Identifying A Bad Business w/ Edwin Dorsey (TIP383)

Identifying A Bad Business w/ Edwin Dorsey (TIP383)

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Trey Lockerbie (00:03): On today’s episode, we are   talking about how to expose a bad company. Our  guest is the brilliant Edwin Dorsey, writer of   the popular newsletter, The Bear Cave. Edwin takes  us on a ride exploring the dark side of the stock   market. Edwin first gained massive attention after  successfully exposing for an unimaginable   amount of negligence that ultimately led to  the collapse of the stock. In this episode,   we also cover some tools you need to identify  suspicious companies, which are completely free,   by the way. Edwin’s researched on companies such  as AgEagle, and Root Insurance, and so much more. Trey Lockerbie (00:38): Look, I’m not a short seller,   but I found this discussion not only highly  entertaining but also extremely informative. I’ve  

now added some of these tools to my qualitative  portion of due diligence, and I think you might   as well. So let’s get into what makes a bad  company with up and comer, Edwin Dorsey. Trey Lockerbie (01:17): Welcome to The Investor’s Podcast. I’m   your host, Trey Lockerbie. And today, I’m super  excited to have with me Edwin Dorsey on the show.   Welcome to the show, Edwin. Edwin Dorsey (01:27): Trey, thanks so much   for having me on. I’m very excited to be here. Trey Lockerbie (01:31): We’re really excited to have you here,   Edwin, because we had recently just explored  what makes a great business with Jim Collins.  

So I thought it would only be appropriate  to explore the opposite end of the spectrum   and expose some bad companies. You  have made a career out of this. So   why don’t we start with what really put  you on the map, which was your report on This is just a wild and fascinating  story. So just give us top to bottom. Edwin Dorsey (01:56): Absolutely, Trey. And   it’s a great story. So three years ago, I was a  freshmen finishing up freshman year at Stanford.   I was interested in the stock market. I had been  talking to a few short sellers, so I was starting  

to learn about it. And I had a friend who was  a babysitter on And I knew it was a   publicly traded company. And she said, “Something  seems off about this site. I don’t think they’re   vetting people even though they claim to be  vetting people, you should dig into them.”

Edwin Dorsey (02:23): So this is the first   company I sank my teeth in and did a little  research on. They were the largest babysitting   platform in the US at the time, with roughly  a billion-dollar market cap. The first thing   I do is I pull up PACER and I start looking at  lawsuits against the company. And I see, “Hey,   there’s actually been a bunch of lawsuits  against this company, a lot around safety   issues and them not vetting babysitters even  when parents pay for background checks.” And   then I started looking at local news reporting,  and there were a lot of these issues where   somebody who had been arrested for drunk  driving passed’s background check.

Edwin Dorsey (02:56): I’m like, “Huh, this seems a little odd.”   So decided to test’s screening for  myself. Because you’re a babysitting platform,   your ability to screen babysitters is  very material to your business if you   claim to be doing that. So I decided  to try to sign up as Harvey Weinstein.   I used Harvey Weinstein’s photo, I made up an  address and social security number for Harvey   Weinstein, a completely fake account.  I consented to their background check.  

I documented the whole process. And at the  end, they’re like, “We’re going to get back   to you within 48 to 72 hours on whether or not  you’re through as a babysitter on” Edwin Dorsey (03:29): And I’m like,   “There’s no way they approve Harvey Weinstein if  they’re actually doing these background checks.”   Lo and behold, I was approved. And not only was I  approved, but I also got to their second-highest   level of authenticity. I got all these badges  for being CPR certified and first aid certified.   And I’m like, “They’re just not doing any  of this vetting they claim to be doing.”  

So I put out a little report on that when I put  it on my Twitter and it goes a little viral,   the stock falls, a board member resigns  the next day. And I’m like, “Okay, good.” Edwin Dorsey (03:56): Two days later,   I get an email from the dean of students  at Stanford saying, “We have to meet,   we got a complaint about your wifi usage.” And  I’m like, “This is probably related   because I haven’t gotten in too much trouble  in the past.” And I go in and they’re like,   “’s co-founder called and said  you’re messing with their site and you’re  

harming their business. You need to take this  article down right now because you’ve violated   Stanford’s wifi policy.” And I’m like, “How  did I violate it?” And they’re like, “Well,   you impersonated Harvey Weinstein and you violated  their terms of service while using Stanford wifi.” Edwin Dorsey (04:29): And I’m like, “I’m not   taking this down.” And they’re like,  “You have to.” I say, “No.” I’m like,   “Put it in an email.” And I get that email, I go  straight to the student newspaper. And I decide,  

“This is really weird, the company is calling  my college, so I really start to dig in.” I   file a FOIA request with every state attorney  general, 50 different FOIA requests for consumer   complaints against I go to the NYTD  and I file a FOIA request for every time the   word had been used in a 911 transcript.  So anytime somebody called 911 and used the word And then I wrote letters to every family  that had ever called the police about Edwin Dorsey (05:04): I became obsessed and I published   a much longer article on Medium that got more  attention, highlighting a lot of safety issues   at the company, as well as other metrics where  they were misleading investors. I sent that to   a lot of journalists. The Wall Street Journal got  interested in it. And to make a long story short,   nine months later, The Wall Street  Journal runs a front-page story   about these safety issues at and how  five kids were killed by babysitters  

who had prior criminal history. So they had no  business babysitting kids in the first place. Edwin Dorsey (05:34): This could have easily been prevented, but   because faked doing background checks and  they claimed to be doing real ones, kids got hurt.   That article got a lot of attention. The CEO,  CFO, and general counsel resigned. The Stanford   dean that investigated me also resigned. The  company sent a private investigator to my house,   which was another crazy thing in this whole story.  And the company ended up, the stock fell in half  

and it was sold to IAC at a small premium. And the  good thing is, the silver lining of this story is,   after IAC bought, they revamped the board  and they really fixed a lot of the safety issues. Edwin Dorsey (06:07): I tried signing up again   under the fake accounts and they all caught  it. So it’s one example of how you can actually   make a little bit of a difference if you’re  persistent and perky and go after it. I think it   also goes to show that activist short-sellers  sometimes out their best can benefit society. Trey Lockerbie (06:24): I was just about to say it. This  

is activism at its core. This is one  of the most amazing stories. Just to   confirm you were actually short  the stock during this whole time? Edwin Dorsey (06:33): I think to short a stock, you need to be 21.   And at the time, I wasn’t even 21. At one point,  I owned put options, not for my first report,  

but for my second report. The sad thing is,  I ended up losing money on this whole ordeal   because the stock went up while I was owning  the put options and then collapsed only later.   So I lost money on this, but I gained a little bit  of a Twitter following, which has come in handy. Trey Lockerbie (06:59): All right. So let me get this  

straight. You post a profile on  as Harvey Weinstein using his photo,   and they accept you with all the bells and  whistles. And then we go beyond that and   the CTO of calls your college with  the threat. He also then proceeds to sell   $700,000 worth of shares. That’s just  fascinating. I’m also curious where you   go to look for insider trading like that. Is that  a typical part of your practice or your checklist? Edwin Dorsey (07:30): This may sound a little odd,   I’ve never paid that much attention to insider  sales. I look them up. There’s a website called  

Insider Score I use, you can find them on  the SEC’s EDGAR database. I think oftentimes,   it’s more noise than signal. If somebody sells  half their stock, yeah, that’ll be bad. But   tons of companies that have performed well like  Facebook have had really 10b5-1 executive selling   plans. Tons of companies that have performed  poorly have had a lot of insider buying. Well,   one thing that I think is worth looking at is  if you see cluster buying like three directors,   the CFO and CEO, particularly at  microcaps, that can be interesting.

Edwin Dorsey (08:05): I’m not great at this,   but some people are really sophisticated at  looking at anomalous option grants to say, “Hey,   that could be a really bullish sign for  a company.” Generally speaking though,   insider selling and buying I think it’s  an overrated thing investors look at. Trey Lockerbie (08:20): Well, you threw out some   terms there that I just want to cover because  a lot of our audience may or may not have heard   of these things. So first of all, you said  PACER, that was the first place you went.  

So talk to us about what drove you to go  there in the first place, just looking up   lawsuits. This is not necessarily a tool I’ve  heard people throughout as the first thing on   their checklist. So talk to us about  that one and then we’ll go from there. Edwin Dorsey (08:39): So, it’s just a government   website that allows any person to look up lawsuits  in certain courts against a company. It’s pretty  

easy to use. You need to make an account. There  are small fees associated with it, but it’s never   that material. And what you do after you make  an account, which is free and government ran,   you just put in a company’s name and you can, say,  search like all federal courts. And it brings up   most, but not all lawsuits that are against the  company. It’s a little bit of a clunky system.   And then you can like organize it by date file or  whether or not the lawsuits are currently open.

Edwin Dorsey (09:13): There’s some stuff that’s sealed,   not everything is perfectly arranged.  But oftentimes, for the cost of $3,   you can just pull up a lawsuit against a company.  Sometimes for major ones, most investors will   see it are hedge funds and look at it, but  oftentimes, things are missed. And what you   can do is you can use it as like an early stage of  research to try to find like patterns. So if one  

person complains about being overbilled by a  company, that might be an isolated incident,   but if you see a lawsuit, you see online  gossip, you test it out for yourself and   something seems strong, you start the formal  mosaic that something’s really wrong here. Edwin Dorsey (09:46): So,   I don’t use it a ton, but it’s a  great cheap way to find lawsuits. Trey Lockerbie (09:52): Another site you threw out   there was FOIA. So what you’re referring to  is F-O-I-A. or the Freedom of Information Act.   Walk us through this tool and  how it might be underutilized. Edwin Dorsey (10:02): So the Freedom of Information Act isn’t   a website, it’s a law that they stack a while that  allows any US citizen to request information from   their government. Journalists use it a ton to  get confidential memos and items like that from  

the government to uncover political scandals.  The way investors would usually use it is,   if you’re a biotech investor, you’re going  to spend a lot of FOIA requests to the FDA,   trying to get any little hint of information on  whether or not a drug is going to be approved.   If you’re looking for an SEC  investigation into a company,   you might send a lot of FOIAs to the SEC  to try to see if they can reveal through   whether or not they approve or deny the request  if there’s an active investigation to the company. Edwin Dorsey (10:42): The way I usually use it and   the way I think it is best to use it is to try  to get consumer complaints against a company.   Let’s say there’s a big company and you think they  might have unfair and deceptive trade practices.   You can go to the FTC. Usually, you file a FOIA  request by sending email fax, or physical letter,  

and this information are online if you just  Google FTC, Freedom of Information Act request,   and you can send them an email saying, “I want all  complaints against this company within the last   two years, or all complaints, consumer complaints  that used this word within the last two years.” Edwin Dorsey (11:13): It varies by agency. Sometimes they’ll email   you back three days later saying, “Here’s a PDF  with everything.” Other times they may charge you   a de minimis fee like $20 to get the documents.  Sometimes they’ll mail you a physical CD,  

sometimes it’ll be an Excel spreadsheet. I  do a lot at the state level. So like state   attorneys generals. So I might go to the  New York State Attorney General’s office,   send them an email or use their portal to say,  “Hey, I want all consumer complaints against   MasterCard over the last two years.” MasterCard’s  a huge company, so there’s going to be a ton,   but for smaller companies, you can  get a lot of insightful information. Edwin Dorsey (11:48): For example, there’s a company called   Payoneer and I filed a FOIA request on Payoneer,  the small payments company. And they’re like,  

“We have 3000 pages of complaints, half of  which are IRS suspicious activity reports.   It’s going to take us two years to get back  to you on this and it’s going to be a $500   fee.” And even though I haven’t got the records  yet, just that information says, “Wait for a   second, there’s something going on here. You  got a lot of problems for a small billion-dollar   payments company.” So that’s the value of FOIA.  And you can use it in a lot of creative ways.  

And even the big smart money investors I  don’t think are that sophisticated with it. Trey Lockerbie (12:24):  All right. Well, let’s go to one of the  other companies you’ve recently reported on,   which is Root Insurance. So talk  to us about what’s happened here. Edwin Dorsey (12:33): Trey, Root Insurance is   emblematic of the types of companies I look for.  I look for companies that are misleading investors   or hurting customers, and Root  Insurance was doing both. Root   Insurance is a car insurance app. And their pitch  to investors is, “Hey, you sign up for our app,  

we’ll track your location. 24/7 for two weeks.  By doing that, we can differentiate the good   drivers from the bad drivers solely on  phone geolocation. And based on that,   we can only underwrite insurance to good drivers  because we can see the times of day you drive,   we can see the locations you drive, we can see  the speed at which you’re driving from the phone.  

We can see if you brake hard or if you break in  a normal way. We can see your turning radius.” Edwin Dorsey (13:12): “We get all this data just   from your phone on how well you drive, which  allows us to underwrite insurance in a really   novel way. So we’re only going to underwrite  good drivers, and we can get them better   prices on that. And once we get to scale, it’s  going to be a massively profitable business.”   That’s how it works in theory. In practice,  what Root Insurance would do is they’d entice   riders to sign up with really low rates. And when  it comes up for renewal every six months, they  

always hiked the price, almost always hiked the  price for silly reasons. Like they’ll say, “The   weather in your area has gotten worse, or the cost  of car repairs in your area has gotten worse.” Edwin Dorsey (13:48): All these silly reasons, when in reality,   they’re just hiking prices for the sake of  hiking prices. And in addition to hiking prices,   they make it difficult to cancel. And that’s where  I have a big problem. There’s no phone number to   call, there’s no website to cancel, you need to  do it through an app. So what I did when I was   researching Root, the first thing I’d do  is I’d file a bunch of FOIA requests with   state attorney generals, Trey. And I’d get  hundreds of complaints. And it’s sad to see,  

you’ll see people who hire lawyers to send  letters to insurance commissioners being like,   “My client has tried to call three times because  they just can’t cancel their insurance policy.” Edwin Dorsey (14:25): I saw a letter oftentimes from   minority communities to the state insurance  commissioner saying, “Hey, you should revoke   their license because too many people are coming  to me saying they’re having problems with this   insurance company.” You see a lot of issues. And  then from that, you can start the form of mosaic.   These issues you get from the letters are  anecdotal, but then you can go to the National   Association of Insurance Commissioners, they have  a website. And on the website, it showed that Root  

Insurance got about four times as many complaints  as should be expected for a company of its size. Edwin Dorsey (14:53): And when you put it all together,   it’s like, huh, even though the financial  metrics look good right now because they’re   raising prices on consumers, in the  long run, it’s going to perform poorly.   I wrote an article on it when the  stock was at like 20, now it’s at six   because guess what? All these customers that you  held captive found a way to leave because that’s   what happens when you have unhappy customers.  And that’s emblematic of the type of thing I   look for. Wall Street thinks is great because  the metrics are looking good, but the customers   hated it and they’re angry, and that’s what  drives the long-term success of a business. Trey Lockerbie (15:24): It’s interesting because a similar   metric that I’m used to using is something  like the Net Promoter Score. And there are  

a lot of examples where a company can have  a very bad Net Promoter Score but then a   very good stock. Facebook comes to mind, not a  great promoter score. Some banks come to mind.   How much attention do you pay to something  like the Net Promoter Score of a company? Edwin Dorsey (15:45): I pay a lot of attention to customer   satisfaction. How that translates to Net Promoter  Score can be interesting. If a company is saying,   “Hey, this is my Net Promoter Score.” I want to  be super skeptical of it. For example, there’s a   company called OppFi. They give high-interest  loans, average interest rates of 120%.   They claimed in their stock prospectus  to have a higher Net Promoter Score than   Apple and Ritz Carlton. There’s no way this  company that’s doing payday lending has that   high of a Net Promoter Score. You might’ve hired  some shady consultant to give you that number,  

but that’s not a real number. I look  at a lot of customer satisfaction. Edwin Dorsey (16:19): But to your point, some businesses that   have low customer satisfaction still perform well.  So you want to look at the customer satisfaction   compared to the investor consensus around  that. So if everybody’s aware of, “Hey,   this is a business that leaves a lot of unhappy  customers,” that business might not be great for   society, but the stock still has the potential  to do well. But if the investing public is like,   “Hey, we think this is a normal insurance company  that has happy customers,” in reality, everybody’s   furious and is going to churn, then that’s some  piece of novel information the market’s missing.

Edwin Dorsey (16:50): And once the market sees that in the financials,   AKA lower retention or lower revenue, that’s when  it’s going to get placed in. And that’s what I   look for a lot when the financials show one thing,  but you can tell it’s about to change because   customers are so unhappy. And as Jeff Bezos  says, in the long run, the customer’s interest   and the company’s interests are the same. That’s  true in most cases and that’s what I believe.

Trey Lockerbie (17:13): So you wrote about this stock,   Root, back in December of 2020. It looks like  the stock was trading somewhere around $20,   a share, 18 to $20. Now, it’s trading around $6   a share. So is this another short of  yours? And if so, my other question is,   and a second follow-up question would be, how the  financials changed over the course of that time. Edwin Dorsey (17:32): Funny enough, Trey, even though I write   a newsletter popular with a lot of short-sellers,  I don’t short any of the companies I write about,   I don’t buy puts. I only make money from paid  subscriptions to my newsletter. Some people find   that odd. I would say, as a 23-year-old, I don’t  have a huge balance sheet, so I couldn’t even make  

that money if I wanted to get to. I think it gives  it more journalistic integrity, and it allows me   to charge subscriptions for my newsletter. So I  actually don’t have a short position and never   have. That said, one thing Root has is a lot  of debt. And if you look at the state level,   all these states are having them issue like  hazard reports and going warnings about their   financial position because as an insurance  company, you have to be strong financially. Edwin Dorsey (18:13): Where it goes from here,   I’m not entirely sure. I think it’s laid out and  the way I expected where the market’s noticed,   “Hey, they actually do have a huge customer  retention issue, and that’s going to be a   problem in the long run.” No strong opinion on it  now. One thing I’d note though is when it was at  

20 and I put my report out, everybody was like,  “Well, Tiger Global owns it, all these 10 big   New York City hedge funds own it. How could they  be wrong?” But it happens a lot more often than   you think where almost any big company that  collapses has a lot of big-name investors.   That’s something I found peculiar. And I think  I got the last laugh to a small extent there. Trey Lockerbie (18:51):  So fascinating. I’m wondering if there’s been any  turnaround on the tech side of Root, based on what  

they were misleading investors with. Are you still  seeing that same issue at hand with the company? Edwin Dorsey (19:03): So the technology is really tough   to evaluate. The way you would evaluate their  technologies through underwriting performance,   and underwriting performance just hasn’t  been good. They’d taken a $1 of premium,  

they lose $1.10. Metromile, their competitor,  based on the conversations I’ve had with people   in the industry, Metromile has the better tech.  It’s tough for me to say, just as an individual   who doesn’t understand this super well, but if you  look at the underwriting performance as a proxy   for the tech, it just hasn’t done well. The rumor  was that they tried to get acquired pre-IPL and   no one would buy them, which is another sign  that the tech isn’t as great as they think.

Trey Lockerbie (19:40): Fantastic. All right.   So the next company I want to cover is  AgEagle Aerial Systems, the stock is UAVS.   You reported on this earlier this  year, what’s happening at AgEagle? Edwin Dorsey (19:53): AgEagle Aerial Systems   is the wildest story I think I’ve ever seen. At  the time, it was like a billion-dollar company,   ticker UAVS. And they claimed to make great drones  that could be used for a wide variety of purposes,  

to deliver Amazon packages, the scout  land. At one point in time, they said,   “We’re going to actually be very great  with the cannabis industry because you   can use our drones to fly above farms,  to find good areas for hemp fields,   to grow marijuana.” Just all these wild uses  for the supposedly great drones. And then   that’s how they’re selling themselves to investors  and online and what’s going on in the chat rooms. Edwin Dorsey (20:30): You just open the 10-K in their annual filing,   and it’s like they have 12 employees. How  much did they spend on R&D? $40,000? How  

many patents do they own? Like zero. It’s like,  “Wait for a second, how can $40,000 R&D translate   to an incredible business? Something smells a  little.” So I start to dig into it a little more.   And it turns out the thing that made the stock  price rocket from one to 15 is they got this big   investment from a Lichtenstein-based hedge fund  called Alpha Capital Anstalt. And you can look   at the last 50 deals they’ve got, like half  of them end with a company near bankruptcy.

Edwin Dorsey (21:03): So this firm basically hasn’t   been associated a lot with pump and dumps,  even if they’re not doing it themselves.   So seeing that was a red flag. And then the  thing that was really propelling the stock   a lot higher was rumors that they had  a partnership with Amazon incoming. The   CEO would always talk about a partnership with a  major e-commerce player. The chairman’s daughter  

created a YouTube video where the Amazon logo was  next to the actual AgEagle Aerial Systems’ logo,   and that went viral on Reddit. And I’m like,  “Wait, this isn’t how real companies operate.” Edwin Dorsey (21:34): And then you could literally find   a local news article where Amazon explicitly  denied having a partnership with AgEagle Aerial   Systems. It was like, “We’ve never talked to this  company. We have no relationship with them.” But   the rumor kept persisting, even with an explicit  denial, because that was like in a local newspaper   behind a paywall and no one paid attention.  So I just put all these factors together,  

put it in a report. The stock’s gone from  now 15 to three. And that is one where   retail investors lost. All these retail  investors would see these like mock-ups   for a drone and see, “Oh, a partnership  with Amazon,” and this stock going off. Edwin Dorsey (22:10): This company was popular   on Reddit and Discord and Twitter, but they all  ended up losing big and Alpha Capital Anstalt,   this shady Lichtenstein hedge fund probably  made a lot of money. And the saddest thing is,   you can look, you can find videos of  the drone online and it’s literally   just a remote-controlled plane with a GoPro  taped on it. And it’s like, “How is this a   billion-dollar company? How is this getting so  much attention?” That’s really problematic to me.

Trey Lockerbie (22:36):  A billion-dollar company with seemingly 11  employees. Is this what I’m seeing here? Edwin Dorsey (22:41): Yeah. But what they do   is you never say, you 11 employees. You’re about  to acquire a transformative acquisition that’s   going to bring you to 300 employees. And then  the number you see in the slide deck is going   to be 300 employees. You have a contractor who  makes these for you. So your total employee   base, including contractors, there’s  some weird metric, is 200. Well,  

you can’t lie in an SEC filing and that’s where  you’ll get the truth, there’s like 12 employees. Trey Lockerbie (23:07): So what’s coming to my mind   is that image from Nikola of rolling a truck  down the hill, or I would suppose as rolling   this electric vehicle down a hill. A total  prototype that obviously wasn’t operational.   It’s reminding me of that. Is that what I’m  hearing from you? Is this a similar case? Edwin Dorsey (23:22): It’s similar. Now,   I think Nikola is a very peculiar example to  bring up here. Sometimes the truth is a lot more   complicated than people think. When people think  of Nikola it’s, “Oh, they faked a truck rolling  

down a hill and they told the investors they had  a working truck when in reality, they were just   rolling a truck down the hill.” That’s actually,  I think, kind of far from what actually happened   because the truck rolling down a hill happened  two years before the company went public. So that   wasn’t a stunt to deceive investors who were  investing in the stock, that was just a promo   video to build hype, not even associated with any  round that you were raising from five investors. Edwin Dorsey (23:58): So, yeah, it’s wrong,   yeah, it’s misleading. But a lot of companies do  stunts that aren’t exactly true to build hype,   and Nikola actually does have  a lot of real people involved.  

So that’s one where you can look at the surface  level and say, “Oh my God, they rolled the truck   down a hill that didn’t work. It’s got to be a  total zero.” When in reality, wait, you did that   when you were a younger company, well before  IPO, and now you have real leaders in there,   maybe there is something there.” So oftentimes.  I’m always skeptical of everything, Trey,   and that’s almost like a counterexample to me of  something that seems like it has zero substance,   but there’s actually something there,  whether it’s worth $4 billion, who knows? Trey Lockerbie (24:38): Recently, we had Tom Gayner   from Markel Corp on the show, and he touched  on this a little bit about how to filter out   leadership teams, which really is what it was. How  to vet them out and know if they’ve got integrity   or not. And he pointed at the debt level. So  what I’m curious about you and your approach   is how you filter down to these stocks to  write about in the first place. Obviously,   with, that was more  of a personal experience,  

it came across your radar. But since then,  what’s your approach as far as filtering down   the universe of stocks into something? I’m  curious, does it involve the level of debt? Edwin Dorsey (25:12): Trey, no. I want to give you   the strangest answer in the world. None of  your guests will say this, but a lot of my   ideas come from really just resources. I am a big  Twitter fan. I think there’s a lot of really smart  

people on Twitter. I’ve even published the list  of the hundred best Twitter accounts to follow   that share great ideas. There’s a lot of  these weird accounts with 50 followers,   100 followers, 500 followers, they’re sharing  really good research, uncovering one or two   red flags. I follow all of them. I spend two  hours a day on Twitter. I have a working list.

Edwin Dorsey (25:43): Anytime I see something   a little suspicious, I add that to my working  list. And we can discuss what I do once something   gets on the working list, but that’s how they  pop up in one way. The second way they pop up   is I’m a big fan of SEC comment  letters. For those who don’t know,   SEC comment letters are informal correspondence  between the SEC and a publicly-traded company.   They can be about a frivolous issue like,  why is there this typo in this filing?   Or you can see these letters where it’s like 15  questions just hammering them like, “Wait, there’s   a discrepancy. You said this number here, but this  number here, you changed the way you recognize   revenue, but you didn’t pose it to investors.  Why did this person not sign this document?”

Edwin Dorsey (26:24): And sometimes you’ll get crazy answers.   I saw one Chinese education company  and SEC is like, “Why did your CFO   not sign this document?” And they’re like, “Oh,  it was a typographical error, don’t worry about   it.” And the CEO resigns the next day. The  CFO is like, “Wait a second, something is   not right here. You had three different CFOs,  there are typographical errors, let me dig in   a little more.” So the two ways I find a lot of  companies are Twitter, SEC comment letters. If   a company has a lot of debt specifically, debt  due soon, that is going to be of interest to me,   but if the debt is due in 30 years, that’s  probably not going to play a huge role in thesis. Edwin Dorsey (27:02): But go back to the original question,   I don’t run screens, maybe I should, but  that’s just not my style and how I do.

Trey Lockerbie (27:09): You see to have a very qualitative approach,   which I appreciate. Not a lot of people though  would think to spend their time reading SEC   comment letters. So talk to us about where this  drive comes from in the first place. Were you   studying investigative journalism? What is  driving you to this dark side of the stock market? Edwin Dorsey (27:28): Trey, I’ve always been   interested in stocks from a really young age.  Like in second grade, I was all about stocks.   My transition to the short side, the dark side,  happened in my freshman year of college. I   by coincidence just got introduced to  two of the best short-sellers out there   freshman year. One is Marc Cohodes. He Used to  run a billion-dollar fund and now is a private   investor and he specializes in uncovering fraud.  My other early mentor was Jim Carruthers who runs  

a billion-dollar short-only fund called Sophos.  I entered for him on and off for all four years.   If you’re too early mentors, are the greatest in  the field, you’re going to be drawn to that field. Edwin Dorsey (28:05): So I like to joke if my two early   mentors were micro-cap rates, I’d be here talking  about micro-caps. If my two early mentors were   in private equity, I would have gone into private  equity. I just so happened to bump into two of the   absolutely best short-sellers and that they taught  me a ton. They introduced me to the right people,   and they showed me how to do real research.  And both of them by the way are very  

qualitative. Try to understand the company  and its relationship with its customers,   modeling and looking at financials, it’s the very  last thing you do. That’s like the afterthought. Trey Lockerbie (28:37): A couple of other companies that have been in the   headlines a lot in the last year, especially, are  companies like GameStop, are companies like Tesla,   few of these others. These are like just almost  basic now shorts, almost cliché in a way,  

but it’s interesting that I haven’t seen your  report on these stocks. What’s your take, I   know they’re very different companies, but in the  GameStop example, are you interested in companies   that have a high level of short interest? Is  that something that pops up on your radar? Edwin Dorsey (29:03): I love that question, Trey.   Traditionally, what an academic would tell you  is a high level of short interest is correlated   with really negative returns. The 50 most heavily  shorted companies historically underperformed the   S&P 500 by like 10% a year. So in theory, it’s  a good fishing pond. I’m actually turned off a   lot by high short interest. I’ll give you a few  reasons why. One is, there to be a short squeeze,   and as you see from GameStop, it goes to  three to 300. When it’s high-short interest,  

even if you think you’re right, you need to make  the position so small, it’s, counter-intuitively,   almost better to get a low short interest  name where you can make the position bigger. Edwin Dorsey (29:42): So something that has a high-short interest   at most, you want to make it like 1% of your fund.  But if you get conviction around Exxon Mobile or   [inaudible 00:29:50] or some boring stock you know  will never be a meme stock, then you can actually   make it a bigger position in your fund and you can  develop more conviction around it. That’s what I   like. Also as somebody who’s writing a newsletter,  I want to focus on stuff that’s off the beaten   path because that’s what provides value. I think  there’s a lot of groups that think on Wall Street,   which is how you get the super high short  interest. And then that almost turns me off.

Edwin Dorsey (30:15): We’ll also say, is if they’re   super high short interest, that means a lot of  people have done a lot of work on the short side   and a lot of people have done a lot of work  on the long side. So in order to be smarter   than the market, you need to do an extreme  amount of work. And just as an individual,   you’re never going to get there. You  might find one or two interesting things,   develop a little bit of conviction,  but if there’s high short interest,   that means there’s some nuance or some complexity,  you’re never going to outsmart the market just   as an individual, looking at a really high  short interest name. At least that’s my view. Edwin Dorsey (30:46): You might if you’re   relentless and you’re smart  and you really read stuff   do that in a sleepy one to $5 billion US company  people haven’t looked out. And that’s exactly   what I try to do. I look at one to $5 billion  US publicly-traded companies that are sleepy,  

no one’s paying attention to, and maybe are  misleading investors or traded companies. Trey Lockerbie (31:06): When we talk about what   makes a great company, in the eyes of  someone like Jim Collins, for example,   he’s big on who’s in the company, the who  first principle. And even Warren Buffet,   leadership is actually one of his four core  values when he’s looking at a company, who   is behind this company, do they have integrity,  etc. When you’re going into these reports, how  

much time are you spending, background checking  of source, the leadership? And what are you   teasing out of their commentary to distinguish if  they have the kind of integrity you want or not? Edwin Dorsey (31:36): Absolutely. It’s a big part of it. The   first thing I usually do is I would try to watch  a CEO interview, just to get a sense of the CEO.   The more you do this, you can try to sense,  are they in it for the money? Are they super   passionate about it? Is this their heart and soul?  Somebody once equates it, you can put CEOs in two   baskets, they’re either a mother or a babysitter.  Babysitters do the job and mothers care about the   child, they love the child. It’s your thing. Are  they a mom CEO where it’s their thing or are they   a babysitters CEO where it’s their job?  That’s one thing to try to differentiate. Edwin Dorsey (32:08): The other thing is you   can tell a lot between by past practice, by their  historical performance. So one tool I like and we  

haven’t talked about this yet, is the SEC  Full-Text Search tool. This is what I use   to really dig deep into a CEO and a management  team’s history. So if you Google a CEO,   you might find their LinkedIn, or you might  find their bio on the company’s website,   but those are going to oftentimes boss over,  leave out the bad experiences. I want to see   the bad experiences if there are any. So this  free website, the SEC Full-Text Search tool,  

it’s run by the SEC, allows you to search any SEC  filing that was published in the last 21 years. Edwin Dorsey (32:48): And what you do is you go to the SEC Full-Text   Search website, you can put in their name, but the  info, and it will literally show you every single   time that name has appeared in an SEC filing for  the last 21 years. And I’ll do that for the CEO.   And you’ll see, anytime you work for a public  company, not just the CEO, but in any role, if   he was a shareholder of a company if he’s a board  member of a company. So if you’ve been a board  

member of three companies that have failed and now  you’re CEO of one, that’s not a great sign. But   I’ll not stop there, I’ll also look at the CFO,  the management team, and all the other workers. Edwin Dorsey (33:23): I found that if you have a board member   who’s associated with companies that only go to  zero, your company probably also going to zero   because likes likes like. That’s the one thing I  do. And that actually doesn’t take a lot of time,   but use SEC Full-Text Search, put in the 20  names, most important to the company, and get a   sense of their history. Very, very underused tool  by investors, very underused tool by hedge funds.   That to me gives you the most comprehensive view  of a management team. That’s what drives the   business, especially smaller businesses,  they’ll have an out-sized impact there.

Trey Lockerbie (33:54): Well, so just for fun,   I pulled up this website while you’re  talking about the SEC Full Text. And   what you’re saying is you could pull up the  name, the CEO, let’s just say, Warren Buffet.   We pull up Warren Buffet, and what you’re looking  for, you get this list of all kinds of documents.  

And you’re going to, these SC 13 GA reports,  beneficial ownership reports. So walk us through   clicking through these letters and what are you  looking for when you go into these documents? Edwin Dorsey (34:22): Warren Buffet’s going to be a   tougher one because he mentioned it in a ton  of different filings. The first thing I do   is I just see all the different companies  he’s mentioned in, and just quickly,   I don’t even care how he’s mentioned, just look up  the share price performance for those companies.   Warren Buffett again is an anomalous example  because there’s so many and they’re mostly big,   but the first thing I do is like, “Okay, I  see this executive has been mentioned by four   different companies in their filings, let me just  pull up the ticker and the chart, have they gone   down to the right? Well, he’s associated with  a lot of companies that have performed poorly.”

Edwin Dorsey (34:56): Then you click on the documents,   how was he associated? You need to be  mindful, sometimes people have the same name.   You can’t like to say, “Oh, there’s another  Jim Smith who’s associated with a lot of bad   ones. This Jim Smith is bad.” That’s going  to get you into trouble, but you click on   the document. And sometimes it’s as simple as  his LLC was a 1% shareholder of this company,   not a huge deal. Other times, he was on  the audit committee for this company and   they had an accounting issue, bigger problems. So  that’s what I’ll look for when I click the links. Edwin Dorsey (35:25): It’s important to note,   the SEC Full-Text Search tool isn’t limited to  just names, sometimes you can put a subsidiary’s   name in there, and it’ll bring up obscure like  exhibits where it is a contract between the   subsidiary and something else. It’s really  this amazing tool that no one uses. And I  

tell everyone to use it and then they’re like,  “Wait, it’s cool.” So people should definitely   check out the SEC Full-Text Search tool just  to see how it works even if you don’t use it. Trey Lockerbie (35:52): All right, well, we’ll have a link to it in   our show notes. Maybe Warren Buffet’s not a great  example. Is there a recent name of sorts that may   be from one of your reports that helped flag  you on a company to ultimately type upon? Edwin Dorsey (36:05): AgEagle, we referenced this   a little earlier, but AgEagle, there was this  hedge fund, Alpha Capital Anstalt that became   the largest shareholder that did a big equity  deal. Hey, how do you learn about this fund?   You could put them in Bloomberg, nothing comes up  other than they’re based in Liechtenstein. You can   Google them and maybe a one or two bad press  articles comes up. But if you put in quotes,  

“Alpha Capital Anstalt” into the SEC Full-Text  Search tool, run it back 10 years or all 20 years,   they’ll come up 50 times. And this is where  you can add a lot of value just by digging in. Edwin Dorsey (36:38): You’ll see as the average   share price performance of every company that  does a deal with AgEagle Aerial Systems is like   minus 40% per year, something like that,  where nine out of 10 really performed poorly.   And that’s a massive red box. And you can’t  find that any other way than using the SEC   Full-Text Search tool to find every single  time this hedge fund’s name appears at any SEC   filing. Then you see the full list  of 40 companies they did deals with  

and you can investigate yourself. No other  way to get that, Bloomberg won’t do it,   a web search won’t do it, only the SEC Full-Text  Search tool will do it. And that’s a super value. Trey Lockerbie (37:16): We’ve talked about a couple   of the tools that you use. What is the first one   that comes to mind? When you sit down to audit  a company, what’s the first tool you pull up? Edwin Dorsey (37:24): Well, when I’m the first day into a company,   I’ll alternate between a few. My favorite website  is Insider’s Forum. Insider’s website is going to   make it very easy to see executive turnover. So  I’ll pull up that, I’ll just type the ticker in  

and I’ll see how many CEOs did they have in the  last 10 years? How many CFOs did they have in   the last 10 years? Have any directors resigned  within two years of joining? Is a high level   of Brexit nations the problem? The second thing  I’ll do is I’ll look into the auditor a bit, Trey.   And this is another tool that people don’t  use enough. It’s called the PCAOB Auditors   Search Tool. It’s the public website. PCAOB is  the Public Company Accounting Oversight Board.

Edwin Dorsey (38:03): It’s a quasi-governmental   agency that regulates auditors. And  people don’t know this, you can type in   any ticker and it pulls up what the auditor is and  who the auditor has been for the last five years.   That itself is actually somewhat common knowledge  on Wall Street. You can find it very deep in the   tech counter. Well, people have no idea what  you can do, is you can go to the PCAOB website,   you type in a ticker, it brings up the  auditor, but it also shows you the specific   audit partner responsible for that audit, which  is fascinating. So you don’t have to just know  

which auditor is auditing the company, you  know which person is auditing the company. Edwin Dorsey (38:44): And what I’ve found is   oftentimes, an auditor might have an okay  reputation with specific audit partners,   only audit companies that go to zero, and that’s  a problem. So you can click on the specific   auditor on the PCAOB website and see every company  they’ve audited in the last four and a half years.  

And if you see, wait, they audited six  different companies, average share performance   of like negative 90%, that’s a problem. If  they’ve audited five companies that are sub   $50 million companies and one company that’s  a $5 billion company, wait, that’s a problem. Edwin Dorsey (39:17): What I think happens   is every auditor, big four, not big four or  whatever, will have some people who are just   ready to be disposed of, ready to be  the fall guy if something goes wrong and   they’re assigned to all the questionable  audits. Can I give you an example, Trey? Trey Lockerbie (39:32): Absolutely.

Edwin Dorsey (39:33): I want to go to the PCAOB website right now. It’s At the top, there’s a search button,  and then you go auditor search. And there was a   Chinese online education company, RYB Education  that collapsed right after its IPO. So if you look  

up RYB, and you can see in 2019, 2018, and ’17,  the auditor was Deloitte Touche China. And the   specific audit partner responsible for that audit  is Li Li Shan. And you look her up, you click   on her and she’s been responsible for auditing  three different companies in the last five years. Edwin Dorsey (40:08): One was RYB Education, which fell   like 80%. One was Puxin, which is another online  education company, which fell significantly. And   the last one was GSX Techedu, which is this other  online education company that collapsed like 90%.   If you were researching GSX or these other  companies, you pull her up and wait, the   other two companies she’s audited are also highly  controversial and have collapsed. It’s like, “Huh,  

this is problematic.” And you just see this  over and over specifically for China a lot,   where specific audit partners only audit companies  that fall 90% or more. It’s just fascinating. Edwin Dorsey (40:46): I think it’s because auditors know,   wait, this company is a little sketchy so  we’re going to sign our fall guy person to it.  

And it’s just terrible, but that’s how it works,  and not enough people are talking about it. And   the crazy thing is smart to hedge funds don’t  know about it too. So there are all these cool   niche government websites that no one’s using  enough, but all your listeners should use. Trey Lockerbie (41:08): What you’re touching on   there are causation and correlation. So you’re  correlating these auditors. And by the way,   are they listed here as auditors? I’m  also seeing an engagement partner? Edwin Dorsey (41:19): Exactly. That’s the specific person responsible. Trey Lockerbie (41:24): So, you’re correlating the engagement partner   with the firms that are falling, and it’s not that   they are causing the stock to fall because  they expose something in their audit,   you’re saying it’s actually the  latter, or it’s the opposite of sorts,   perhaps where they’re putting almost like a less  qualified person on the case. Is that correct?

Edwin Dorsey (41:44):  Yeah, precisely. This is precisely it. So it’s  not like, “Oh, they have bad audit partners so   their customers are going to be upset.” No, no,  no. It’s that company is almost self-select and   get it like, “We’ll work behind the scenes to get  the questionable audit partner who will sign off   on anything.” And if you’re getting that person,  then that means you probably pushed for it,   and that’s a big red flag. And it just happens  across the board. I’m literally looking into one  

company now, I don’t want to say its name,  a $25 billion entity. The audit partner has   audited three companies that have fell 90%  penny stocks and one $25 billion company. Edwin Dorsey (42:22): And it’s like, how is a $25 billion company   getting that done? Well, it’s because they want  somebody who’s going to sign off on anything   where they can pay huge fees. And that’s a lot  of what I do. So you look at bad directors. Does   a board member actually have that much  effect on a company? Probably not. But   if you find somebody who’s been a board member  on companies that have gone to zero in the past,   then that probably means the people  who recruited him on the board are bad,   that the CEO wants a complacent board who’s just  going to get their checks and not ask questions. Edwin Dorsey (42:57): So I do a lot of this stuff,   which is not things that are going  to cause the company to fail,   but things that are highly correlated with  the company failing. And that’s like my prison  

through the world where people have built super  complex models and I’m like, “No silly, just go   to this government website and put in the ticker  and I’ll get you something so much more useful.” Trey Lockerbie (43:17): We recently had Ben Mezrich   on the show and he just wrote a book called  The Antisocial Network. It was all about the   GameStop saga with Reddit and WallStreetBets,  etc. Ben even mentioned that this is really   happening at hedge funds now where people  have full-on Reddit analysts who are on there   trying to anticipate a short squeeze. Is something  like Reddit on your radar at all as far as even  

uncovering companies or just looking out  for companies that might be going short? Edwin Dorsey (43:45): Trey, I think Twitter is   generally the better tool than Reddit. It’s  similar, but just the quality is generally   higher on Twitter. I’ve been blown away  with some of the research on Reddit though   if you’re wearing a suit and work at a big  hedge fund, you probably think, “Oh, it’s all   idiots living in basements staying to the moon,  AMC.” In reality, that’s part of it, but there’s   actually really outstanding research being done  and shared there if you know where to look.   The GameStop stuff is actually a great example  of that. If you go back, read the early stuff  

from Roaring Kitty, the guy who predicted  this all, it was remarkably well-researched. Edwin Dorsey (44:19): He was like, “Well, COVID is going   to help with game sales if people stay at home  more, and the biggest driver of new game sales are   new consoles. And a lot of new consoles are all  going to be released in this three-month period.   That’s going to help GameStop. And they currently  have a two-year one runway of cash. That will get   them to a five-year runway of cash. And they’re  at like one 10 sales. So six months from now,   this business is going to go from nearly bankrupt  to actually having a five-year runway of cash and   growing sales. The market’s going to notice that,  and then they have a chance to turn it around.”

Edwin Dorsey (44:50): And I’m like, “This is a remarkably good thesis.”   I didn’t buy any, and this guy couldn’t have  predicted the magnitude of this short squeeze,   but it was just out there in the open, this great  like A-plus quality work, and people still don’t   recognize that. If you get this stuff to  crowdsource, there’s a lot of nonsense,   but there are diamonds in the rough there. So I  think everybody should use it. Rather just type   in the ticker and scroll through everything. And  more often than not, there’s one useful thing. Trey Lockerbie (45:20): In the words of Charlie Munger,   invert, always invert. So what I love about this  approach is not so much that our listeners need  

to go out there and start short selling stocks,  because that’s not something we often talk about   or advise on our show. But what I do love about  this approach is almost not starting with it,   but ending with it with your diligence. So you  find a great company, you filtered it down,   the financials look good, you’re going through  your basis. And then you cap it off with something  

like this, almost as just another part of your  checklist to ensure that you’ve covered your   basis and there are not in other risks that  you haven’t currently taken into account. Trey Lockerbie (45:57): So is this something   that people should try to add to  their personal approach or should   we just rely on folks like you who know a  little bit more about what they’re doing? Edwin Dorsey (46:07): It depends, there are elements   you can do very easily. If you’re investing in a  concentrated portfolio and you actually care about   understanding your investments, I would totally  just play around with the Full-Text Search tool,   at least put the CEO’s name. Seeing  who an audit partner is taken like  

10 seconds. It also depends on the area you’re  playing. As you’d expect, bigger companies tend   to have fewer of these issues. I found once you  get above the five and $10 billion market cap,   these extremely obvious red flags go away.  So if you’re playing in the sub $10 billion,   and especially like the sub $5 billion or sub $1  billion area, these tools will add a lot of value.

Edwin Dorsey (46:46): If you’re investing in Apple and Google and   Facebook, these are really irrelevant. Facebook  isn’t going to have a board member who’s been   involved in a ton of frauds in the past. All these  companies are going to have reasonably qualified   auditors. This becomes less of an issue. But for  super small companies, any investor doing it,  

I recommend it. They can reach out to me on  Twitter or over email, and I’m happy to talk   to people. And then if you’re investing a  significant amount, all your requests are   almost market cap-independent, those can add  value regardless of the size of the company. Trey Lockerbie (47:17): Well, Edwin, this has been   so much fun. This is just part of the stock market  I’ve not explored very often, and it’s been really   enlightening. And you just have an incredible  track record calling to some of these companies.  

So congratulations on that. Obviously, I have  a knack for it. Before we let you go, I want to   give you the opportunity to hand it off to our  audience, where they can learn more about you,   where they can fall along with what you’re  doing. Anything else you want to share? Edwin Dorsey (47:40):  Well, Trey, thank you. I had a lot of fun  too. My Twitter handle is @stockjabber,   Edwin Dorsey, @stockjabber. I tweet a lot  about stocks, so that might be a fun thing to  

follow. I’m unique in that I don’t work for  a hedge fund, I’m not employed by anybody.   I really just write a newsletter called The Bear  Cave, which is focused on exposing corporate   misconduct. There’s a free email that goes out  every week, and there’s a paid tier for people who   want more deep-dive articles. And so check out  The Bear Cave newsletter if you’re into this stuff   @stockjabber on Twitter, and keep listening  to this podcast, because you guys do well too.

Trey Lockerbie (48:14): Well, I will be subscribing   and I will be sure to grab a bucket of popcorn  as I read it because it’s highly entertaining.   So thank you so much again, Edwin.  Let’s do it again sometime soon. Edwin Dorsey (48:23): Absolutely. Thank you, Trey. Trey Lockerbie (48:25): All right. That was a lot   of fun. If you’re loving the show, please go  ahead and follow us on your favorite podcast   app. And if you’d be so kind to leave us  a review, we always love to hear from you  

Edwin and I connected originally on Twitter, so  feel free to find me there @treylockerbie. And   if you want to do your own due diligence, be sure  to check out the TIP Finance tool. You can simply   Google TIP Finance and it should pop right up.  And with that, we’ll see you again next time.

Outro (48:47): Thank you for listening to TIP.   Make sure to subscribe to Millennial  Investing by The Investor’s Podcast Network   and learn how to achieve financial independence.  To access our show notes, transcripts, or courses,   go to This show is for  entertainment purposes only. Before making any  

decision, consult a professional. This show is  copyrighted by The Investor’s Podcast Network.   Written permission must be granted  before syndication or rebroadcasting.

2021-10-06 19:49

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