not handing keys to lenders (yet/now), and why should they? But let's take a 2021 or 2022 vintage deal, bought at 10 to 14 times sales, financed at 7 times leverage when debt cost 9 percent (wrap deal structure), in a business that has slowed from 25 percent growth to 7 percent, with comps that have re-rated from 10 times to 3 or 4 times sales, with debt that now costs 13 percent. The math certainly works less efficiently now, and there is a case to be made that on paper the equity is impaired, and the IRRs presented 6-9 months ago are pretty much unlikely to be realized. The marks don't reflect it because nobody in the ecosystem has the standing or the incentive to force the issue.

And let's be honest about why the media tour is happening at all. The exit market is essentially closed (other than the full pamp private deals where they are "reserving space" for retail...yikes). IPO into this? For what audience and at what price?

The strategic buyer universe, your Oracles, your Salesforces, Constellations, SAP, has pulled back. The competitive bidding situations between Thoma, Vista, KKR, Blackstone and the long list of other capable strategics that made 2020 to 2022 feel like a permanent bull market for these assets, those are gone, at least for now. It's opportunistic now and sparse, and the optics of what deals you do matter as much as the economics and snap shot accretion.

The special dividend recap at 2022 terms with 25 lenders fighting for allocations? Not happening. So what's left? Merging portfolio companies that you wouldn't normally put together to cut OpEx. Rolling assets into continuation vehicles to buy time and avoid a new mark. Selectively selling the winners to show LPs some DPI and prove the fund is working, while the weeds sit on the books marked at something that has no real buyer to test it against.

Someone will respond to this with a one off deal example as if it really matters. Ask yourself whether that sponsor is doing it because the setup is genuinely compelling or because they need liquidity and think they better move before it gets worse.

We will also almost certainly see a sponsor pay a multiple materially higher than where public comps are trading, and a lot of people will call that a re-rate signal for the sector. It ain't. Get your mind right.
You bought $80 to $100 billion of deals at 8 to 14 times sales two to four years ago and now you're telling your investment committee you're hunting in a world where deals are 2 to 6 times sales.

Someone is going to respond to this post and immediately jump right to but but but, software multiples are cheap versus history. This is the most seductive and probably the most dangerous signal of all. Insert its a trap gif. Multiples are only cheap relative to the growth, moat, and terminal value assumptions that justified them historically. If those assumptions have structurally changed, the historical comparison is a false anchor.

The prior cycles where buying software on a drawdown worked, 2016, 2018, 2022, those were multiple compression events. Those business models were intact. Terminal value wasn't seriously in question (I am sure a few were...so come get me in the comments). The lending environment recovered. You could trust the c-suite disclosed guidance (and was likely sandbagged), trust the board increasing the buybacks, and in many, if not most cases, could trust the moat. This is a different set of conditions and the old toolkit doesn't cleanly apply.

So what does real underwriting look like here and now? The framework and variety of checklists that involve unit economics that genuinely benefit from AI or true insulation from it, improving earnings revisions (rate of change), no material pricing degradation, clean balance sheet, straight forward formulaic and opportunistic honest capital allocation that is all spelled out and aligned with governance and incentive compensation structures. Almost nothing in software passes all of that simultaneously right now is the way I see it. But the more difficult issue to contend with, is that even if you find something that does, the work is just beginning and you have to keep verifying. This environment requires dynamic re-underwriting as conditions shift, which adds real stress to longer duration investing in a way that sitting back and letting it work and play out is a tough way to approach this, is my view.

I look at this approach as the lazy approach with excuses like I have a mandate that allows me to be patient and I have earned the trust of my LPs. PSA: I would be very careful with this assumption... And for a lot of people it's genuine conviction that it resolves the way it always has. Maybe it does...and perhaps it will.

This is what I keep coming back to...The AI disruption risk is probably somewhat overhyped. I think that (I don't necessarily have a convicted belief in the statement). I just can't really quantify it, I certainly can't qualify it with any real precision, and I have no honest way to weight that assumption in a model (do you??). I would be careful of anyone telling you they can issue spot this with conviction and are sizing up the opportunity as a long duration investment (this is not a TRADING DISCUSSION POST - yes if semi's sell off, software will prob bounce!).

The phone in the limo is busted. The signals that used to tell you where you were and where you were going aren't working the same way anymore.

More comin'...this much I promise you.

Best,
Mojo

[Scav Enger @Scav_Enger]

Was looking into the $MKC deal (via RMT) and came across this. A very interesting piece

[Mojo @MrMojoRisinX]

My Experience with Reverse Morris Trusts

Hat tip to @ProfPaulNary for a great question prompted by yesterday's Unilever Foods $UL and McCormick $MKC announcement. I have worked on a number of these deals over the years and wanted to add some practitioner color to a topic I think I know reasonably well from a deal and trade structuring perspective.

The Unilever and McCormick deal is a fascinating one. Unilever is spinning off its global food business, Knorr, Hellmann's, Maille, into a standalone entity that immediately merges with McCormick. Unilever shareholders will own approximately 55.1% of the combined company, existing McCormick shareholders hold 35%, and Unilever PLC retains a 9.9% strategic stake. The $44.8B valuation includes $15.7B in cash to Unilever funded through new debt and committed bridge financing. That $15.7B debt push-down into SpinCo is worth watching closely. It might actually become the transaction anchor down the road. More on that below.

People ask why there aren't more Reverse Morris Trust deals. It is a fair question. The structure is sophisticated, the tax efficiency is real, and the surface level strategic logic is often compelling. The answer is that the conditions required to actually close one are genuinely rare, fragile and cumbersome. Reality is that many situations that start down the RMT path end up somewhere else. The deals that close are the survivors of a very long filter and extended duration process prior to any announcement.

Section 355(e) was enacted in 1997, Congress attempting to plug the original Morris Trust loophole. What it actually did was create the modern Reverse Morris Trust structure. Advisors needed a year or two to get comfortable with the new rules before pitching clients on deals this complex, which is why the first notable transaction did not appear until 1998 with W.R. Grace and Sealed Air. At the time, we were already circling deals in this space at the family office I was at (See, The Education That Paid Me at Inside Mojo), exploring whether we could buy regulatory disposals to help these transactions get done.

Then 2002 happened. The semiconductor industry was in the middle of a massive restructuring wave, and multiple large asset divestitures were being contemplated simultaneously. Various structures were on the whiteboard, straight spin-offs, PE carve-outs, and RMTs, and the path each deal ultimately took depended on which conditions could actually be satisfied. I was involved in the Agere situation when Lucent separated its semiconductor business, and I worked on the Agilent semiconductor division that eventually became $AVGO Avago Technologies. I knew Hock Tan before he became HOCK TAN. Neither ended up as an RMT. The tax basis, the sizing constraints, the availability of a public merger partner, the regulatory picture, something in each situation made the RMT path too hard to execute, and a different structure emerged instead.

The one that did close as an RMT in that window was Conexant and Alpha Industries, which created Skyworks $SWKS. I was involved in that deal. Structural logic: Conexant's wireless business was materially larger than Alpha, so the 50.1% shareholder continuity requirement was naturally satisfied, the assets fit, and a willing public merger partner existed at the right size. Even then, it took over a year just to announce the deal! That same year I worked on the P&G and Smucker Jif and Crisco deal, another clean RMT where the asset fit and tax efficiency made a compelling case to both boards. The AT&T and Comcast broadband transaction that year showed the structure could scale to $72B. Then GM and EchoStar collapsed, and advisory activity pulled back hard. The "1+2=5" pitch got considerably harder to make.

The obvious pattern in corporate actions: A cluster of deals gets done, a high-profile failure follows, and advisors go quiet for several years and the space retrenches. The structure didn't really disappear, it just went back to the whiteboard while the market absorbed the lesson.

The mid-2000s were rich trading territory, but with an important distinction. RMT deals can be structured either as a spin-off or a split-off, and that difference matters enormously for how you approach them as a trader re trade structuring. In a spin, every shareholder receives SpinCo shares pro rata. There is no proration, no optionality, no spread to trade. In a split-off, shareholders elect to tender parent shares in exchange for SpinCo shares at a set exchange ratio, typically with a discount built in to incentivize participation. If the offer is oversubscribed, shares get prorated. That proration mechanic, combined with the discount and the relative value spread between parent and SpinCo, is what creates the trading opportunity. You set up the swap position to express a view on the exchange ratio, the proration outcome, and the back-end convergence. That mechanics breakdown deserves its own post. This is not a free money trade like an odd lot tender, but you can size this trade into the billions of exposure.

Alltel and Valor and $WY Weyerhaeuser and Domtar were both split-offs, which is precisely why those were tradeable in size. We held an activist position in Alltel going into the deal, which sharpened the view considerably. Weyerhaeuser and Domtar was notably the first RMT executed as a split-off, a structural milestone beyond just the deal itself. The split-off tender and proration arbitrage is a bucket I return to every time a new RMT is announced. The hit rate is not a slam dunk, but the announcement itself is worth investigating on two levels: the arb and proration trade, and separately, whether the combined entity represents a genuinely transformational business.

Disney and Citadel Broadcasting shows both sides of that coin. Transformational logic at announcement, bankruptcy two years later. Pfizer and Upjohn into Viatris is a cleaner example of the structure delivering on its promise. The $HPE and CSC deal that created $DXC was another rich trading environment given the spread, the integration uncertainty, and the sheer size. These deals either crush it or end up in the restructuring bin.

The P&G and Diamond Foods Pringles failure in 2011 caused another round of advisory hesitation, the second high-profile RMT collapse in a decade after GM and EchoStar. But the structure kept reappearing wherever the tax logic was compelling enough: Verizon's multi-year wireline exit via FairPoint and Frontier, Lockheed and Leidos, GE and Wabtec, and ultimately AT&T and WarnerMedia into Warner Bros.

Tea leaves and pattern recognition is a helluva drug: The structure is strategically sound and the tax efficiency is legit. But it demands a near-perfect confluence of conditions: the right tax basis, the right asset sizing, a willing public merger partner, regulatory clearance, and stable macro, all at the same time, across a negotiation that runs two years (or more) from private inception to close. A lot can change in two years. The debt that got pushed down into SpinCo, which made the deal compelling at signing, becomes the anchor when macro shifts or integration stumbles. Frontier and Warner Bros. Discovery are the textbook cases of what happens when scale and cultural integration do not match the pro forma. McCormick is now absorbing a global food portfolio that dwarfs its existing business.

The deals that never get announced are the more instructive data set. For every Skyworks there were multiple Ageres and Avagos, situations where an RMT was contemplated, the conditions did not align, and a different path was taken. That is why there aren't more of them. Not because advisors aren't trying to push these deals on companies.

[Dani @trades_lakes]

I don't post much here but I spent years keeping a trading journal, not the kind with entry prices and stop losses, but the kind where you write things down at 2am after a bad week. Now I put it together for boom and bust traders.

Maybe it helps someone.

https://t.co/KVHRFY8j6o

[Scav Enger @Scav_Enger]

@Ron284Ron Me every election year

[Scav Enger @Scav_Enger]

Me when Claude was down this morning

[Scav Enger @Scav_Enger]

Are we at the peak yet?

[The Kobeissi Letter @KobeissiLetter]

BREAKING: Allbirds stock, $BIRD, surges over +200% after announcing they are pivoting from shoes to AI.

[𝒵𝒾𝓀✯ @_Gottalovezik]

my mom recently asked me how to take a screenshot, At first i laughed, but then I remembered she taught me how to tie my shoes.

[Scav Enger @Scav_Enger]

@BryanGreenbaum What a beauty

[Scav Enger @Scav_Enger]

@ThePeterMick This thing is a monster

[Boring_Business @BoringBiz_]

Recently grabbed coffee with a senior VP at a very well-known private equity firm

Well above $2M in net worth. Not enough to fully retire but can walk away for a better work life balance if he wants to

Just had a kid few months ago and now struggling to decide between continuing this career path or shifting to something that would let him spend more time with family

I asked him what is keeping him at the current firm, beyond just money

His answer was simple: "Insecurity. I might look back in 10 years and feel bad knowing that my friends are buying their second vacation homes while I walked away to chase an easier life. Whatever job or title I have next would not earn me the same respect"

That is when it really hit me

A lot of people stay in high-performing careers, not even because they need the money, but rather because they are used to a certain level of status and respect from people around them

This only gets worse as you move higher up the ladder and start spending time around people at the same level in terms of career or wealth

I asked him if he was okay if I posted this on my X and sought advice on what my followers would do.

He agreed.

So I am genuinely curious: what would you do if you were in his situation?

[ConquerMindsetMoney | Self Mastery @TheConquerMM]

Your parents stopped buying things for themselves years ago. Not because they couldn't afford it. But because every time they had extra money, they thought of you first. They wear the same clothes. Use the same phone. Eat simpler meals. While making sure you never felt like you went without. Most of us noticed too late. Some of us never noticed at all.

[goma @soigomaa]

After a certain age, your parents slowly become your children. They ask simple questions, repeat stories, and depend on your patience the way you once depended on theirs. Very few understand this role reversal.What looks like innocence or inconvenience is really time coming full circle. Don't correct them harshly. Don't rush them. Care for them the way they once protected you. This is not a burden. It is repayment.

[Scav Enger @Scav_Enger]

I can attest to this as a Korean living in the US. Have been to several different countries in Asia, Europe, and North America. America is the least racist country I’ve been to.

People in Asia and Europe were very racists and they didn’t even recognize they were

[Autism Capital 🧩 @AutismCapital]

🚨PROFESSOR JIANG: "I've been to a lot of countries in the world and I'd say that America is the least racist country in the world because regardless of America's racist past Americans have a deep respect for hard work and talent.

America is the only country in the world where you can come as a nobody and open a restaurant and become a millionaire. I know because I have relatives who have done that. You couldn't do that in China. You couldn't do that in Europe. You couldn't do that anywhere else.

I understand that there's a racist past in America, that of slavery, that of the indigenous people, but you can't forget that America is still probably the most open and generous society in the world."

[Scav Enger @Scav_Enger]

@Art444Star There is a word in Korean, 연패 which can mean ‘a winning streak’ or ‘a losing streak’. The most uselwaa word in the Korean language

[Scav Enger @Scav_Enger]

That is enough internet for today. I am shutting it. Good bye

[THAT SOUTHERN DUDE @TSDmemes]

“vapes are a psyop to condition us to enjoy sucking robot dick”

[Scav Enger @Scav_Enger]

@Jebaim3 Wrote about it here, if interested. My Thacker Pass assumption is too frothy on the write-up, but the Mitigation banking seg becoming profitable likely makes up for the over-assumption.
https://t.co/ayBnzOU8fC

[Scav Enger @Scav_Enger]

Dismissed as a coal miner. However, it operates mines (coal, lithium, limestone, etc.) under a capital-light, cost-plus fee-based model. An exclusive miner for Thacker Pass; has been investing heavily in contract mining. Also, has been shifting $94 mm to acquire O&G royalties since 2020. Should benefit from the current environment. Mitigation banking seg also about to turn profitable. Expect a near-term cash flow inflection from the investments. FY25 EBITDA ~$48mm on EV $420mm. Target EBTIDA $150mm by FY32.