Thanks to Etienne and another that was kind enough to email me, Spruce Point Capital wrote a hit piece against GFL Environmental (TSX: GFL / NYSE: GFL, GFLU).
The allegations can be summarized as shady people, shady accounting, shady history, shady operations and shady associations. Apparently being associated with the late Toronto Mayor Rob Ford (infamous for being busted in his term in office for doing cocaine) is also is grounds for financial excommunication.
Do I believe the report? Not in its entirety. Do I dismiss the report? Not in its entirety.
The investment thesis for GFL has always been on whether they possess an ability to process acquisitions and make them more profitable. Even at the IPO their financials were a train wreck to go through, although you could see how it could be done to yield a decent amount of free cash flow, in line with major competitors (Waste Management / Waste Connections / Republic / etc.).
The report does present evidence that there have been exaggerations/creative interpretation by management, in addition to many acquisitions in the past that appeared to deliver sub-par results that were disappeared 1984-style.
One of the great things about being a small-time investor is that you can get in and out of positions (in most cases) by clicking a button. Shortly after the peak of the Covid crisis, I took a minuscule position in GFLU which I offloaded today.
Just imagine if you were an institution and have 50 million shares of this thing and the 180 day lock-up expiry doesn’t happen until August 31. Or if you were one of the purchasers of the US$750 secured bond financing, getting a paltry 3.75% for 5 years on an investment that doesn’t seem so secure anymore. Egg on your face as an institutional manager!
It actually doesn’t matter for me whether this report is true or not, simply because the thesis of any future investment in this company has changed. It is now a thesis on whether the evidence laid out in this report or not is factual enough to sink confidence in the company enough that it won’t be able to raise further financing. On balance, I deeply suspect it will survive and just like a lot of these short seller reports, they turn the most tenuous of connections into big news, just like a political “guilt by association” hit piece.
However, to deal with this in the future takes mental space that I can ill afford with a portfolio that is spread out with more individual holdings than I have ever had in my financial history. This quarterly cycle of 10-Qs and conference call transcripts just slammed me. I just do not have the mental capacity to follow the inevitable gyrations that will be occurring as institutional holders try to confirm or refute the GFL allegations in the upcoming weeks and months. Too many eyeballs are going to be looking at this, and my eyeballs aren’t going to have a competitive advantage of any worthy note. So I’m out, taken it off my watchlists, and focusing elsewhere.
This is also why I don’t get involved in any other financial scandal stocks (e.g. Herbalife), although I must say the Home Capital Group (TSX: HCG) fiasco in 2017 was most fascinating. There’s just too much attention and too many people, some a lot smarter and most of them better resourced than I, looking at these situations.
There is a valuation claim that I was suspecting from the very beginning that if GFL does have their crap together that they can head up to the CAD$50 range, but clearly that’s now going to turn into a “show me” with regards to their mammoth acquisitions they have recently made. This will take a lot of time (at least 18 months), and once the IPO lock-up period expires, there’s going to be a lot of gyration in the shareholder base. One tailwind for the company will be the inevitable inclusion in the TSX indexes (with a decent shot to get into the TSX 60 if it appreciates from here on in) which will cause its own momentum. We will see, and for those that are sticking around, I wish them the best of luck.
