The $40 Million Process
The One Year Anniversary of GameStop Madness
It's been a year since the GameStop ($GME) saga that nearly bankrupted a Wall Street institution and made one individual investor a very rich man. On January 28, 2021 GameStop hit $483 per share, which was a significant feat considering that in mid 2019 the stock price was trading for under $4 per share.
While most people in 2019, myself included, saw bankruptcy in GameStop's future, one investor saw a deeply undervalued stock. Keith Gill / Roaring Kitty / Deep F_cking Value depending on what social media site you follow him on made a $53,000 investment in GameStop and the market morphed that investment into $40 million.
Pied Piper or Stock Market Hustler?
Since the big GameStop win, there have been a lot of writings about Gill, but not a lot written about Gill. Most stories are the same, man in headband doles out stock picks from his basement on YouTube and bought GameStop in 2019, and then convinced investors on Reddit to follow him, GameStop has its day, man in headband gets rich, gets sued, and is requested to testify in front of congress. The Wall Street Journal did a piece on Gill's track background, which was refreshing, but for the most part, the stories on Gill have been the same.
While some people have called him the Pied Piper of retail investors, others have labeled him a trickster who convinced unwitting investors to buy GameStop without cause or concern. Very few outlets however have talked about Gill's process that led to the GameStop investment.
How Does An Individual Investor Make $40 Million On One Investment?
Many of the stories covering Gill would lead you to believe that he's just a guy shooting out crazy stock tips on YouTube; or that he's a trader that got the timing of GameStop just right. Neither are true. Gill is a self proclaimed value investor and has a very thorough process to locate, research, and track potential stock investments.
In his live stream videos, he talks about doing all night research sessions, but then refers to himself as lazy and not that smart. However, the elaborate spreadsheets that he shares with his YouTube viewers are far from something a lazy / not smart person would create.
For all that's been written about Gill, what's rarely mentioned is that he is a serious investor, and serious about the art of investmet analysis. From watching several of Gill's live stream videos where GameStop wasn't the main focus, I got to see the method behind the madness, and what it takes for an individual investor to turn tens of thousands of dollars into tens of millions of dollars.
Tools: What Gill Used to Find and Track Potential Investments
Tools are important to every professional in every trade. Whether it's hammers, power drills, and levels for a general contractor or a great camera for a photographer, the right tools make all the difference, and it's no different for Roaring Kitty.
In Gill's arsenal there are several websites that he leans on for information to drive his investment decisions. Sites like Seeking Alpha, FINRA, WhaleWisdom, Open Insider, StockCharts, Twitter, SEC.gov, and Moody's to name a few. Each site serves a specific purpose in the process.
Seeking Alpha provides news as well as thoughtful write-ups on potential investments. FINRA provides bond information. Gill states he's often checking the site to find the yield-to-maturity on a potential investment's debt. WhaleWisdom provides insight into what investments hedge funds are buying and selling. Open Insider tracks insider buying and selling, which is a major touch point for Gill. He also admits to using Twitter for almost the same reasons as Seeking Alpha, for news, updates, and also to see who's talking about or investigating a particular stock. He also reads through company fillings at SEC.gov, and uses Moody's to check credit ratings, though he admits analyzing credit ratings isn't a particularly strong point for him.
So much of Gill's process is tracking. He tracks stocks, he tracks other investors, professional and retail, and he tracks hedge funds and money managers that have an investment style similar to his own. What is evident from his process is that he isn't throwing darts at the stock section of the Wall Street Journal, nor is he picking names out of a hat. He is actively hunting for stocks that he believes have been deeply discounted by the market.
The Spreadsheet: The Tool of Tools
To help Gill do the work of what a professional investment firm does he created a very elaborate spreadsheet using Google docs. There are multiple sheets tracking investments made, investments yet to be made, sectors, industries, commodities, markets, and ETFs. With the help of Google docs and several dozen scripts, Gill is able to get an instant top down view of the markets.
He often sights that his spreadsheet may seem like overkill at times, and that investors with access to greater financial resources can pay for the service of a Bloomberg Terminal, which costs $2,000 per month, and get all the same features of his spreadsheet.
Inside of the spreadsheet is where the analysis is done. Gill looks for companies with 20 years of operational history and has a script that pulls the financial data from Sharadar and Quandl into the spreadsheet.
Also inside the spreadsheet are links, upon links, upon links. Admitting that he's just too lazy to type in ticker symbols or website names, Gill created links from the spreadsheet to the websites he frequents the most. For example, a spreadsheet page with a list of industries takes him to a StockCharts page, which shows all of the charts of the stocks in a particular industry. He's able to access this with one click. From this page of charts, Gill is able to get a quick view of which stocks are outperforming or underperforming their specific industry.
While he states it's out of laziness, the links are a major time saver. For an investor looking at one or two stocks a week, typing a symbol here, and a website there may not be a big deal. But for someone tracking the amount of information Gill is, being able to point, click, and get information quickly is a necessity.
Lots of Reading
Warren Buffett once stated that he reads 500 pages a day, because the knowledge he gains from reading builds up like compound interest. Gill may not be at 500 pages a day, but a part of his process is reading, a lot.
He admits to reading Seeking Alpha articles written by writers and investors whose opinionshe trusts or respects, and he also reads company related news on Seeking Alpha, but in addition he reads the comments on articles as well the comments written on the news. Because a major part of his process is tracking, he's looking for someone who has valuable insight into a prospective investment or investment idea so that he can track them and the investment. He states he reads through Twitter for the same reason, to find people talking about investments that he's eyeing and to get another opinion. Gill states he reads earning call transcripts, but only on companies he has a big position in.
Because he deals in highly leveraged companies, he spends a good amount of time on Moody's reading through company credit reports, when Moody's makes it available for free.
The Type of Stocks He’s Hunting
The best market navigators, whether fundamentalists, technicians, value investors, or growth investors, they all have something in common, they know exactly what they're looking for when they're eyeing an investment. The best of the best have a framework that they work within to determine what to buy, and Gill is no different.
For Gill, he seeks out companies that he describes as looking like they're dead in the water. He frequently values companies that are close to bankruptcy. He prefers small caps, and noted that his sweet spot are companies that have a market capitalization of $100 million to $700 million.
Insider buying is a big catalyst as well. He likes insiders buying 200,000 to 300,000 shares. He looks for insider buying during market sell offs, which is typically a strong signal of confidence to the markets from company insiders. When it comes to insider ownership, 20% is what Gill looks for, but he admits it's not a deal breaker if insider's own less than 20%.
When it comes to institutional ownership, Gill doesn't just look for big firms buying big blocks of stock, he specifically looks for institutions that share his style of investing, those focusing on deep value. If those institutions that share his investment philosophy are in on a stock, then the stock may make his tracking list. He admits to not always agreeing with the opinions of the money managers that he tracks, but states he still reads and follows if he feels the manager is doing or has done good research and analysis.
Some of the hedge funds and money managers Gill tracks are Scion Asset Management, Towle & Company, GreenLight Capital, Fairfax Financial Holdings, Baupost Group, Abrams Capital Management, Appaloosa LP, Alan W. Weber, Carl Icahn, Berkshire Hathaway, Lapides Asset Management, and Oaktree Capital. All of the funds are listed in a shortcuts drop down in his Google Chrome browser and linked to their respective WhaleWisdom pages that display their top holdings.
Gill also admits that he keeps an eye on activist investors who he shares overlapping views with. It's another point he looks for when investigating a potential investment.
The Charts
When it comes to the charts, the picture that gets normal investors excited isn't what excites Roaring Kitty. While most investors are looking for a chart that shows a stock in an uptrend or upward breakout, Gill finds charts with a steep drop in price appealing. While he states to be an investor that relies on company fundamentals, he doesn't shy away from using stock charts to pick his buy and exit points as well as gauge sentiment. In a video discussing his criteria to buy an investment, he declared that the best opportunities occur when the chart looks like shit.
The Style
In one of the first videos I watched, Gill made it very clear that his investment style is aggressive. He explained to his audience that he's looking for 50% to 100% returns, and the stocks that he examines to get these returns aren't suitable for many investors. Unlike many investment gurus on social media explaining how their strategy is can't miss, Gill does anything but. He does talk about investments that were five-baggers and ten-baggers, but also mentions that his returns are lumpy due to his style of investing. In one video he mentioned an investment in Tailored Brands, the parent company of Joseph A. Bank and Men's Wearhouse. The struggling retailer emerged from bankruptcy in December of 2020 and quickly fell back into financial trouble. Gill confessed in the video that he didn't believe the retailer was going to make it.
What He's Looking For in a Company
Gill often states in his videos the importance of a solid balance sheet, and that he could do most of his investing based on a company's balance sheet. He explains that although he's doing a lot of slicing and dicing of the numbers from the 20 years of financial data that he pulls into his spreadsheets, he's looking at revenue and revenue trends, in addition to the level of revenue a company has compared to its peers. He looks into gross margin and net margin trends over the past three years, and the level of a company's margins compared to its peers.
As stated earlier, he's into highly leveraged companies, and believes that's where some of the best opportunities can be found. This choice of investment requires him to spend time on understanding the company's credit risk and likelihood of bankruptcy.
Gill is big on free cash flow as most value investors are. He analyzes operating cash flow, net cash flow, and the simple free cash flow of a company, and breaks them down to get a three year average of each. He also analyzes a company's maintenance capital expenditure versus the capital expenditure the company needs to fuel growth.
Share count is another big touch point in Gill's process. Dealing with leveraged companies, he tries to gauge how many shares the company could issue in the future to ward off bankruptcy and regain good financial footing.
Something near and dear to my own analysis is tangible book value. Gill admits he still looks at tangible book value even though people believe it means less these days. Then there is the most important part of Gill's described buy criteria, and that's the discount in the stock price. To achieve the type of gains he's seeking, Gill revealed that he needs to see a sizable discount in the stock price.
“Without continual growth and progress, such words as improvement, achievement, and success have no meaning. “ – Benjamin Franklin
Experience: We're Talking About Practice
Very few articles written about Roaring Kitty and the GameStop trade mention the time Gill has spent working on his process. From looking at the spreadsheet he created, it's easy to see that he's put work in, but during his stream he talks about times he thought he had things figured out only to have the market make him look foolish. He discusses how his process has changed over the years, and how some things he used to pay attention to when he started, he doesn't focus on any more, like the price-to-earnings and price-to-sales. He states he's learned over time that the better measurement of value is to have price as the denominator and now looks into the earnings-to-price and cash flow-to-price among other metrics. There are a few times where he wonders out loud what he’ll look back on in five years and find irrelevant to his process.
The world may not have known who investment analyst Keith Gill was prior to the GameStop saga, but it's clear that he just didn't get lucky, he's been working at investment analysis for some time.
You Never Know
In an episode of the Gene Simmnons Family Jewels reality show, the demon of rock once stated serious money goes to serious people. The headband, long hair, kitty cat shirts, and gaming chair may scream amateur, but Keith Gill's process of hunting down undervalued investments is far from bush-league.
From watching the Roaring Kitty live stream videos as well as the videos where he explains the tools he uses and his process, Gill takes investing and investment analysis seriously, and it's why he was able to turn a few thousand dollars into a few million.
What was also noticeable to me during my look into the Roaring Kitty process is why he's become a hero to so many retail investors. While he takes investing seriously, he doesn't seem to take himself too seriously. He's smart without being arrogant, confident in his process but not cocky, and enjoys openly sharing his process and thoughts.
Process: Create, Tweak, Follow
Gill's big win proves again that success in anything comes from having a plan and a process. The term system quarterback, system player, system executive, system fill-in the blank is an overused phrase by people who haven't found success in their own lives. Gill proves again that successful people whether in sports or investments aren't free styling through life, they are creating, tweaking, and following a process.
Gill's process likely won't net you $40 million from one stock pick, but it will make you a better investor.
Before you can trust the process, you have to create a process. Whether we want to be better investors, better people, better workers or anything else, we should take time to create a process to help us get better and achieve our big win, whatever that is.
