Stocks Neat: Investing in whisky - worth it?

In this episode of Stocks Neat, Forager’s Steve Johnson and Gareth Brown taste-test a Tasmanian classic and answer the question: is whisky really a worthwhile investment? Featuring Tamikah from the Forager team, they also chat tech stocks, offer an update on Magellan, and discuss the drama at Lark Distilling Co. Tune in to hear all of this and more.

Steve:

Hello, and welcome to episode three of Stocks Neat, a Forager Funds Management podcast, where we talk about the stock market, and try a few whiskies and tell you what we think about them. I'm joined by Gareth Brown, Portfolio Manager on our Forager International Shares Fund, and resident tough fullback in soccer. Well, used to be anyway, back in his younger days.

Gareth:

Hi everyone. Hi Steve.

Steve:

Especially joining us today is Tamikah Bretzke, who is responsible for the start of this podcast and pulling it all together. And if you're liking what you're hearing, you can thank her for it. And today she's joining us on the podcast, perhaps permanently joining us on the podcast – if we can talk her into it. But she's going to, I guess, guest host today and talk us through it. We are going to talk investing in whisky, rather than drinking it. We are going to talk tech stocks and their blow up over the past six months – what's real there and what's market related and we're going to follow up on Magellan, after our last conversation proved an interesting one. It's been a pretty eventful time at Magellan since. So, Tamikah over to you.

Tamikah:

Thanks for having me guys. A bit nervous to actually be on the podcast, but we'll see how we go. So yeah, we're trying a whisky today. We've got Lark Symphony Nº1. We took a couple of questions on Twitter and some of our other social platforms, and some of the comments that came through were on Lark, so we thought it was good to try some of that.

Steve:

So for those who haven't heard this story, I'll just give a quick bit of background. Lark has been on social media for few of the wrong reasons over the past few weeks. Its now former CEO, Geoff Bainbridge, was featured in a video that The Australian published, quite clearly smoking methamphetamine and saying some horrible things. He came out in the Fairfax papers and said it was seven years ago and that he'd been extorted by some Asian gangs and has been paying money for seven years ago. And then the Australian has gone and found a whole bunch of photos online of a house that he bought less than 18 months ago, that looks remarkably similar to the house in the video that he was filmed in. So he has stepped down from Lark. We had quite a few interesting questions on Twitter. The share price has fallen because of all of this and people asking whether it's interesting or not, but the story itself is certainly interesting.

Tamikah:

Yeah. And, I guess for, from my perspective, anyway, just Perennial Partners, for example, which is one of Lark's biggest investors, said, "It's a 30 year old company and Bainbridge was only there for two years." So I think it's a good reminder that all companies face setbacks. But when it comes to a company's history and its product, if the fundamentals are there, that often speaks louder than news headlines. And, already, Lark’s share price has clawed back some of what it lost after the video was released, which is a good sign. But yeah, I'm looking forward to getting you guys to try this whisky.

Gareth:

It's a 40% alcohol, and it's a blend, and it's actually got all three different types of barrel. So there's bourbon barrel, there's a sherry barrel and there's a pinot barrel, I believe.

Tamikah:

Yep.

Gareth:

This is how most of us first experience whiskies with blends with something like a Johnny Walker, they buy from a bunch of different distilleries. This is from three different distillers. It's a nice product. I don't know. Is this a pricey whisky?

Tamikah:

Yeah. So, I mean, for 500 ml, I think the average going price for this is about 150 bucks. So it's definitely up there. But, I mean, Tassie whisky generally is, so you can sort of expect that.

Steve:

If you told me that was straight out of a pinot barrel, I wouldn't have been surprised. It's definitely got the pinot taste to it. And interestingly, when I was in Scotland a few years ago (I've got a bunch of family over there), we went and visited a distillery and the guy running it was telling me that you make really, really nice blends, it just got a bad name from the mixing a really well-known brand with a really cheap whisky and selling it for a fortune. So the single barrel became just certainty around provenance, rather than it necessarily being better quality. But that's quite nice. I do find the Tasmanian whiskies – there's less variety in it and that's probably because it's all made from a much more similar area than when you look at Scotland, and you've got the peat-

Gareth:

It doesn't have the history. It's been a couple of big personalities that have driven the whole industry rather than many generations of art.

Steve:

But winning lots of awards around the world and, Gareth, let's maybe get into the investment side of investing in something like whisky. And I guess, in this world that we live in where, I would say, that the direct-to-consumer sales path has become easier and easier through the likes of Instagram, Facebook. You can now build a brand without relying on the massive distributors to help you get it out there. So things like this, I think, are more and more popular. What are your general thoughts on the space?

Gareth:

So, I mean, kudos to Bill Lark for what he's built. He's done a very good job and basically created this industry in Australia and Tasmania. My bias here though is that I love businesses like beer brewing. I really dislike businesses like wine. And whisky's probably an even more extreme example of that. To understand why, you need to think about something called, a DuPont Analysis. So when we look at the return on equity in the business, for those of you not familiar with it, the higher the return on equity, the better the business is a general rule. And there are various components that make up return on equity. So you have the profit margin, and then you have the asset turnover, and then you have the leverage. So just to put it simply, "How much profit will I make on each dollar of sale? How long will I tie up my assets to generate that sale? And how much leverage do I use to deuce returns?"

You look at something like a beer business – typically, they have a profit margin in a 4% to 5% range. It doesn't sound like a lot. Some of them are higher of course. But you think of the assets you use to make some beer: you put all the product together and two months later you've got a finished product. So you can turn over all those assets sort of four to six times a year. So you make your four or 5% margin, but you do it four times a year. You've got a 20 return on equity without the use of any leverage. Whereas-

Steve:

So take that to an extreme, I guess. Even a different type of business, a Dicker Data IT Distribution or a JB Hi-Fi – something like that – where it's actually quite a low margin business, but they can turn their assets.

Gareth:

Woolworths is a classic ... supermarkets is a classic example. They often have other people funding their assets, even. Whereas with whisky, you get your margin but you are tying up your assets – or those working assets, at least – for a really long period of time. They sit in the barrel for, let's say, six years. If you’ve not got a year on it, or it's 10 or 12, if people are buying it based on year. And so you need to make a really high margin there. And it's just not something I see with Lark. I've spent five minutes on their accounts and there's a lot of stuff going through there. But it would be generous to say a 10% margin would be what they're sort of targeting at the moment. You're tying your assets up for a few years. That return on equity's pretty rubbish, so it's not something I would rush out to buy.

Steve:

I'll tell you where you see that as well. They're all making gin, because gin is just whisky that hasn't aged effectively. So they're trying to sell that. And you go down to Tasmania, I've been to some of the distilleries, and they're really talking down the benefits of an aged whisky and say, "It doesn't make any difference this age stuff. You want to drink the early whisky." So they can sell it earlier. And then, I'm sure a lot of people have seen these ads, they're all over the Fin Review, all over my Twitter feed, guaranteed 8% return from buying a barrel of whisky. Whatever you think about the listed company, Lark, I'd give that sort of stuff a wide berth.

Gareth:

They're taking what is difficult economics of the business, and trying to ship it off to a bunch of investors so that you don't have it on your balance sheet, right?

Steve:

Well, that's exactly right. And there's just been so many, well, outright frauds – stuff not being there. People that have sold twice as many barrels of whisky as they actually owned. There's not a lot of security around that space. And a general rule in life, there's risk free and there's 8%.

Gareth:

But you know, I'm very cautious of ... Lark published this Value of Litres Under Maturity, or whatever it is. It's an attempt to say, "Here's the gross value at retail price of everything we've got in the barrel right now." It's like, show me the cash and then...

Steve:

Yeah. And this stock price has gone up a lot over the past few years and it's been a bit of a sordid history. We actually had a bunch of shareholders come and see us a few years back. They were fighting with another group of shareholders in the company and they were trying to get out of their stake. And in hindsight, we should've bought it because it's gone up a lot since then. But their history has been patchy, now you've got this episode on top of it. And I think you've got a lot of people putting huge amount of weight on these management forecasts four and five years out. They're going to increase volume a lot. And I don't think you necessarily just hold margin when you increase volume a lot, you can dilute the product. So that's one big assumption that needs to happen and they need to hit those targets down the track.

And we've talked a lot about this in some of our reports previously. I think there's different ways of working out what's going to happen in the future. Different forms of information that we collect from audited financial statements to Scuttlebutt, where you talk to people on the street, to your conversations with management. I would put the management ones right down the bottom in terms of the amount of weight I'd place on them, because it doesn't necessarily mean that because they want it to happen, it is going to happen. And when you're that far down the track I'd be pretty cautious about it.

So, yeah, it's not one that we've invested in, in the fund. I don't think this particular issue is a massive one, but it is a more difficult business, I think.

Gareth:

Maybe just flip it on its head for a bit too. What do you need to see as a buyer today at five times bulk to succeed? For me, the answer is much higher margins. So you're not going to change your asset turn situation. Maybe they can apply a little leverage, but that's something ... that's a double-edged sword. So you need higher margins. And I think some of these little distilleries that are 300 years old in Scotland probably do get that kind of margin – 30%, something like that. You tie your ass out for two or three years, you end up with a 10% to 15% ROE.

I think, maybe, Lark could get there one day. I, personally, think that the gap in the Tasmanian market is for a really nice $100 bottle. And I don't think they're addressing that, and I think it's an opportunity for someone to get decent ... You can know that it doesn't have to be aged 12 years – it’s just got to be a good product and you can get 20% top margins on it, and you could build a good business. I've seen no one have a decent crack at that.

Steve:

That's right.

Tamikah:

I think that's sort of one of the things that's going for the Japanese whisky environment. Over there they don't really have age statements or anything like that. If they're happy with the product, then they release it.

Gareth:

First time I bought one of those 20 years ago, they were…maybe a little bit higher priced than the Scottish equivalent. It's a good product.

Tamikah:

Yeah. Some of them were shut down – so many bottles that are out there have sort of become like these rare gems that are now $400 a bottle. It's crazy.

Steve:

I think it becomes a status symbol more than an enjoyment thing at some level of price, and true of wine, and whisky as well.

Speaker:

Stay tuned. We'll be back in just a sec.

Are you a long-term investor with a passion for unloved bargains? So are we. Forager Funds is a contemporary value fund manager with a proven track record for finding opportunities in unlikely places. Through our Australian and International Shares funds, investors have access to small and mid-size investments not accessible to many fund managers, in businesses that many investors likely haven't heard of. We have serious skin in the game, too – meaning, we invest right alongside our investors. For more information about our investments, visit foragerfunds.com. And if you like what you're hearing (and what we're drinking), please like, subscribe and pass it on. Thanks for tuning in – back to the chat.

Tamikah:

There are a lot of other businesses that have gone through challenges recently – not just the whisky industry. And in some of these businesses you might see the economics can be far more attractive. We spoke about Magellan in the last episode. Did you guys want to give an update on that?

Gareth:

I'll let you start, Steve.

Steve:

I mean, we had a really good chat and we were, I would say, fairly glowing in our views of the business a month ago. There's been a lot happen in the month since. The guy who's been the driving force behind this business has stepped down for health reasons. And first and foremost, I hope he's okay. My wife actually said to me – watching this unfold she said, "I don't understand why you'd want to work in an industry like this." It's just such a rollercoaster ride, and there's so much adulation at some point in time, and then everyone wants to stick the boot in at the other end of the spectrum.

So Hamish Douglass has stepped down from Magellan. I think that's a massive, massive piece of news for everyone invested in both the funds and the management company as well. Chris Mackay – who founded it with him but has been really operating in the shadows of Magellan for…must be the past 10 years since he went off and ran their listed investment company, MFF – has stepped back in, I would guess, temporarily, to run that business. And then, big investor updates last week alongside the results…a large buyback announced, option issuance announced, which was a very interesting one and still paying out 90% of the profits in dividends, which I thought was interesting as well.

It's pretty clear here that the profitability of this business is going down from the last six months levels. They already have 25% less fund than they had back then. So paying out all their earnings as dividends, I wouldn't have been surprised if they cut it just to reset it at a level that they think they're going to be able to sustain, but they've committed to paying it out. And then, yeah, Gareth, you and I got a bit worked up about this option issuance. Do you want to explain it quickly first?

Gareth:

Just, you can't see on video, but my eyes just rolled back in my head then. So this is a tactic used particularly by LICs and trusts, where they say, "Here, you get a free option. For every share you own, we'll give you an option to buy another share at, let's say, the current share price over the next five years." What it does is gives funds a chance to double their funds under management – significantly increase their funds under management. But when you're sitting here looking at that stock, it also gives away half the upside, in effect, over the next coming years to the option holder at your expense. That was a one-for-one example that I was just running through then.

Steve:

Yeah. So just really quickly, the simple way to think about that is that any value that those options have, whether they're at the money or way out of the money, is coming straight off the value of the equity. You can't create value. And they pitch these things as free options, and they clearly have a cost in the form of the dilution that you cop, if you're an ordinary shareholder. So ...

Gareth:

It's free marketing for a fundie, right? It's where it's at.

Steve:

That concept is important. So to the extent that you just give one to everyone, who's already a shareholder, the net impact of that has to be zero, other than the marketing that comes with it. So Magellan has come out and said they're doing a one-for-eight option issue to everyone at a $35 strike price. So it's way above the current market price. Share price was up on the day. I don't know whether it's related to this, but it seems that people got quite excited by it.

Gareth:

Yeah. I mean, it's out of the money. It's one-for-eight. It's not as bad as the example I gave before, but it really just set off some alarm bells. This is a business that, I don't see, has any need for capital anytime soon. Yet they're giving away options and effectively crimping some of your upside as an existing shareholder and giving it to you as an option holder. But it just doesn't leave a good taste.

Steve:

Yeah, that's exactly how I felt about it. It's not that significant, and they've given it to everyone, so it's not like it's hurting some shareholders at the expense of others. But reading between the lines, they wanted to issue a bunch of outright options to the staff to keep them, giving all the turmoil that they're going through. Which you can understand and which I would probably be supportive of as a shareholder. But because they were doing that, I think they wanted to say to shareholders, "But don't you worry about it because we'll give you all an option as well."

And it's just distasteful because I think it's treating their shareholders as less intelligent people than they are. And I've got a lot of respect for the business and the management team and what they've built here – like we said in our last podcast. So it is disappointing for me to see that sort of behaviour that seems like a token effort to keep-

Gareth:

Yeah. A confidence, massaging type situation. The other thing I wouldn't mind talking about, if we've got time there, is Hamish's messages in the weeks before he left on sick leave. I can't remember the exact wording, it was in the Aus, I think, where he said that he'd received no negative feedback on performance.

Steve:

It was in the Sydney Morning Herald. He did a big Sunday Sydney Morning Herald interview. Where he said he was in the best place he's ever been in, in his life. And yes, said that he had not had one query about performance from this.

Gareth:

Not one query. Right. And it's just, Steve and I read that, we talked a lot about that in the week before he left. I mean, it just, it smelled like bull to everyone that's read it, which is sort of interesting. But what I found, particularly...galling around that is that the people that had given him negative feedback, the institutional investors that I'm sure have been giving him negative feedback, are going to take that kind of comment very personally because, "I have given you negative feedback and you're saying you haven't received it." That creates triggers for withdrawals. It definitely creates triggers for contacting the company and saying, "This is unacceptable." And I wouldn't be surprised if that's at least a big part of what's, I guess, triggered this departure very soon after.

Steve:

And even your own internal culture. I think everyone that's working in your business reads that and says, "Well, hang on a minute, I'm the one that's picking up the phone and dealing with all these people that are unhappy about it. And if that's what's being said externally, then what does it mean for me internally?" So look, I really hope this ship turns around. I think there's a lesson for all of us in, I think people get absolutely idolized way too much at certain points in time. And then they get criticized far too much at other points in time as well.

I really love this quote out of Ian Martin's book on RBS, and Fred Goodwin was the guy that led Scotland's oldest bank into the financial crisis and almost blew it up. And 2006, 2007 the guy was an absolute hero and by the time the financial crisis was over, he was one of the most maligned business people in history. And his successor was actually quoted saying, "I don't think Fred Goodwin was anywhere near as good as people made him out to be in the good times. And I don't think he was anywhere near as bad as people made him out to be in the bad times either." And I think that's largely, largely true. There's just so much in business that is the external environment, that there's a lot of luck that's at play. Yes, you need to be good to execute on those things and you need to do a good job, but I generally think we … state the influence of any one person.

In Magellan's case, that attracted a whole heap of inflow, so that personality was very, very important to their growth. But whether you're investing with them or you're buying the management company, I think it's important to be sceptical. And that's true of anyone that's invested with us as well. We go through our periods of great performance and everyone thinks we're genius. And then we get the email saying, "You couldn't pick a snotty nose" when things are not going well. And those two extremes are now too far in the extreme.

Tamikah:

I've never heard that before. "Pick a snotty nose."

Gareth:

I do note that we do get negative feedback when we're underperforming sometimes. So...

Tamikah:

So have we talked about Facebook and Netflix – two other businesses that have had some challenges? Obviously, 2022 so far has been a year where the stock prices of many companies like this have plummeted. What is going on, exactly?

Steve:

Yeah. It's been wild, Tamikah, in tech land. Most true in the NASDAQ and most true in the smaller, growthier end of the market. I've got an email in front of me from a broker that's just charting the percentage of stocks in the NASDAQ index that are down by various percentages. We are now up to more than 40% of the stocks in the index are down more than 50%. Twenty-five percent, one quarter of the stocks in the NASDAQ index, are down more than 70% from their 52-week high.

So you're sitting there at a third of the price that it was within the last year for one quarter of the market. I think the first few months of this were largely constrained to those smaller companies, but we've really seen it to start to spread into the bigger NASDAQ constituents over the past couple of months. One of those, Facebook, which we own in our portfolio. Another, Netflix – a giant darling of the growth investors that sold off 25% after its results as well.

So I guess, I'll ask you first, Gareth – is this just a massive market meltdown, or is there something real going on with these businesses?

Gareth:

So, I think the background here is that prices were too high. If not just in mid-2021, perhaps even by the end of 2019, they were too high. We are looking at several businesses now that have grown quite dramatically over the last two years, and we're back to, sort of, late 2019 prices – like COVID and the response never happened. Like for the Feds kicking all the liquidity into the system. Like it never happened-

Steve:

I mean, Zoom is the posterchild for this. It has now completely round-tripped from where it was before COVID. Yeah, probably, the number one business beneficiary of everyone working from home. Attracted a huge amount of paying subscribers. Now doing a billion dollars a year of earnings, whereas it was sort of nothing in 2019. And the share price is way back where it was. In fact, if you had bought Hilton Hotels on the same day before the market melted down about COVID, you'd be doing better owning Hilton Hotels over the past, what are we up to now, three years? Two years. You'd have done better out Hilton Hotels than you've done out of Zoom.

Gareth:

And this has been like work from home, just dragging a whole bunch of new customers into Zoom. Yeah, so we start off with a really high pricing environment that's ... there's some natural correction coming. And then, I think, the way it's happened, and I don't want to sound like Nostradamus here, we didn't predict this, but the way it's happened is a classic end of cycle finish. So you look at all the smaller, non-profitable businesses, they peaked between March and June, or July 2021, and they've been on a downward trajectory ever since.

And then you've got, let's say… Salesforce was ticking higher and higher over those times and it's just classic investor behaviour. I see a bubble or I see a period of danger ahead. What I'm going to do is pivot to the safest ... I don't want to get out of the sector, but I don't want to own unprofitable businesses anymore. I'm going to buy the leaders, the big players, and they go on for a few more months, and then they break as well. And we've seen that, really, amongst most of the big tech companies have really busted down quite dramatically over the last two, to three months.

Steve:

Yeah. And that's even been true, I think, of the much more conservatively priced one. I mean, we invested in Facebook in our international portfolio. We have a portion of our portfolio that we invest in large liquid stocks that we think are sensibly priced and are going to provide us with sources of liquidity in highly dysfunctional markets. And we thought Facebook was fitting that bill at 20, and 21 times earnings. And then the results came out in late January, and they've just not played that role at all for us. The share price is down 25% or 30% since. We clearly got that piece wrong.

But, I think also – and this is what set the cat amongst the pigeons even more in that whole space – is concerns around the actual revenue and profitability of these businesses, rather than just the interest rate story. Because it was interest rates are up, therefore all these stocks are selling off. And the linkage there is their profits and revenues and value were always a long, long way down the track, 10 and 20 years.

So at low interest rates, you can make the case that that was worth a lot more money today than it was at high interest rates. Interest rates have been going up, tech shares have been falling, and that was sort of the only link. I feel like the Facebook result, and a bunch of other results out there have got people also thinking about what that revenue and profitability is going to look like down the track.

But, I think, there's some little things in it that are really, really, really important. Number one, that growth slowing down there is happening across a lot of different businesses. And the question now is, "Is this 10 years of growth, 15 years of growth for all these businesses because of the shift of the cloud? Or did we actually just bring forward those 10 years of growth into two, and now these are much more mature businesses that are going to grow much more slowly?" And that's happening at Netflix and Facebook and, really, across the whole space is that growth rates are slowing and people are freaking out about that.

I think that's a genuine concern that you've got to get your head around as an analyst. And then perhaps the bigger concern is that all of these models for these businesses are like, okay, it's going to grow like crazy for 10 years. I've got some question marks about that but it's still going to grow a lot. But then, every single one I've seen is this thing is going to make 25%, 30% margins. It's losing money at the moment, but it's going to be 25 or 30% margins in 10 or 15 years’ time. And, I think, there's a huge amount of questions about that. And we're seeing all over the place cost pressures on these businesses.

Gareth:

The really great businesses, even in the growth phase, don't do that. Google didn't do that, Facebook didn't do that. They were profitable pretty damn early and they grew at frenetic pace while making a decent margin – even in their growth phase. I'm not just saying there's not other models available, but you have to suspend belief or something, have faith that this will show up down the track. And the other thing that you haven't directly touched on there is the stock-based comp piece, which, in Silicon Valley is just monumental.

Steve:

Yes.

Gareth:

And can just kill almost any good investment thesis, when it's mismanaged.

Steve:

So there's a business that I really like called, DocuSign. It's an enterprise signing piece of software. People think of it just as sign a PDF and send it back, but it's much more complicated than that in businesses that need a lot of internal approvals. It's a really nice business and it has grown at 50% per annum for the past three years. But if you turn that into, instead of just overall growth per annum, you say, "What growth per share?" They have doubled the share count over the same three-year period, just through stock-based comp.

So they gave as many shares away as were on issue three years ago, and that brings your revenue per share growth back to something like 10% or 12%. It's a dramatic difference. Redbubble, I think, are a really good example of the cost pressures here in Australia. This is a stock that I've always been a massive sceptic of, because it gets most of its traffic from search. So...

Tamikah:

Bought some stickers on Redbubble recently.

Steve:

What did they say?

Tamikah:

What? My stickers?

Steve:

Yeah.

Tamikah:

On Redbubble? I just bought some characters, some flowers.

Gareth:

Dungeons & Dragons.

Tamikah:

Dungeons & Dragons, yeah.

Steve:

I was up in Brunswick Heads for holidays – which is the far north coast of New South Wales – in early January, and there's a sticker on a sign up there that said, "F-off back to Sydney, you yuppie Cs." That wasn't you, was it, Tamikah?

Tamikah:

Sure.

Gareth:

A thing that you look at – and this is a really important point here – who owns the customer? It's a classic issue, right? And Redbubble's case…they can drive revenue growth almost as quickly as they want by spending more on Google. Who owns the customer in that case? And, I think, that we know some examples of businesses that can work around this really nicely. So, Auto Trader in the UK. Carsales in Australia is probably the same. I don't know the exact data, but you go to Auto Trader and you ... because you're looking for a car, you go Auto Trader. And it's roughly like six-to-one. So if you are looking for a particular type of car in the UK, people tend to type into the bar autotrader.co.uk at a six-to-one ratio, versus searching on Google for that. So they own the customer, they don't have to pay for eyeballs. And then they get the 70% margin.

Steve:

Yeah. Whereas Redbubble's average transactions per customer is 1.1 per year. So most people just go there, they buy, and they don't come back. And then the next time they want a T-shirt, or a sticker, or something, they're back on Google saying "T-shirt stickers", whatever it is.

And, therefore, it's a generic commodity product. The price of advertising for that just very efficiently extreme. It's the most efficient medium we've ever had, in terms of price comparison. Right? So people will … that search term up to the point where you don't make any money out of it anymore. And Redbubble's got a long history of not making any money. COVID came along, they sold some crazy number of masks, and made $50 million in one year. And then, all of a sudden, it's straight back to where it was, not making any money. It's still growing the top line very quickly.

And to your point, Gareth, I think money has been so cheap. There's been so much thrown of it at the space that, that's also feeding into rampant cost inflation for customers. So you're seeing customer acquisition costs go up like crazy all over the place. It has woken up a bunch of offline players that didn't really worry too much about their online, that are now very focused on online.

We own Adore Beauty in our Australian Fund, that share price has been smashed because, again, business is going great at the top line, cost of customer acquisition has gone through the roof as Sephora and MECCA have come online and started competing for the same customers. And then you already touched on the share-based comp, but there are only so many people out there that can do the coding and work in this industry and you've tripled the size of it by throwing hundreds of millions of dollars of capital – billions and billions of dollars of capital – and they're all trying to recruit the same people. So, not surprisingly, the cost of that labor goes through the roof.

And Adore Beauty as well, I mean, it's doing a wonderful job of keeping its old customers. So the repeat business there is actually quite nice. They're something like 2.2, 2.3 transactions per annum. And that's a split of some people doing almost all of their beauty and makeup shopping on it. So their old cohorts are performing very well, the people that they've acquired in the past – it's just that the cost of the new ones has gone through the roof. So it's a wide range, I think, of a Redbubble at one end of the spectrum, where I'm really confident that all of that economic value goes to Google. At the other end, you've got the likes of Auto Trader that are almost immune to it. And then there's a lot in between. And I don't think anybody's immune to the rampant cost of labor issues in the space.

Gareth:

And I think the time to really aggressively add to these sort of businesses like Adore, is when people are ignoring that long tail of business that they already have on the books, because they're worried about the customer acquisition costs.

Tamikah:

All right. Let's chat about this whisky. What do you guys think?

Gareth:

As I said, I'm not very good at verbalising this. And yes, I just used the word "verbalise". Dark colour, nice strong smell. It's relatively smooth, isn't it?

Tamikah:

I think I, personally, am a fan of the individual components within this particular blend, rather than of the blend.

Steve:

So you actually tasted the flight ... all of the whiskies that went into the blend there?

Tamikah:

Yeah. So last year, right before lockdown, my husband and I managed to get another trip in to Hobart. Love it down there. Went on a bit of a booze tour and Lark was one of the stops on the list. And they do have a flight – they actually break down the individual components. So your Nant, your Overeem, and then, I think, it's the Lark Tawny or the Lark ... Yeah, the Lark Port cask.

Gareth:

It is my guess is they're $250 a bottle rather than $175? Is that-

Tamikah:

I'm not sure about the prices of those individual components, or anything like that. But for a bottle of this it's about…$150, depending on where you buy it.

Steve:

You can definitely taste that colour in the whisky. I've really, really enjoyed it. Just back to what you said, Gareth, it's a really nice whisky. I think you can get a really nice whisky in a 750 ml bottle. So 50% more-

Gareth:

700ml mate. Wine's 750 ml.

Tamikah:

Well, they've got such a great sense of community down there. That's one of the things that I really like about that industry there – they use a lot of local resources. A lot of them are friends. They help each other out. I went to a cidery – I think it's Pagan Cider, or something like that – and they're right next to this farm and they produce fruits, apples and stuff like that. And they'll just take a couple of crates of fruit and just use that as their ingredients. And I just really like the sense of community there-

Steve:

I think the whole state's done a great job on Brand Tasmania as well. And as a country, I think, Australia could do that a lot, lot better at selling our fresh produce up into China and Asia. You go into a fancy supermarket up in China and it's all New Zealand dairy and New Zealand milks and New Zealand's done a fantastic job of building their brand out as a clean, healthy place to buy your food from. And, I think, Australia could do a lot more of it. Tasmania is doing it well, but we could do it better across the whole country.

Tamikah:

Well, I think we'll start to wrap up. First, one of the suggestions we got from a listener – I think it was over email or over Twitter – they want to hear what we're drinking ahead of time so that they can perhaps have a drink with-

Gareth:

That's a great idea.

Tamikah:

Yeah. So, we might look at doing that for the next episode. You guys are going to be over in the US, so we'll have to play that one by ear. You'll have to try out some bourbon – see if there's anything in particular you recommend people trying, if they can grab it over here.

Steve:

That's not a bad idea. We also had quite a few questions about inflation and interest rates, which are huge topics out there in the investment world at the moment. And I think that next podcast, while we're in the US, is going to be an interesting time to talk about that. Where, across the three of us, we've got 60-something company meetings across three days at a huge ROTH Conference that's happening.

Going through the list, a lot of them are down 70% and 80%, so that's going to be interesting. But also, just through this reporting season we've been going through, everyone is talking about cost inflation and the problems that it's causing for their businesses. It'll be very useful, I think, and interesting to try and get a feel for whether that's going to reverse at some point in time here, or whether we're in a high-inflationary environment for a long time to come.

Tamikah:

Should be an interesting chat. Will have to have fun. You going to like, Disneyland or anything?

Gareth:

Yeah, right.

Steve:

Gareth and I are ... the Conference is at Laguna Beach in LA, and then we're off to Chicago to visit a few marijuana stocks which have also been heavily beaten up over there. But we'll be very careful about any videos filmed, or releases to the press while we're over there.

Gareth:

I'm pitching for stocks in spliffs for the next one. Let me know what you think.

Tamikah:

It'll be a very interesting episode, I'm sure. Finishing up. Thanks for having me guys, appreciate it. Thanks for drinking all my whisky.

Steve:

You've been very useful guest, Tamikah, and I think we'll have you back on for sure. Thank you, everyone, for tuning in. Don't forget to subscribe and rate us on your favourite podcast platform. It's going really well. Tamikah, you're tracking the numbers. I think we've had more than a 1,000 listens if you add up our first couple of podcasts, which is fantastic for just getting started. Tips and improvements or questions – make sure you through to admin@foragerfunds.com or follow any of us on social media.

Tamikah:

Thanks very much

Thanks for tuning in!

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Steve Johnson
Founder & Chief Investment Officer
Forager

Steve began Forager Funds in 2009, and now manages approximately $470m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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