Edwin Dorsey, The Bear Cave.| No Bull George Noble.

Yeah. George, thanks so much for having me on. It's an honor to be here.

I'm 27, George.

Do you think my age is a liability? Ouch.

Yeah, George. Absolutely. And thank you guys again for having me here. My transition to the short world and my interest in the short world really happened freshman year of college when I got introduced to two big short sellers. One person I met my freshman year was Mark Hotez, who I know has been a guest on your podcast and is a big independent short seller. He was a very early mentor. And the other person who was a big early mentor for me was Jim Carruthers, who ran a $1 billion short-only hedge fund called Sophos. I interned for him on and off all four years of college, and then my senior year of college, Sophos was in the early stages — Jim was in the early stages of retiring — so I needed to get a job. And that's when I came up with the idea of starting the Bear Cave newsletter, first as a way to share smart content online with the hopes of getting hired. But early in the pandemic, the newsletter became pretty big in its own right, and it quickly became a full time job for me. And that's what I've been doing for the last five years.

There's two components to the Bear Cave. There's a free version that goes out every Sunday where I summarize new activities, short reports. I track executive resignations every week — there's 150 or so executive resignations — and I try to highlight the 5 or 10 that are most suspicious or meaningful. And I link to interesting stock-specific tweets and additions twice a month for the paid readers. I'll write about a $1 to $10 billion U.S.-listed, publicly traded company that I feel is harming customers, misleading investors, or on the wrong end of disruption. And what I would say I'm particularly strong at is using FOIA — the Freedom of Information Act — to get consumer complaints on businesses to better understand a company's relationship with its customers and what might be going wrong, and understanding these qualitative factors that are leading indicators of where the numbers are going to go. So that's what I really focus on: qualitative issues at these $1 to $10 billion public companies, and trying to highlight them for the readers of the Bear Cave.

Yeah, George, your intuition is completely right. So it's not a hard and fast rule. I'm happy to look at stuff bigger than $10 billion. Below a billion it can get tougher because the readership just won't care that much — if there's at least 10 million average daily volume and it's borrow, maybe I go under $500 million, or if I'm really stretching for an idea, go lower. But typically $1 to $10 billion is the sweet spot for readership. And also, when you get above $10 billion market caps, companies might have problems, but they tend to not be as severe, in my view. You know, you don't see a $50 billion company collapsing 80% in a year. Or maybe you do in this crazy market, but typically you don't. In the $1 to $10 billion range, you can still find companies that are egregiously overvalued, the market might not know how to price them yet. The other thing I'd add is I like looking at recent IPOs or SPAC mergers or businesses that don't have a long history in the public markets. If you've been around ten years, the market kind of understands you and knows how to price you. But if you're more new, that's where I can come in and do well, and maybe get a little bit of an edge.

Yeah. So there's a lot of executive resignations, and sometimes executives just naturally turn over. So what makes an executive resignation suspicious? The first thing I look at is the tenure. If somebody's been there less than three years, to me that's a big red flag. Very few people join a company just to leave a year later. I also try to look at the timing of the resignation. Are they leaving in six months, are they leaving next month, or are they leaving effective immediately? With effective immediately being the most serious, and a long term transition plan being less serious. In addition to that, how long they've been there and how quickly are they leaving, I'll look at the pattern of resignations. Is this kind of a one-off, or is the CFO leaving a month after the chief accounting officer resigned, and now a member of the audit committee is resigning the next month, and there was turnover last year? You know, trying to see if there's a pattern. In addition to a pattern of resignations, I might look at — is there a B7, indicating undisclosed investigative activity? Are there SEC comment letters? Trying to piece together a mosaic of what's going on, or if there's some sort of problem. So it's really trying to see, is there a pattern of resignations, how quickly are they leaving? And then one more thing I typically do is I always go to the executive's LinkedIn and see if they're writing anything about the company, and will occasionally find signs that it was like a negative departure. So I remember for Tattooed Chef, the former CFO, he moved his work experience back to his education experience, not linked to the company. It's like, this was such a bad experience, I'm putting it in the education column. And the new CFO had their degree from the University of Phoenix, which is an online for-profit. So the timing's like — might be tough to model or build a real system around, but when you see stuff like that, it makes me chuckle and say, wow, this is egregious. And that's what ended up going to zero: Tattooed Chef.

I think you might be onto something with that sometimes. You know, the companies pay a lot for a ticker symbol or name. I don't know if it was DNA that paid for it. Yeah, or somebody. But when you're willing to pay like crazy amounts of money early on to get a certain name or ticker, I don't know if maybe that's correlated with something.

Yeah. And George, could I piggyback on the domain for a second? We were seeing domains only go up in value. I kind of wonder, in the world of AI, are domains going to have as much meaning? You know, if you don't use Google as the top of funnel but instead you're asking questions? And then the other thing I think of on domains is, some people know you can look up a domain and see who owns it, and oftentimes it's registered through proxies so you can't see the actual person. Most people don't know you can actually see all the domains a company owns through something called the reverse WHOIS search. You can search a company's corporate email address and see all the domains affiliated with that email address. And sometimes I do that just to see the domains the company owns, because sometimes, you know, they'll say our product sucks dot com, and they'll be registering domains just to defer lawsuits. Right. Oh, you know, I remember one pet care company — they were registering a domain like our drug kills dogs.com. And I was like, well wait a second, I didn't think dogs were buying the domain. I think there might be an issue.

I haven't watched the replay yet, but I've heard good things about the conference, so I will be watching the replay. Yeah. And I did see Mark tweet that he wasn't going short anymore. George, between me and you — you know, I've known Mark almost ten years now. I think every fiber of his DNA is a short seller. So I don't know anybody who's more of a short seller than Mark.

No, I'm not. No, I love Mark, I think he genuinely believes what he says. I think he genuinely finds some other thing to do for the next five years. But then he's going to find some other bad actor, and he can't help himself.

Yeah. So I do a lot of kind of weird things. I generally prefer to be off the beaten path — not heavily shorted, not written about, generally in the tech or consumer space, because that's more understandable for me. Now, one of the first things I do that's kind of odd is I immediately look to see who all the board members of the company are, and see what other boards they've been affiliated with. Because my philosophy is, winners in the public market tend to continue to win and losers continue to lose. So if I see a public company and the board members have been affiliated with a lot of other companies that have gone terrible, especially if it's a recent IPO that the market's trying to figure out, that's going to grab my attention. I focus a lot on a company's relationship with its customers, with the logic being here that you could look at two companies that have identical sets of numbers, identical growth rates. But if one has customers who are extremely dissatisfied and on the verge of completely canceling, and one has customers that are delighted and extremely happy with the company, those two companies, even with identical numbers, should have very different valuations that are going to play out in the long run. So I'll just look at online consumer complaints, I'll go on Reddit, I'll go on TikTok, I'll go on YouTube, I'll just try to get in the minds of the customers, reading consumer reviews if possible and easy. I'll try to use the product myself and develop an opinion. And if I get a spidey sense that something's wrong, then I'll bring out the most powerful tool in my toolkit, which is using FOIA — the Freedom of Information Act — to get consumer complaints people are filing against companies. Because online it's hearsay — maybe competitors are planting rumors, maybe the issues aren't that severe, maybe the competitors are even worse. But once you get complaints that people are sending under penalty of perjury to state agencies, to federal regulators, and you can see companies' responses, I think you get a much better sense of how egregious the issues are with companies. So that's probably the most important thing I do. I'll do a lot of other games, like most people know you can sue the auditor for a public company, but many people don't know you can see who the specific audit partner is for a public company under the PCAOB government database. And that can be useful, especially for U.S.-listed Chinese companies. I look at SEC comment letters, and I look at a lot of other random stuff. But the core tenant of what I do is trying to understand that company's relationship with its customers and the value proposition of its products.

Yeah. So far I don't think you can automate me, but I think computers especially could make what I do more powerful. So let me give you an example. I pay for ChatGPT Pro. I ask it a ton of questions. One of the questions I do for idea generation is, now every month or so I ask ChatGPT: please go through the list of all recent IPOs and SPAC mergers and identify the ones for me that have high levels of consumer complaints. And it'll come back — oh, you can do that. Yeah. Yeah. And it's actually quite good. And they'll give me like eight tickers back, and it'll give me a one paragraph summary on each. And I'll go through eight, and not all of them will be relevant and I won't agree with the analysis on each one. But now at least I'm looking at every IPO through the lens of technology, and it's helping me find the ones that'll be relevant for me.

Yeah, I mean, but the thing is, so you might say, okay, well, that's going to make the market more efficient because all these powerful tools. But then on the other hand, there's fewer and fewer people doing active management. So more and more of the market is being indexed. This is perfect for you because it makes for a less efficient playing field now. Maybe so. You know, I think with AI, even if AI is making the market more efficient, the games are always going to change. So I think there's already now startups that are trying to poison the AI training datasets to get the AI confused, so they recommend one company over another. And you know, so there's always going to kind of be a market, I think, for a human to kind of interpret the data and see what's right and what's wrong. You know, in terms of the role of index funds growing, I'm not sure. I think there's always going to be kind of an active market, and I think especially in the smaller cap arena and mid cap arena where I tend to play, that that isn't going away anytime soon.

Yeah. So one company I've written about twice in the Bear Cave now, and I think it should be at the top of any short list, is Signet. Signet is a $3 billion publicly traded company. They're the largest retailer of diamond jewelry in the US through brands like Zales, Kay, and Jared. Mall-based retailer, largest retailer of diamond jewelry, with an emphasis on diamond engagement rings. They've got several headwinds, such as declining mall traffic. You know, there's better value proposition from independent jewelers. But the big single factor of the short thesis is the growth of lab grown diamonds. Lab grown diamonds are chemically and optically identical to naturally mined diamonds, but much, much cheaper. And they're getting higher quality every day, and they're getting cheaper every day. And as lab grown diamonds become the dominant source of diamonds in the industry, I think all diamond prices are going to go down. And when diamond prices continue to go down, they're going to become so commonplace that nobody wants them. So I think the diamond industry is just going to be totally disrupted by lab grown diamonds over the course of the next five years, and as a result, Signet is going to suffer significantly.

And I want to just give one historical anecdote about how powerful this can be. In the late 1800s, the most valuable metal in the United States was actually aluminum. And I encourage people to look this up, because the top of the Washington Monument was literally 100 ounces of aluminum. The wealthy women of the 1800s would literally wear aluminum jewelry. And now aluminum is so commonplace — in fact, they found a way to smelt aluminum more efficiently, and the price of aluminum fell 99.9% over the course of a decade. And there are no more aluminum jewelry businesses. I think you're going to see a similar thing happen with the diamond industry today or ten years from now. They're just going to be so commonplace, and you cannot differentiate between natural and lab grown diamond — literally, jewelers can't do it anymore — that it's just going to make all diamonds worthless. And a company like Signet is uniquely positioned to suffer from this.

Yeah. They're not fake. They're very much real. This is the important thing: it is literally identical. In fact, the way you tell the difference between lab grown and real is you look at the imperfections, and real ones are going to have more imperfections than lab grown. So the thing is, it's tough for the lab grown to mimic the imperfections of the real right now. But right now, if you go into a jewelry store, they cannot tell you the difference. There's literally — I think a person is being prosecuted in Manhattan for going into professional jewelers and convincing them that lab grown diamonds he bought were the real deal. So a jeweler right now in the United States cannot tell you the difference between lab grown and real. There's only one lab, the Gemological Institute of America, that can do it. And one day they're not going to be able to do it. It's kind of like, imagine if you could just produce gold for $10 an ounce in your basement. And it used to be you could tell the difference, but then there's no way to tell the difference, then gold becomes worthless, right?

So I think there's a few ideas. First, it's cheap on a free cash flow basis. Second, some people would say — Edwin, you're so naive. This lab grown diamond business is overblown. Have you ever talked to a woman? They definitely prefer a real diamond, not lab grown diamonds. So that would be number one. Two — what they're going to say is lab grown diamonds are actually a benefit for the company.

Why, yes, there's higher margins, George. If you can buy them for free, you know, and sell them for 80% margin. But here's what they don't get. Yes, there's higher margins today, but the prices are going to come down so much and have continued to come down. If you look at the prices of diamonds — literally, they go to the Idex Diamond Index — the diamond prices for natural diamonds are going down every month. For lab grown, they're going down every month. So even if you get a temporary benefit right now, this quarter, next quarter, whatever, eventually the diamond prices are going to come down so much it affects the results regardless of what the margins are. If you're selling diamonds for 90% lower than what you're selling them today, I don't care what your margins are — they're just not going to be enough profit to go around. What you've seen, especially from younger generations of women, is that they don't mind the lab grown diamonds because, again, it's chemically and optically identical. You can get a bigger ring, you know, clearer cut, for a lot cheaper. And nobody's going to know the difference. It passes a diamond test on everything. And then you can spend an extra $5,000 on your honeymoon. It's an easier trade off for people to make. It's more environmentally friendly. It doesn't use child labor or any form of physical labor harming people. It's just kind of the way of the future. And every time I write about it or tweet about it, I get so many emails and people reaching out to me who are on the younger generation saying, hey, I bought it — and can anyone tell — if you gave a diamond to a girlfriend, could she tell the difference between the lab grown one and the real one? No. And a jeweler can't, and a jeweler's loop isn't going to show you at all. Now, that wasn't the case five years ago, but now the lab grown diamonds have gotten so good. Literally, the only person that can tell is the Gemological Institute of America. And even they're being fooled. Okay. So professional jewelers can't tell the difference. It's just that, you know, for half the price, you can get a bigger ring, that's a clearer cut, and the prices are only going to go down. So it's an easy trade off for younger generations to make.

I think it's going to take a year or two to play out, and I think it will show up in the numbers. I just look at their earnings commentary, and I encourage any investor just to look at the earnings commentary over the last year. And the management does not communicate the same view about lab grown diamonds that I'm communicating to you, George. They think there will continue to be a market for natural diamonds. They don't think there's going to be a ton of price compression for natural diamonds. And they say things like, well, we're going to retrain our store staff to better educate consumers about the value of natural diamonds. We're going to add warnings to the receipt for lab grown diamonds to help consumers understand that lab grown diamonds aren't going to hold up in value. Of course, what they don't say is that natural diamonds aren't going to hold up in value either. So they very much have this view that they're not being disrupted. And those are the types of companies to get hit by disruption the hardest. If they were leaning into it and they said, well, you know, we understand that the jobs of the future might not be diamonds, and we're going to have all these other solutions, and we're going to be lab grown first — you know, I would be more sympathetic to them. But it's very much kind of old school: we're going to sell lab grown, but we think there's always going to be a market for natural, and it isn't going to affect prices.

I think KinderCare might be a good one to talk about. It's another one I've written about twice. $2 billion daycare company in the United States. They operate about 2,300 daycares, a private equity backed recent IPO. Their issue is kind of similar to the first company I got famous for, Caricom, which is they have a lot of safety issues that aren't being properly written about. So, you know, lower middle income, hardworking consumers, they drop their kids off at these daycares. About 35% of the company's revenue comes from government subsidies. And just overwhelmingly, if you look at local news stories, these daycares aren't doing their job.

Wait, wait, wait, wait — wait, wait, wait. Yeah. Because a KinderCare worker brought cocaine in their backpack and then left the cocaine in the backpack. And the kid got inside the backpack and ingested it. And then KinderCare didn't report it to the parent, but the parent knew something was wrong, so brought their child to the ER. And then the cops accused the parent of being the one who brought the cocaine. But that's when they figured out it was the daycare worker. And these aren't isolated incidents, George. In several occasions, kids have literally escaped from KinderCare locations and been found walking across the street, like three year olds, caught on Facebook lives and stuff, just like waiting in the middle. And these aren't just isolated incidents of kids being abused — kids, you know, just having all these bad outcomes. If you even look at the state licensing level down, KinderCare, which you'd expect to have the best standards because it's a large corporation, is actually way below average. So you combine it all together and you got private equity involved, you got cutting costs, you got bad parent outcomes, you got state subsidies, you got a brand that kind of isn't liked by any of its constituencies. I think that's kind of a recipe for disaster.

They got some debt. Got a big one. Yeah, yeah. They do have about $1 billion in debt.

Yeah. So fair question, Rusty. And the simple answer is I don't have a strong opinion because I just don't know them well enough. I think I generally stick to more consumer and tech stocks because I think they're easier for me to understand than the Carvanas or the Teslas of the world, because they're just too heavily talked about. I don't even waste a brain cell on them. I think there's lower hanging fruit elsewhere. In terms of other car manufacturers, I just don't know. There's going to be so much change in the auto industry, it's like — I feel like if I was even a full time autos analyst, I'd have a tough time understanding it. So I wish I could give you a better answer, but I don't know and don't have an informed opinion.

Well, we just talked about Signet. And hold on — I made a fun report on the worst retailers. I'm pulling it up on my phone. You know, Zoomies has been around — so outside of Signet, which is my favorite, Zoomies is a shoe retailer that's been around forever and kind of gone nowhere with a really old manager. Yeah. When I got interrupted, maybe Jilly can talk about this. I don't think he does. Maybe she does.

I don't know if they have that problem. I think it's just kind of like an outdated mall based brand. And it's the same management for 20 years and the stock has gone nowhere. I'm looking at my list. Land's End is one on the list. And that's just, you know, doesn't connect with younger people. Children's Place — I'm trying to see if there's something with a bigger market cap, kind of like retail.

Yeah. So I made this list of 100 long-term underperforming companies, partly because of how the market's acting right now. You know, every stock is going crazy, everything's hitting all time highs, people are getting blown up in their short books. I think now is the time that you kind of maybe want to shift more to these sleepy old companies that have been flat for 20 years, and they can be your funding short so you can get more long, exciting stuff. Now, the criteria for the 100 long-term underperforming companies — the only real criteria is that every company on this list must have materially underperformed the S&P 500 since IPO, with dividends reinvested. And ideally, I'm looking for companies that have underperformed materially for at least ten years. So I did a bunch of things. I got a list of every company that's underperformed the S&P 1500 since inception. And, you know, that's like a few hundred companies. I just go through each one and I try to see who has old management. Right. So if you have the same management team for 20 years, and you've underperformed a lot, I think you're going to continue to underperform. Now if you've underperformed for 20 years but you just got a new CEO, I'm not saying you're going to turn around, but you might. So I don't want to include you on my list. But if it's the same guy who's been there for 20 years and you got no new management, then I want to look a little deeper. Is the board old? Can I get any more confirmation that the product is just, like, not great and nothing's changing?

Then I think you want to get on this list. I look at Glassdoor reviews and see like what employees are saying. I do look at the balance sheets a little. I will prefer companies with — I like to think of companies that are like slowly on the wrong end of disruption. And doing this, you find all these companies no one's ever talked about. Like, I don't know if you've heard of O-I Glass. They're like a glass bottle manufacturer. And I think for the last 30 years, their stock is literally just completely flat.