In this week's Stansberry Investor Hour, Dan welcomes Matt Franz back to the show. Matt is the founder of Eagle Point Capital, an advisory firm focused on long-term investing. Eagle Point Capital has more than 5,000 subscribers on Substack.

Matt kicks things off by sharing the kinds of companies that he likes to search for. He says that these are "simple, predictable, and profitable" businesses that he can look at over a period of five-plus years and know where they're heading. But even though Matt's firm likes to have a long holding period for its stock picks, the team is constantly assessing and investigating what's occurring with the companies to ensure that they're still worthwhile buys. Matt then begins discussing a vertical market software ("VMS") company he likes. Despite the stock starting to decline following the "SaaSpocalypse" and more recent concerns of AI harming the business, Matt says there's no reason to be afraid...

I think what the bears are missing is that the code is not the moat at a business like [this one]. So writing the code was never the most difficult thing, the most value-added thing, that [the company] did... [It] has had to go out and build relationships and understand the addressable market... And in many ways, [it] knows better than the people themselves using the software what is needed or desired.

Next, Matt explains why decentralization is one of the biggest strengths for the company. It has about 1,500 business units that operate independently. Management looks at what works and what doesn't and shares the data throughout the rest of the business. But the individual units are still free to evaluate the practices and decide if they're beneficial for that particular unit and can implement them as needed. This allows the company as a whole to constantly innovate and improve itself. Matt then discusses the process this company goes through to make acquisitions. It's able to find bargain deals on smaller, overlooked businesses that can have a dominant role in their respective fields. And with the success that it has had with this strategy, it's leaning more into this method...

The interesting thing about VMS... is that the TAM, the [total] addressable market, tends to be pretty small, which means that venture capital and private equity are not really interested in these businesses... So there's very little competition. And [the former CEO's] genius in founding it was to realize that while these businesses are capped by their TAM – they tend to be very mature and they're often almost monopolies. It tends to have businesses with 50% to 80% market share.

Finally, Matt presents another company he's fond of. Its focus is mainly on coal royalties, though it also owns soda-ash assets as well. It had suffered from years of debt after investing in multiple businesses before making coal its primary business. Today, it's nearly debt-free, and while coal prices are low today, with the many mines that it owns, if the prices start soaring, the value of those mines (and the company) will also go up. And Matt leaves listeners with advice on deciding to stay long in positions in the face of potential downturns...

[Figure] out your variant perspective in your investment. Just [get] to the root of the bare thesis and [pick] that apart... I think when you can have that variant perspective, that's when you can make an investment and you're going to have the staying power to be a long-term owner, because you've really thought it through and come to some conviction that you're going to need.

Click on the image below to watch the video interview with Matt right now. For the audio version, click "Listen" above.

(Additional past episodes are located here.)

This Week's Guest

Matt Franz is the founder and principal of Eagle Point Capital. He founded the company in 2017 to make long-term value investments for himself, his family, and friends. Previously, Matt worked as an options trader and quantitative analyst. Matt graduated from the University of Michigan with a Bachelor of Science in engineering.

Dan Ferris:              Get out your pens and papers because today you are going to hear chapter and verse, a really thorough understanding of two very attractive investment propositions. And we're going to talk about all the things that went into finding them and all the key things that our guest today looks for when he's trying to find new investments. And he's got investments that he's held for years, since the beginning of his firm. So he's a serious long-term investor. This is how a serious long-term investor thinks about the businesses that he owns.

We're going to talk about Natural Resource Partners. The ticker symbol for that is NRP. And we're going to talk about Constellation Software. Its ticker symbol is CSU in Toronto. You can find the pink-sheet symbol in Google or Yahoo Finance.

So we're going to talk about those two like you've never heard them talked about before. So let's do it. Let's talk with our guest Matt Franz. Let's do it right now. Matt, welcome to the show. Glad you can make it.

Matt Franz:             Thanks for having me, Dan. I'm excited to be here.

Dan Ferris:              Yeah. I just want our listeners to know I am a subscriber to Matt's newsletter, and I've seen him do presentations, which I really enjoyed, at an annual conference that he and I get invited to every year. And I just had to have him on the show. In fact, I liked one of his pitches so much that I looked into it myself and I put it in my newsletter, and we'll talk about that eventually. But I actually would like to lay some groundwork, Matt. I'd like to just talk about investment philosophy and why start another fund? Why start Eagle Capital? What are you doing or think you're doing or trying to do that adds value or it might be different from what other people are doing?

Matt Franz:             Yeah, I think we really try to take a private business-owner approach to the public markets. That's not exactly novel – Ben Graham wrote about it, but we try to take it seriously. And so that means we're looking for simple, predictable, profitable businesses. Simple means I have to understand it and I have to have some sense of what it might look like in five or 10 years. We're not looking for stocks that we're going to flip in a month or six months or a year or two even. Although, of course, mistakes happen or you find better opportunities, so you do sell occasionally, but ideally you don't. You find good businesses you understand. We're looking to get into business with partners that we like, we admire, who we think run the business well and have our best interests as minority shareholders at the forefront of what they're doing.

Dan Ferris:              I just want our listeners to know, Matt, when you say partners, [you're] talking about the management folks. You've used the management team as partners in the investment. Sorry, I just wanted to clarify that.

Matt Franz:             Absolutely. Yeah. And so you're basically going to be married to them whether you like it or not. So you better find a management team that you do like and you like their capital allocation and you like how they think about the business and whether they're just playing for a three-to-five-year big stock option grant and going to be out of there and retired on their island, or they're going to stick around and really build wealth alongside of you.

So that's a big consideration. Another big consideration is the actual cash flow, right? Cash flow is the blood of a business, and it needs to keep moving for the business to survive. And we like businesses that, to quote Charlie Munger, are drowning in cash. They have so much cash and it's just coming in and coming in. And there's a lot of decisions to be made then about how they're going to spend it. So we tend to stay away from businesses that are not profitable consistently, or maybe they're profitable but only on a kind of accrual accounting basis and the cash flows are not so steady.

And so doing all of that really actually limits your universe and it shrinks what you might be interested in investing in down to a relatively manageable size that we can again sift through because there's just so many things we don't understand or are not consistently profitable or have managements that have some crazy incentives or not very good track records.

And so then what we're looking for is a margin of safety. So we want to make sure that we're not overpaying and we want to make sure that – even what we really try to do is we say, even if we do make a mistake – because mistakes are part of investing – we don't lose money. So you want to really then find a price that you can buy one of these businesses at that you're not paying for perfection or you're not expecting everything to be perfect as your bull case sort of outlines. You want to be able to say, well, even if nothing good sort of happens, my downside is protected and this will just muddle along, and maybe it won't be a good investment, but at least we won't lose a big chunk of money. And if you can lay capital at risk over and over again and not lose money, eventually you will have some big winners because investing results tend to follow a power law.

Dan Ferris:              OK, so it sounds like you're getting to the end of the list here, but if there's another item, go ahead.

Matt Franz:             Yeah, no, that's kind of the trick. And then we are – once we get into those good businesses, we're holding them for a long time.

Dan Ferris:              I'm going to ask you what a long time is in a minute, but I just want to sum up for our listeners: So this is something you can understand, run by people that you like and trust, and that you understand what they're doing. Cash flows are really important and you buy with a margin of safety. Those sound like your critical four items.

Matt Franz:             Yeah, absolutely. And one thing, too, I'll add is we like to invest with a thing we call replication mode. So that means the business's past was very good, and we think that it has to just keep doing what made it successful in the past into the future, and then it has a long runway to keep doing that. So we're not really looking for big inflection points or turnarounds. We're basically saying, "Look, they've done this really well. It's a well-oiled machine, and they have a long runway to just keep doing the same thing."

And then usually there's been just some one-time exogenous event that casts doubt on that, that we can come in and maybe have a variant perspective as to why we think it will continue. The market doesn't think that, therefore we can get an attractive price and a margin of safety.

Dan Ferris:              Right. And just to go back a minute to the cash flows, the cash flows are – there are other types of other ways to value businesses, but overwhelming majority of the time, especially if you're looking for a good operating business, it's not going to change. It's not going through a big inflection point. It's just going to keep making money, keep drowning in cash. Cash flows are the thing that value investors are valuing. When you value a business, it's all about the cash flows. I think a lot of – especially a lot of the individual folks that we write to, don't appreciate that enough. I write it in every single issue. I write those words, the cash flows are the thing you're valuing. That's the valuable part in every issue of our Extreme Value newsletter. But I'm just glad you mentioned it for that reason.

So it's super-duper, duper important. You didn't mention balance sheet. I imagine that's very important to a guy like you.

Matt Franz:             Yeah. So we're – of course, like everyone, we're looking for a strong balance sheet. We are willing to invest in businesses with some leverage, but it has to be reasonable. And we're typically investing in situations where they're rapidly paying down the debt, and then you can get that enterprise value moving from the debt to equity.

So it accretes to you as they pay that down. But yeah, all things equal, we prefer the net-cash or zero-cash balance sheet or very modest leverage that is – f you study businesses, there's lots and lots of good businesses that went bankrupt because they had too much leverage, not because it wasn't a good business. So something you really want to not play with fire with.

Dan Ferris:              Sounds like you probably have a pretty fairly longer than average holding period at your shop.

Matt Franz:             Yeah. I'm not exactly sure what our average is off the top of our head, but our longest investments we've held six, seven years now, which is basically the length of our firm. And what has happened is, as we get into better and better businesses, our turnover slows down and the holding period increases because the bar to activity becomes increasingly high. And we like that. We want to have a high bar to activity. One of the things we say is to try to make fewer, better decisions.

And so if you have a high bar to clear, that's good. You want to have very high standards about what you're investing with and really waiting until the relative valuation difference between what you're selling and buying is so extreme or the quality difference is so extreme that it would be silly not to act. We don't want to just have activity for activity's sake or because it's exciting or fun or interesting. It feels productive, but ultimately the statistics show it tends not to be productive. Just owning really good businesses and sitting tight tends to be what produces the best returns.

Dan Ferris:              Owning really good businesses and sitting tight, that requires a kind of a special client base, doesn't it? One of your sets of partners is the management teams and the companies you're buying, but the people who are literally called partners in most of these setups, are your clients. And they've, in a situation like this – if you're saying, "We never want to have a down year" and you want to be some kind of great trader or something, that's one thing. And people find that exciting.

And like you say, most of the time it doesn't work out so well. On the other hand, if you're holding for the long term, value and price can get out of whack, and people can call you up and say, "How come you don't own more Nvidia?" or something. Certainly, I would imagine a guy like you really tries to get ahead of that and hire the right clients.

Matt Franz:             Yeah. So that's exactly right. We – as investment managers, I don't think you can be more patient than your clients allow. So we can all say we're long-term investors, but if your clients don't allow you to be as long term as you want, you've got a mismatch, and that's going to cost you or your clients some money someday when they lose confidence at the wrong time, or you make a trade you don't really believe in just to placate them.

So we spend a lot of time trying to communicate with our clients. We write a lot. I believe in showing your work, basically. So we write about stocks we're researching. We write about everything that we ended up buying, but we also write about a lot of things we don't end up buying. And I think that's really crucial to show that even if there's not a lot of activity going on in the portfolio, there is a lot of activity going on behind the scenes, as we're constantly taking in information, adjusting our thoughts on things, and studying new businesses, trying to widen the circle of competence.

So I think that is crucial to show we're not just "feet up on the desk watching sports" or something.

Dan Ferris:              I think there probably should be a firm somewhere called Swan Capital. Paddling like hell beneath the surface and just gliding along the top.

Matt Franz:             I like that. Yeah, that would be a good one.

Dan Ferris:              All right. So maybe we'll dive into some ideas here now that we know the basic framework of what you're after. And, and presumably, like, we, we exchanged an email. I presume you don't mind talking about specific names. Some people are kind of –

Matt Franz:             No, that's fine.

Dan Ferris:              Yeah, OK, good. But the one that I wanted to talk about – because it's kind of relevant to the current moment – was Constellation. And you talk specifically about this collision of AI with certain software companies that everybody thinks are going to be instantly put out of business in the next few years here. But Constellation's been in business for a little while. They got a pretty decent model. They kind of know what they're doing, don't they?

Matt Franz:             Yeah. Yeah. So Constellation's a super interesting, super unique business. So they are a serial acquirer of vertical market software businesses, VMS for short. And VMS is a specific type of software that basically means it is targeted at a super-tiny niche application. So some of Constellation's businesses, they run public transit routing for a municipality, or they run the point-of-sale system for a golf course. They might help a company who owns big ships or machinery manage the crew on the ship and the engine maintenance and all of the regulations about what cargo they're carrying and ports they're going into. They do operating systems for grain elevators. Basically anything you can imagine in the economy, there's some niche VMS software behind it that is not a household name. It's nothing you've ever heard of, but it's running the show behind the scenes.

And so these tend to be really good businesses actually, because they are, like I said, they're simple, predictable, profitable. They produce very regular cash flows through maintenance fees and kind of a [Software as a Service] model, and they're very deeply entrenched in that business.

So it's the operating system for your business. It's connected to everything and everyone in that business, and maybe even your vendors and outside applications. So once it's up and running and integrated, it's very, very difficult to pull out, even if you wanted to. And they tend to be mission-critical. So your whole business is running on this software. If the software goes down, you are not in business that day. You're closed, whether you want to be or not. So people are very careful and intentional about which vendor they're going to choose for that software. And so trust and relationship building is very important.

Dan Ferris:              OK, so I'll throw you the softball and pretend to be upset. But Matt, Matt, AI is going to put those kind of companies out of business, aren't they?

Matt Franz:             Yeah, yeah. So that's the fear. And so, these businesses, they used to trade Software in general traded at extraordinarily high multiples for a number of years. I think the average was like 37 times [enterprise value] to free cash flow.

Dan Ferris:              Whoa.

Matt Franz:             Now Constellation trades at sub-15 times. So the stock's down over 50%. I think what the bears are missing is that the code is not the moat at a business like Constellation Software. So writing the code was never the most difficult thing, the most value-add thing that Constellation did. What Constellation does is – 1) they've got a world-class [mergers and acquisitions (M&A)] machine to continue buying. These businesses they're buying, they're super tiny. They're like a couple-million-dollar acquisitions a pop, and they've done over 1,200 of them in 100 countries, and they have a pipeline of 40,000 more acquisitions to come.

The other thing they've done is, these niches are pretty small, so Constellation has had to go out and build relationships and understand the addressable market and saturate that market and build relationships with those people who – it's kind of a long sales cycle if you're going to put your entire business operating model on – operating system on one piece of software, so they have these really deep, trusted relationships for years and years and years, decades in many cases. And Constellation has been in constant contact with these users of their software to figure out what their workflows actually are, what use cases they actually need. And in many ways, Constellation knows better than the people themselves using the software what is needed or desired because it's – sometimes you understand you have a problem, but you don't know what would be a better solution to fix it.

So Constellation has a big advantage over somebody armed with AI and vibe coding to actually understand the workflows that you're going to be using on a day-to-day basis if you're running a grain elevator or managing a fleet of oil tankers around the world. You can go probably vibe code something in a day that that might look decent, but without any actual expertise in that matter, you're going to be guessing. And then if you did vibe code something, let's just say for argument's sake, it is amazing and it's great software, you need to now go out to this really tiny fragmented market and go convince them why your software is worthy of betting their business on.

And what's notable about Constellation is that software is not that expensive. So on average, Constellation's customers pay less than 1% of their sales to Constellation to use that software. So it has – even though it's very mission critical, deeply embedded, entrenched – it has a relatively affordable price.

So there's not a whole lot of room for a vibe coder to come in and undercut on price. It's going to be difficult to build that trusted relationship. Then, of course, trust extends to the maintenance and the uptime. Maybe the vibe-coded software is great today, but AI is much better at writing fresh code from a blank slate than it is maintaining code over the long term as rules and regulations change. Those all need to be updated in real time as use cases change, those sorts of things.

The last point I'll make is that AI, it benefits a company like Constellation that is writing software because, of course, the cost and barriers to entry to writing code have come down. So Constellation, knowing the workflows, having the relationships, they can now innovate even faster. Constellation, in its business units, has a long laundry list of features it would like to add to its software or that its customers would like to add. And now it can just go crank on that list and get them to market even faster than they ever thought. So Constellation is not laying off engineers because engineers are becoming more productive. They're just writing even more code and getting more features to market and making their software better.

And so their software, I think it's going to be better and it's going to be doing even more than it was before. And I think that's going to be generally true of software in general, as a result of AI is that, We've spent the last 10 or 20 years digitizing a lot of things like banking and things like that that were previously very person-to-person.

And I think that we're probably going to be amazed in the next 20 years how many things that are still very physical and person-to-person are going to be digitized and controlled by software.

Dan Ferris:              I agree with you. People can lose jobs. We heard about Meta laying people off or what. It can happen, right? And we don't say that it doesn't happen. But the utter unemployment apocalypse that even some of the highest-up AI executives are talking about – historically speaking, these big transformative, technological innovations have created vast new industries that did – just didn't exist before.

And they take away, let's face it, they take away drudgery. I don't go to the bookstore and use up two or three hours of my workday. I'm working and I say, oh, and I go to Amazon and the book arrives tomorrow and I'm back or working or relaxing or whatever it is I wanted to do. And it's a great benefit to me.

I'm inferring quite a bit from your take on this about your attitude towards AI. But I don't know, maybe I just want a chance to let the listeners know what I think of it, because I keep making this point about it. And people keep saying, "Oh, there you go. You're all going to be out of work." It just doesn't make any sense.

And it makes perfect sense that a software company would get better at software by using AI. And I really love that the moat is the relationships, but it's more, it's the relationships plus, as you say, the knowledge of the industry that Constellation has. Like the guy at the – running the system at the golf course, he doesn't know golf-course software. He knows what he has to do at work, but Constellation knows golf-course software better than he does. I love that. I love this argument.

Matt Franz:             And yeah, Constellation, they've not just learned, too, from the one golf course customer. They've got all the golf course customers they can learn from, and plus they've got all the other businesses. I think one other interesting idea that will help – it gives Constellation a good chance to benefit or not be as disrupted by AI – is that they are a hyper-decentralized organization. So they currently have 1,500 business units, and each of those business units are run autonomously and independently.

Dan Ferris:              Whoa.

Matt Franz:             Right. I think of it as 1,500 independent games or 1,500 watertight compartments on a ship. Water might get in one or two, but Constellation's top headquarters management, they think of themselves as coaches. And they're constantly looking at the data from the lower-level business units, distilling what's working and what's not, and then disseminating those best practices throughout the organization.

                             And then the business units are able to choose whether or not those best practices are something they want to implement. So I think that you're going to see a very tight and very rapid learning cycle going on, tight feedback loops, as we inevitably will see some business units falter, but others nail exactly how to use AI and not be disrupted by it. And then those are rapidly spread through all the different types of business units across all the industries. If you compare a company that's – most, most software businesses are like large and they're highly centralized and they maybe have one or two, three key products. Well, those products – it's sort of going to be up to the top CEO and his top guys to figure out a strategy forward on AI. And they're either going to make it or they're not. They don't – they kind of get like one at-bat to, to see if they can do this right. And Constellation has these 1,500 things. So they have a much broader universe, many more opportunities to innovate and try different things.

Dan Ferris:              Every time you say 1,500, I'm like, "Oh, he really did say 1,500." 1,500 sounds like a lot, Matt.

Matt Franz:             It's a lot.

Dan Ferris:              Berkshire Hathaway is like 200 and some, and that sounds like way too many, but 1,500?

Matt Franz:             Yeah. And I think it's one of the things that's underappreciated about Constellation is just how decentralized they are. And that allows them to keep buying businesses, hundreds of businesses per year. And these are kind of like $10 million acquisitions on average. So they have even decentralized capital allocation. Berkshire Hathaway is highly decentralized, but capital allocation is centralized in Warren Buffett and Greg Abel now.

And so they've kind of become a bottleneck where for them to do a deal, it needs to be at least $10 billion or so. And those are hard to get really good bargains at that price in a business you like and understand and all of that. But at Constellation, they actually let the business units do their own acquisitions, and they arm them with data and they teach them how Constellation thinks about businesses and this and that. And then, of course, the key is that they heavily incentivize those people doing the acquisitions, their pay in is based on how well those acquisitions perform. And then –

Dan Ferris:              So – Go ahead.

Matt Franz:             Oh yeah. So then top management, all they're doing is really they're distilling best practices, figuring, and then they're setting hurdle rates and setting incentives for those lower business units.

Dan Ferris:              That difference that Berkshire with the capital allocation through two guys at the top versus through 1,500 business units, which is really decentralized. To me, that is the difference between a model that should really have no trouble outliving a highly influential founder. Mark Leonard – yeah, Mark –

Matt Franz:             Yes.

Dan Ferris:              – at Constellation. And one that – hopefully Greg Abel is as good as Warren Buffett because Buffett's 95 or 96 or whatever it is now. Almost 96, I guess. So that to me is a really important difference if you're going to do this "we buy businesses" sort of model.

Matt Franz:             Yeah, absolutely. I think it's much more replicable because there's only one Warren Buffett, and Greg might be a great investor, too, but –

Dan Ferris:              There's a real culture that can be passed on, right?

Matt Franz:             Yeah.

Dan Ferris:              Passing on culture is harder when there's one guy.

Matt Franz:             And it's notable, too, because Mark Leonard, so he was the founder of Constellation and he recently stepped down. So that's another reason the stock has slumped a little bit. And he left just because he's had some health-related concerns. But Mark Miller is the new CEO, and he was actually the founder and head of Trapeze Group, which was Constellation's very first acquisition back in 1994, 1995. So Constellation was just an idea, and Mark Leonard approached him and explained his vision. And Mark Leonard instantly saw the power of what Mark Leonard was going to do and sold to him and then stayed on. And so he's literally been there since Day 1. And I think there's no one more qualified to kind of continue carrying the torch of what Constellation's doing.

Dan Ferris:              That's great. Gosh, it makes me want to steal another one of your ideas. I stole one of them, and this one is just becoming more attractive to me the more you explain it. And that difference – the thing that really put me over is, is I – that difference between the decentralized capital allocation and not. Because one of the genuine problems you do run into regardless of centralized or not on the capital allocation is size, right?

But if you've got 1,500 or the equivalent of 100 or 200 or 300 $1 billion market cap – or no, whatever it is – just split the market cap up any way you want and call it, $10 billion market-cap company, whatever it is. That's different than having one trillion-dollar market-cap company that's got one massive asset base that there's a bottleneck of one or two guys at the top.

You can have that other thing that Constellation's doing. It's like the equivalent of – it could be 1,500 more on average, more rapidly growing businesses that are buying things with really high returns on the capital they're allocating. That is really impressing me right now. And it's obviously working on me in real time here, but I don't know. That's the way it looks to me anyway.

Matt Franz:             Absolutely. And it's much cheaper to buy these small businesses, too, so you tend to be able to get higher returns on them and they're easier to grow.

I'll also say the interesting thing about VMS software is that the TAM, the [total] addressable market, tends to be pretty small, which means that venture capital and private equity are not really interested in these businesses. And if you think about a $5 million or $10 million software acquisition, that's actually too small for most private-equity businesses you're even looking at. So there's very little competition.

Dan Ferris:              Yeah.

Matt Franz:             And Mark Leonard's genius in founding it was to realize that while these businesses are capped by their TAM, they tend to be very mature, and they're often almost monopolies. Constellation tends to have businesses with 50% to 80% market share. So there's really not a lot of share up for grab and the market's sort of only growing at GDP. So you can't reinvest in the business, but they're highly free-cash-flow generative, so if you buy a whole bunch of them and then you pool the capital and then you spend it on even more, you can just keep growing and growing because there's always more VMS businesses to buy.

And so that's how they've been able to compound. They've compounded at 26% per year since they started in 1994. And it's been one of the all-time best-performing stocks.

Dan Ferris:              Right. So that's the big – I want people to know what Matt just said is really important. Like you said, you can't reinvest in the business, meaning these software companies – they don't need more capital. They just crank out so much cash. They literally have more money than they know what to do with. And way more than they could ever reinvest in their own business. So that's the point.

And that's the thing – this has been – the last four decades, investors increasingly, egged on by Warren Buffett and other folks, have been increasingly looking for this highly capital-efficient businesses. But the complaint is about them is what Matt just said. And with Constellation, we have a way to handle that, which is beautiful, actually. It really is quite amazing.

Matt Franz:             Yeah. And how they do M&A is also interesting. We touched on their decentralized structure, but they're not sitting around waiting for the phone to ring. They treat M&A like it's an industrial replicable process. And so they're out proactively building their pipeline and relationships with VMS businesses that they think they might one day want to acquire.

So they have grown that from a few thousand names when they started in the early '90s, and now it's over 40,000. And these aren't just names in a database that they bought from a broker. These are actual person-to-person relationships. They're making contact with the founders of these VMS businesses three to four times per year. And what they're doing is, 1) they're learning about the business to decide if it meets their criteria – it's something they want to buy. 2) they're establishing rapport and trust with the founders because these are small businesses, so it's sort of a founder-owner-operator-type business, and they're making sure that Constellation is sort of top of mind when they want to retire or sell the business.

And so they're sort of proactive, they're out there, they're getting everything set up so that when these founders are ready, Constellation comes to mind. And if you think about it, they're huge. Constellation's grown to 1,200 acquisitions, 1,500 business units, but they have 40,000 in their pipeline, and that's growing.

So there have been concerns from the bears about the pace of Constellation's capital deployment and will they run out of software businesses to buy. I don't see that slowing down anytime in the foreseeable future, and I think that AI is only going to allow more niche VMS businesses to exist or get started.

Dan Ferris:              Well, right. The pace, when you got 1,500 firms with presumably more than one guy maintaining these relationships with 40,000 pipeline companies, pace is kind of a relative thing here. That's an odd – to me, that is an odd criticism, and it strikes me as kind of a – it's like doctrinaire. It's – or what is the word, dogmatic. It's not really examining the nature of what – and the numbers, 40,000 divided by whatever, 1,500 or something.

It lacks an appreciation, I think, for what is really happening here. Of course the pace is enormous with 1,500 units looking at 40,000 companies. Of course it is.

Matt Franz:             Absolutely.

Dan Ferris:              It wouldn't be if it weren't – go ahead.

Matt Franz:             Oh, they've leaned into the pace of acquisitions, too. So as you've seen software multiples come down, especially in the public markets, they've deployed five times more capital year to date than they have on average the last couple of years.

So they're only accelerating as the opportunity set gets more attractive. And I think the other thing we haven't talked about is, there's a million articles about how private equity moved into software in a big way the last couple of years, especially through the COVID boom, and they were paying extraordinary prices because it was just considered like the best business ever. It was predictable, recurring revenue, free-cash-flow generative, and now they have to return capital to their investors. Their funds have hit the end of their limit.

So they may become forced sellers, and that would be perfect for Constellation to finally be able to dictate a reasonable multiple as a bunch of software companies come to market.

Dan Ferris:              Yeah. A guy who we've had on the show, Jim Osman, he loves a forced seller. He was on Twitter talking about forced sellers today. And I've heard other people talk about that, too. It's just – when somebody is selling for a reason, it's got nothing to do with the business. Nothing's wrong with the business. They just have to get rid of it. Oh man, it's perfect, and perfect for a firm like Constellation. Well, that's really cool. I'm glad that you're the guy who has talked about Constellation to our listeners. I don't think anybody could have done it better.

So, I alluded before to having stolen one of your ideas and kind of made it my own, of course. And it was Natural Resource Partners, the coal company. Really, this thing spoke to me. I really thought it was a fantastic idea. Maybe you'd like to run through that one for our listeners.

Matt Franz:             Sure. Yeah. Natural Resource Partners, it's a coal royalty business, basically. And they also own some soda ash assets, which I'll talk about, but the core is owning mineral rights, which are leased to large coal companies. Most of the royalty value is on metallurgical coal, which is used for steelmaking, as opposed to thermal coal, which is used to make electricity, although they do have quite a bit of thermal assets as well.

So they've been in this business for years and it's similar to Constellation where it just produces a ton of cash flow. So they're not mining or anything. They have basically no capex. They have hardly any employees. They have almost no costs. And so the question is, what do you do with all the cash? Before they wanted to grow and they reinvested aggressively in a bunch of random things that basically didn't pan out, didn't earn good returns, took on too much debt. And then coal prices, of course, dip and you're levered up. And they almost died, but they didn't. They survived. And they've been on this decade-plus delevering program.

So they've decided – they got religion and they said, "We're just going to own these really good royalty businesses that we understand, and we're going to pay off our debt to the penny. We're going to be a zero-debt company," because – especially a couple of years ago, the big banks did not want to finance fossil-fuel companies, especially coal of all things.

And so they said, "This is a risk that we are not willing to take, that our bank debt won't be able to be rolled over. So we're going to pay off our debt 100%. And then after that, we're going to just take all the cash every quarter and give it back to shareholders as a dividend." And they've been at this plan for many, many years now. And They're finally on the precipice of being debt-free. So that should be in Q3 this year. And that's when we should see a big jump up in their dividend yield, as they no longer have any interest expense or debt to retire.

So that's kind of the main kind of thesis, is you're going to have a kind of valued at about 10 times earnings right now. Coal prices are sort of depressed. They're low. They're nowhere near their highs. So you're at the lower part of a cycle, and eventually those coal prices could spike and you're going to own – they've got these long-lived tenants who've built mines that cost tens and hundreds of millions of dollars, so they're not going anywhere. They've got reserve lives that are 20, 30, 50 years in many of their assets. And they're just going to kind of keep printing cash. And sometimes coal prices will be low and sometimes they'll be high, but all that money's going to get shipped back to the shareholders.

Dan Ferris:              All right. I love this. I love the paying down of debt. I love the fact that they're doing this. This is a response to the situation that you're talking about where people don't want to invest in natural resources. If I could sit down and wring my hands like a cartoon villain and say, "How could I make my natural resources more valuable? How about if we prevent anyone from finding new ones or developing them or investing anything in them?" [Laughter]

Matt Franz:             That's right.

Dan Ferris:              You couldn't set it up better. I've done this to an extent with other natural resources, but this may be among the more pristine situations because coal is so hated. I feel like among the fossil fuels, the hate is like at 100% for coal and then something less for the others because we can't do without them.

But even coal is – there's no substitute for making what you might think of virgin steel – you need coal, you need carbon, and you need iron ore. So it's – I believe that you need steel just to have – the modern world is steel, cement, plastics, ammonia. For that reason, there's always – right at the moment when you think, "Natural Resource Partners. Oh, it's coal, it's dirty, done, it's out of business," that's the moment to buy more, in my opinion.

Matt Franz:             Yeah, absolutely. These are the building blocks of the modern world. And so, like you said, met coal, it's for making steel. And the virgin steel, the highest-quality structural steel you're using in a bridge or a skyscraper, that can only come from a blast furnace with met coal. You can also make steel using an electric-arc furnace using recycled steel, but there's always a risk of impurities or something in there that could make the steel a little bit weaker. And so you're not going to trust it in like the most important applications.

And so there's always going to be this need for met coal so long as we're building things out of steel, which I think is going to pretty much be forever. NRP also has thermal assets which are used to generate electricity. And of course, we're seeing electricity demand surge as a result of the data-center build-out. And so, what had been a pretty rapid pace of decommissioning of thermal coal plants has basically slowed to a trickle. And a lot of the easy pickings for conversions to natural gas turbines and stuff, that's already been more or less done. I do think they'll probably continue to dwindle, but at a much lower pace.

And so those assets could have a much longer life than we predicted a few years ago. And then the last thing they have exposure to –

Dan Ferris:              [Crosstalk] Go ahead.

Matt Franz:             Oh, is soda ash. And that's used in a variety of applications, mostly for making glass, but it's also used in solar panels and really all sorts of things. And that's one reason the stock has come down to an attractive level is because soda ash prices are at multidecade lows because of overcapacity outside of China. So soda ash tends to grow at a GDP-like pace, but China, like many things, has just brought factory after factory on board to crank this stuff out, flooded the global market. And the good news is that NRP's soda ash is in Wyoming and it's among the lowest cost, if not the lowest cost producer in the world.

So they're sort of at breakeven-ish right now while most of the world is losing money. And of course, the cure for low prices is low prices. It's going to push producers out of business and eventually it could take a few years, but things will normalize and they'll be a survivor.

And so unlike its coal royalties, the soda-ash business is not a royalty business. So they own like 49% of a [joint venture ("JV")], and so sort of out of an abundance of caution, they decided to prepay some of the debt at the JV this last quarter, which was a little bit of a drain on free cash flow, but it's sort of just a one-time thing and is not going to be reoccurring. It still puts NRP on pace to be debt-free in Q3 and increase the – start doing dividends, special dividends. So I think it's just – part of being a commodity investor is not every commodity is going to be at midcycle or higher at all times.

Dan Ferris:              Right. And when you get down to looking at the numbers, the yield, the potential yield, once you get past paying off all the debt, the potential yield is like – I remember when you first did this presentation a couple years ago, it was like "Really?" Because it's an enormous double-digit number. I think you said like 18% potentially at the higher end, as I recall.

Matt Franz:             Yeah, absolutely. So, it's sort of – right now would be tracking for like 10%, 12%, 13%. But if you sort of normalize soda ash and you look at what coal prices have done historically, we'll certainly get a year or two where yields are pushing 20%, if not higher on the current price. And so, that won't happen every year, but, especially with inflation and the cost of mining going up and things like that, I think you're going to see coal prices continue to be firm, increasing over time. And then inevitably, once every five or 10 years, there's a supply shock and they go parabolic for a bit, right?

Dan Ferris:              So if this massive – and that is a massive – yield is kind of imminent, it seems like the market just doesn't really believe it right now. Do they not believe it for the reasons we've already said? Do you think the soda ash and the payment of debt at the JV and coal prices are down and all that is – do you think you've pretty much covered the pessimism that's in the stock?

Matt Franz:             I think so. I think that's most of it. And this is a $1.2 billion market-cap stock, so it's not that big. It's got pretty good insider ownership. It's like 30-some percent, so there's not a lot of float, and they're not promotional. It just flies under the radar. Like we've said, it's an area that a lot of people are not particularly interested in investing in, and no one's really doing the work here, I think.

Dan Ferris:              All right. Yeah, I still love it, by the way. It hasn't like soared out of sight the way I thought it would in the past year. Soda ash, paying down the debt, I get it. But I still love it. I still think it's a great thing. And I did recommend it in my newsletter The Ferris Report. So thank you for the idea. I looked at that, I was like – I think I told you at the time, "I'm stealing this," as I recall.

But I'm really happy that you could be here and sort of give a couple of really interesting situations like the "Eagle Point Matt Franz" treatment for our listeners. It is time for our final question. This question is the same identical question for every guest, no matter what – even like when I've had nonfinancial guests – same identical final question. And if you said the answer earlier on or whatever, just feel free to repeat it. But the question is simple. If you could leave our listeners today with a single thought, a single takeaway, this is your moment. What would you like it to be?

Matt Franz:             Yeah, I think investing-related, I would leave listeners with the idea of really figuring out your variant perspective in your investment. So just getting to the root of the bear thesis and kind of picking that apart. And oftentimes, when you're doing that, you're going to say, "OK, well, I think either I can't pick it apart or it seems pretty reasonable."

But sometimes you're going to get to a point like with NRP and you say, "Well, OK, they're mad that they prepaid some debt at the JV and coal is out of favor" and this and that. There's really not a good argument or like Constellation where you can pick it apart, tease it apart and say, "Well, the consensus is just that AI is going to destroy everything," but isn't AI, when it really works well and seamlessly, isn't that just a form of software? How is software going to go away if AI is just becoming software?

And so I think when you can have that varying perspective, that's when you can make an investment and you could have the staying power to be a long-term owner because you've really thought it through and come to some conviction that you're going to need.

Dan Ferris:              Understand the variant perspective. That is good. I like that. And thanks a lot. Thanks for that, and thanks for being here, Matt. It was really, really great to talk with you.

Matt Franz:             Of course. Thanks for having me, Dan. It was great to chat with you today.

Dan Ferris:              Wasn't that great? Matt just does it. He doesn't just throw some ticker symbols out. He gives us the ticker symbol and then he gives us chapter and verse, inside out, upside down, and backwards about why he likes the stock. And he even treats the other side of the bear case, why people don't want to own it right now.

So, he understands the whole thing from both perspectives. And that was, and I've seen him present a number of years or a few years now at a conference that we both attend every year. And I knew what you were going to get. And that's why I wanted to have him on, because if I could just sort of take one investor's mind, it would be somebody like Matt and just transfer it onto you. It would be somebody just like that with that skill and knowledge of Looking at every business and taking it very seriously and looking for the businesses that don't tax your intellect. He said we just want businesses that are replicable, that can keep doing the same thing.

Plenty of cash flow. Nothing – we don't buy what we don't understand. There [are no points in investing for novelty and difficulty, in other words. So all you get points for is picking good companies that perform well in your portfolio over a period of time. And that is what guys like Matt are completely focused on.

Obviously a very skilled analyst, very knowledgeable. And I hope you took some really great insight from this. I don't want you to necessarily rush out and buy both of these stocks. It's really not investment advice at all. But it is sort of investor advice, advice on how to approach your investments with two incredibly good examples, well-spelled-out examples.

Natural Resource Partners, that trades in the U.S. on the ticker symbol NRP. I have recommended it in my newsletter, The Ferris Report. And then Constellation Software, it trades in Canada, but it also trades on the pink sheets in the U.S. And it's easy to find in Google or Yahoo or anywhere.

So yeah, two fantastic examples of a great investment mind at work. I really hope you enjoyed that as much as I really, really, really, truly did and do every single time I ever talk with Matt. Please remember to click like and subscribe and don't forget to sign up for our free daily e-mail.

Announcer:             Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stansberry Research, its parent company, or affiliates.