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We Study Billionaires - The Investor’s Podcast Network

TIP758: Current Market Conditions & Investment Opportunities w/ Derek Pilecki

with Derek Pilecki

Published October 3, 2025
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About This Episode

Host Clay Fink interviews hedge fund manager Derek Pilecki about his recent performance and how he is navigating current market conditions in the financial sector. Pilecki explains his process of targeting ideas with potential to double in three years, combining value investing with an awareness of momentum and technicals, and selectively using leverage at both the company and portfolio level. He discusses opportunities in regional and European banks, beaten-down fintech names, case studies in Robinhood and WEX, and his views on interest rate cuts, inflation, and the real estate market.

Topics Covered

Investing Hedge funds Banking competition Stock market valuation Inflation Mortgage Private equity Short selling Value investing Fintech

Disclaimer: We provide independent summaries of podcasts and are not affiliated with or endorsed in any way by any podcast or creator. All podcast names and content are the property of their respective owners. The views and opinions expressed within the podcasts belong solely to the original hosts and guests and do not reflect the views or positions of Summapod.

Quick Takeaways

  • Pilecki targets investments with a realistic path to doubling over three years, effectively aiming for roughly a 26% internal rate of return, which keeps him focused on high-upside ideas rather than incremental gains.
  • He sees large-cap financials as expensive but finds many small and mid-cap banks and fintech companies trading at single-digit earnings multiples with attractive risk-reward profiles.
  • In his view, persistent inflation in housing, healthcare, and college education is not meaningfully addressable through higher interest rates, while powerful deflationary forces from technology and AI argue for lower rates.
  • Pilecki integrates value and momentum by waiting for technical bases before buying, and by allowing winning positions to run instead of mechanically selling at predefined price targets.
  • He believes regional banks will benefit disproportionately from a steeper yield curve and ongoing deregulation, especially via increased spread income and merger activity.
  • His Robinhood trade evolved from a successful short during the 2021 speculative bubble into a deep-value long near cash per share, which then became a multi-bagger as the business improved and crypto volumes surged.
  • Pilecki is comfortable investing in companies with operating and financial leverage when the upside justifies the risk, noting that deleveraging can drive multiple expansion.
  • He views WEX as a neglected fintech with solid businesses, an activist shareholder, a large leveraged buyback via tender offer, and a clear plan to de-lever and potentially re-rate.
  • Banking, in his assessment, is an average to below-average industry structurally facing increased competition and margin pressure, so it must be approached selectively and tactically rather than via passive long-term exposure.
  • Lessons from Warren Buffett, especially about the power of turnover with small sums and the importance of long-term optimism and selective risk-taking, heavily influence his strategy.

Podcast Notes

Introduction, guest background, and recent performance

Host introduces Derek Pilecki and his track record

Derek's role and fund background[0:06]
• He is the portfolio manager at Gator Capital Management, focused on financials.
• He launched Gator Capital weeks before Lehman Brothers collapsed in 2008.
• Since inception in July 2008, Gator Capital compounded at 21.8% annually versus 11.9% for the S&P 500.
Key topics previewed for the episode[0:02]
• Derek's process of targeting a 26% internal rate of return on new investments.
• His moves during the so-called tariff tantrum earlier in the year.
• How Warren Buffett influenced his investment process.
• Opportunities he sees in the current market, and his expectations for Fed rate cuts on the economy, banking, and real estate.
• They will cover his Robinhood investment before it rose more than 13x and his thesis on WEX Inc.

Host welcome and setup

Clay welcomes Derek back and notes prior episode[2:00]
• Clay says he enjoyed their prior discussion about Derek launching his fund in 2008 just before Lehman Brothers collapsed.
Recent performance numbers[2:45]
• Clay states Derek rounded out 2024 with a 41% return net of fees.
• Through July of the current year, Derek was up another 21%.
• Clay notes Derek is positioned for three strong years in a row, and jokes that can sometimes precede a down year in markets.

Derek comments on performance and current market observations

Navigating the 2023 regional bank failures[3:00]
• Derek identifies the big story of the past three years as successfully navigating Silicon Valley Bank and First Republic failures in 2023.
• He was underweight regional banks going into those failures.
• After the failures, he significantly increased his weightings in regional banks after doing work on which deposit franchises were intact and recognizing extremely cheap valuations.
Concerns about mean reversion after strong years[3:20]
• Derek shares he worries about the same reversion-to-the-mean issues Clay mentioned after three strong years.
• He says the overall market looks expensive to him as an observer.
Large-cap financials vs small and mid-caps[3:37]
• Within financials, he views very large-cap names like JP Morgan, Progressive, and Visa as expensive.
• He contrasts this with many small and mid-cap names that still trade at single-digit P/E multiples.
• He questions whether small stocks can do well while big stocks underperform to mean-revert, or whether everything will go down and large caps will fall more.
Passive flows and valuation distortions[3:59]
• Derek notes heavy passive flows into SPY and S&P 500 stocks, while Russell indices have lagged for years.
• He observes many mid-caps lack sponsorship and remain cheap, and he is unsure how that imbalance gets resolved.
Comfort owning cheap stocks amid uncertainty[4:26]
• Over time he has become comfortable that owning cheap stocks leads to good outcomes, even if the market outlook is uncertain.
• He is not looking at his portfolio wanting to sell many holdings and still has a list of cheap, interesting ideas to buy.
• He is not "running for the hills" but repeats that large-cap stocks look rich.

Investment process: target returns, value vs growth, and use of momentum

Targeting doubles in three years and examples

His rule of thumb for new investments[5:21]
• Derek likes to find stocks with a clear path to doubling over three years, roughly a 26% compounded annual return.
• He stresses this rule sometimes works faster than expected and sometimes not at all.
Successful example: Carlyle[4:56]
• He owned Carlyle, a private equity manager that had underperformed peers since going public and mishandled a CEO transition from founders.
• A second CEO transition brought in Harvey Schwartz, former Goldman Sachs CFO.
• By end of 2022, Carlyle traded at about 10x fee-related earnings, while Blackstone was at roughly 22-23x and KKR at 17x.
• Derek screens sectors for laggards; he saw Carlyle had lagged peers, was cheap, and had a CEO-change catalyst.
• He believed Schwartz could cut what he saw as an overly high expense structure.
• He bought at around 29 dollars and notes the stock traded around 65 dollars less than three years later, achieving the double.
Slower example: PayPal[5:29]
• He bought PayPal about 18 months prior as a cheap value stock widely owned by value managers, with valuation compression and a CEO change catalyst (Alex Chriss from Intuit).
• He expected refocusing spending on three core products and initially saw progress.
• A hiccup in Q4 earnings caused the stock to stagnate; it is around flat or slightly up from his purchase price, far from a double so far.
Reinforcing focus on big-upside ideas[7:04]
• He mentions Robinhood as a case that hit the three-year-doubling hurdle much faster and by a larger magnitude.
• The double-in-three-years rule prevents him from tying up capital in ideas where he might only make 20%, because capital is limited and he wants substantial gains.

Evolution of value investing and role of momentum

Growth vs value and quality of mega-cap growth[8:33]
• Derek has been shocked by the performance gap of growth versus value in recent years.
• He notes the "Mag 7" are phenomenal cash-flow businesses with big moats, which has powered growth stock outperformance and hurt value stocks.
Importance of combining value and momentum[8:14]
• He believes some value investors underappreciate momentum as a driver of returns.
• In his view, value plus momentum is ideal: a cheap stock still needs price movement to generate returns.
• He cites a classic value-investor error of buying too early and selling too early.
Technical awareness learned from Clover Capital[7:34]
• Early in his career at Clover Capital, PM Mike Jones reassessed process in late 1990s when growth and value diverged.
• They concluded they were buying too early and selling too early, and decided to wait for a base in the chart before building positions.
• On exits, they would not fully sell at a price target; instead they might trim, then let momentum run if the chart remained strong.
• Derek links this to Peter Lynch's idea of not cutting flowers and watering weeds; he emphasizes letting winners run.
Risk management when positions go against him[9:01]
• He does not automatically average down into losers; if a stock goes against him, he asks whether he truly has an edge in buying more.
• This discipline has helped him avoid pouring good money after bad.

Applying technicals and catalysts to PayPal

PayPal chart dynamics and entry[10:58]
• Clay notes PayPal rose from about 100 to over 300 dollars in 2021, then fell sharply after the tech bubble popped.
• Derek says he believed a base had formed when he bought in April-May of the prior year: the stock had gone sideways for a couple of years and stopped making new lows.
• The CEO change acted as a catalyst, and the stock initially started working late in the year.
Business hiccups and patience[11:50]
• A weaker Q4 led to a step back in the stock; there were a couple of okay quarters afterward with some business deceleration.
• He notes one PayPal business is growing but low-margin, which drags down overall margins and is unpopular with investors.
• He is not adding to the position now; the stock is about where he bought it and not making new lows, but he wants more evidence before increasing exposure.

Market stress events, tariff scare, and emotional discipline

Tariff tantrum and trading regional banks

Market drop around tariff talks[12:26]
• Clay recalls markets dropping sharply around April 25 due to tariff talks, with the S&P down around 20% before rebounding.
• He notes taking advantage required quickly shifting the portfolio, often by selling existing positions to fund new ones.
Derek's activity and regional bank positioning[13:14]
• Derek says he was not extremely active but was willing to move stocks when seeing opportunities.
• In the two days after what he calls Liberation Day, the KRE regional bank ETF fell 13-14%.
• He describes the macro playbook as: when recession risk appears higher, macro investors sell regional banks.
• He disagreed fundamentally, viewing the situation as unlike 2006-2007 because regional bank credit books, capital, and liquidity are much stronger.
• He does not expect widespread bank failures in the next recession, though a few isolated failures may occur.
Policy uncertainty and reaction[13:32]
• He was initially unsure if the tariff policy was aimed at crashing the economy but later saw signs it would be moderated.
• A 90-day delay on tariffs, pushing them from April to July, acted as a catalyst for a market rally.
Covering regional bank shorts and handling stress[14:12]
• Derek is long many regional banks and short others with weaker management, higher valuations, or disliked acquisitions.
• When some shorts fell to about 8x earnings, he covered a lot of them despite misgivings about management or deals, because valuations were compelling after sharp drops.
• Those regional bank stocks then rallied strongly after the tariff pause, benefiting his decision to cover.
• He describes such episodes as super stressful but also where much performance can be gained or lost.
• To manage emotions, he mentally imagines being the only investor in the fund and asks what he would do purely for long-term benefit, avoiding extra pressure from managing others' money.

Influence of Warren Buffett and investment philosophy

Early exposure to Buffett and Berkshire meetings

Books and first Berkshire meeting[15:16]
• Derek read Roger Lowenstein's "The Making of an American Capitalist" in 1995, which he calls the first Buffett biography and eye-opening for understanding Buffett's career.
• At University of Chicago business school, classmate Dan Kozlowski took a group to the May 2000 Berkshire Hathaway meeting at the peak of the internet bubble.
• He was surprised that at age 69 Buffett was energetic, jovial, and thoughtful, and viewed it as a huge gift to hear a billionaire investor answer questions for six hours.
Buffett's 50% return comment and turnover[15:54]
• He recalls Buffett saying at that meeting that if he had 1 million dollars, he guaranteed he could make 50% a year.
• Derek did not dismiss it as arrogance; he instead thought deeply about how Buffett could do that.
• Studying early Buffett partnerships, he noted higher turnover than today and concluded Buffett would make many smaller trades, each earning 40-50%, rather than only a few huge winners.
• He also observed Buffett used leverage early on and at Berkshire via insurance float, and would likely use some leverage with 1 million as well.
• Inspired by this, in his hedge fund's early days Derek was not afraid to turn over the portfolio in volatile markets to "put points on the board."
Lesson about optimism and risk-taking[16:51]
• He cites another Buffett comment from an early 2000s meeting that if Buffett could change anything, he would have been more optimistic and taken more risk.
• Derek finds this striking because Buffett is already considered a perma-bull who is leveraged long America.
• This comment made Derek more optimistic about the economy, seeing many talented people acting in their economic self-interest and creating value.
• He believes it is better to be a perma-bull than a perma-bear, as optimism tends to make more money and bearish timing is very hard.
• He uses a little leverage in his portfolio and is willing to own some less-than-highest-quality companies, guided by long-term optimism.

Current opportunity set: banks, fintech, and European financials

Areas of greatest opportunity

Small and mid-cap banks[17:13]
• Derek still finds small and mid-cap banks attractive, especially after the Silicon Valley and First Republic implosions.
• They have done okay since then but remain cheap relative to history.
• He notes they face a headwind from the yield curve, focusing specifically on the spread between the overnight rate and the five-year Treasury.
Yield curve dynamics[18:16]
• Currently he says the five-year Treasury is about 3.68% and the one-month Treasury about 4.08%, a roughly 40 basis point inversion.
• In 2018 that spread was about +80 basis points, so the swing to -40 is roughly a 120 basis point headwind for regional banks.
• He argues a steeper yield curve with more rate cuts would widen margins and boost bank profitability and multiples.
Fintech names as value stocks[18:53]
• He highlights fintech as another opportunity area: names that were growth darlings in 2021 are now out of favor and cheap.
• He says everyone hates fintech now and valuations are compelling, often cheaper than big banks, with many companies at single-digit P/Es.
• He specifically mentions WEX, PayPal, and Global Payments as examples that convert a large majority of net income to free cash flow.
European banks[20:19]
• He has increased investing in European banks after owning Barclays for about six years.
• He notes European banks have been terrible for 15-17 years but finally started working last year.
• He started buying French banks like BNP Paribas and Societe Generale when BNP traded at about 60% of tangible book and SocGen at 35%.
• He points out SocGen's CEO is about 50 and had been in place two years, viewing CEO change as a catalyst.
• Those positions have worked so far this year, and he believes there is more upside.

Interest rates, inflation, and the real estate market

Fed rate cuts and economic impact

Derek's view on current rate levels[26:23]
• Clay notes the Fed just cut rates by 25 basis points and that Derek recently argued the Fed should cut twice this year (about 50 basis points total).
• Derek believes rates at current levels are restrictive.
Bifurcated economy[27:00]
• He describes a bifurcated economy: AI and non-interest-rate-related sectors are humming, while interest-rate-sensitive sectors like housing and autos are struggling.
• He cites existing home sales bouncing just below 4 million units annually versus about 5.5 million in 2021.
• Real estate development is also hurting because developers do not want to borrow at 8% to build apartments or warehouses.
Why he thinks rates should be lower[27:23]
• He argues rate cuts are needed to help interest-rate-sensitive parts of the economy.
• He is frustrated with the inflation debate and says three big drivers of persistent inflation-housing, college education, and healthcare-cannot be solved by higher rates.
• Higher rates do not reduce healthcare or college costs, and in housing, land use regulation, NIMBYism, zoning, and entitlement delays are the root issues.
• He contends higher rates can worsen housing by slowing apartment construction, limiting supply, and increasing prices.
• He views the Fed as unable to fix those structural inflation drivers.
Deflationary forces vs inflation risk[28:28]
• He points to ongoing deflationary forces: the internet, globalization (even with some pullback), and especially AI.
• He believes lowering rates will not ignite runaway inflation and thinks the IPO market has been dead for four years, reducing speculative excess.
• He acknowledges concerns about private credit but does not think two more cuts this year will cause inflation to "rocket."

Mortgage rates and regional real estate dynamics

Mortgage rates vs home prices puzzle[27:59]
• Clay notes mortgage rates jumped from below 3% in 2020 to around 7%, yet overall home prices have not fallen significantly, though activity is low and some expensive markets have softened.
Derek's expectations for rates and mortgage products[29:13]
• Derek says 30-year mortgages are around 6.25%.
• He expects that if the yield curve steepens with more short-end cuts, borrowers may shift into 5/1 ARMs, potentially dropping below 5.5% or even to 5%.
• He thinks that could improve housing activity.
Regional variations in housing markets[29:23]
• He groups COVID boom markets such as Central Florida, Nashville, Boise, Phoenix, Austin, and LA as having boomed and now pulling back.
• He says inventories in those markets are increasing and prices at the margin are ticking lower, likely to continue.
• He contrasts that with New England, where inventory is almost non-existent and it is hard to find a home.
• He notes that people used to leave New England, and he is unsure how the new scarcity is resolved or whether much building will occur there.

Shorting strategy, leverage, and bank industry structure

Shorting financials and the changing opportunity set

Performance of shorts in an up market[32:33]
• Clay notes Derek had significant shorts at the end of 2024, and both his longs and shorts outperformed the financials index despite a rising market.
Derek's iterative approach to shorting[32:39]
• Derek says shorting is hard and his approach has improved iteratively over the years.
• He tries to respect momentum when shorts move against him and balances shorting expensive valuations with names facing business headwinds.
• He explains that most bad financial companies were wiped out in the financial crisis, so survivors had staying power and fewer obvious short candidates.
• The SPAC craze of 2021 brought many new financials public, including mortgage companies and fintechs he saw as bad values, improving the short opportunity set.

Investing in companies with leverage

Risk-reward and tolerance for losers[34:15]
• Derek says he has made money in highly leveraged companies, though not easily, and is comfortable owning stocks without a guaranteed profit.
• He believes he may have a higher tolerance for holding losing positions than many managers.
• He accepts that losing control of leverage or adverse outcomes due to leverage is a real way to lose money, but finds the upside can justify the risk in some cases.
• He notes leverage can keep management focused because with a low margin of safety they tend not to do dumb things.
• He mentions some fintech companies have levered up to buy back stock and then stopped doing acquisitions to pay down debt.

Why big banks have done well despite higher rates

Outperformance of financials index[35:19]
• Clay observes the S&P 1500 financials index, with major holdings like Berkshire Hathaway, Visa, MasterCard, and big banks, was up nearly 30% in 2024.
Drivers of big-bank strength[36:01]
• Derek says big banks received a huge gift from the Silicon Valley and First Republic failures through a flight to quality into "too big to fail" institutions.
• They enjoyed low-cost deposit growth as customers moved accounts to them.
• Proposed Basel III capital rules for big banks were watered down from earlier onerous versions, and stocks rallied when standards were reduced.
• He adds that big banks reacted favorably to expectations of a Republican administration, anticipating deregulatory policy and more M&A.
• He agrees that higher rates have led to lackluster loan growth as borrowers balk at moving from 5% to 8% loans and instead use existing liquidity.
• Despite weak loan growth, capital rules and likely deregulation have helped big banks' stocks.

Regional banks vs big banks and long-term industry pressures

Valuation inversion between large and small banks[37:53]
• Derek is overweight regional banks and defines them as mid-sized institutions, larger than community banks but smaller than national giants.
• He explains that normally big banks are cheapest, mid-caps in the middle, and small banks most expensive due to M&A and growth prospects.
• Currently the pattern is inverted: big banks are most expensive, mid-caps in the middle, and small banks cheapest.
• He expects a steeper yield curve will help smaller banks more because they rely more on spread income, while big banks have more fee income.
• Spread income expansion has minimal incremental cost, so margin gains at small banks largely drop to the bottom line.
• He anticipates valuations will revert so small banks again trade at higher multiples than big banks.
Need for consolidation and big-bank competition[39:17]
• He notes the US still has about 4,000 banks, down from 13,000 when he entered the business, while countries like Canada have around a dozen.
• He underscores economies of scale in banking and calls for more M&A so mid-cap banks can become real competitors to mega-banks.
• He praises JP Morgan as remarkable: they entered Boston, Philadelphia, DC, and even North Dakota by opening branches, not via acquisitions, and now have a branch in all 50 states.
• JP Morgan and Bank of America spend heavily on tech, have the best apps, are easy to do business with, and are taking share from smaller banks.
Branch footprint, online banks, and long-term returns[40:31]
• He notes branch traffic has fallen every year since 2010; big banks still open branches but fewer per geography.
• In DC, JP Morgan might have 20-25 branches versus perhaps 80 if they had entered 20 years earlier, as customers now visit branches only a few times per year and will drive further.
• Online banks pose a real threat by paying higher rates and being easy to use, further increasing competitive intensity.
• He concludes that greater competition means margins and returns in banking trend lower over time.
• He would not recommend simply owning a broad regional bank ETF like KRE for 20 years; instead he prefers selective ownership of well-run banks when cheap.
• He calls banking an average to below-average industry structurally, unlike software or semiconductors.

Portfolio mix of compounders vs opportunistic value names

Balance between long-term holds and tradable positions[41:13]
• Clay notes Derek owns very high-quality compounders like First Citizens alongside very cheap names he is willing to sell once valuations normalize.
• Derek estimates 30-40% of his portfolio is in enduring names he wants to hold for a long time and 60-70% in ideas he would sell at the right price.
• He keeps turnover going in the latter group to rotate into new cheap stocks or cheap sectors.
• He cites former GSAM PM Herb Ellers, who said if you ever own a stock in a great company, never sell it, aligning with a Munger-like style and influencing his long-term holdings.

Robinhood case study: from short to 14x long

Shorting Robinhood during the 2021 bubble

Initial short thesis[44:59]
• Robinhood went public in 2021 amid a speculative environment of SPACs and inflated valuations.
• Derek viewed Robinhood's valuation as high relative to its business, while the company was losing a lot of money.
• He saw the speculative bubble as unsustainable and shorted the stock as a way to profit from its eventual decline.
• He notes Robinhood had about 8 dollars per share in cash when the stock traded around 25 dollars; he shorted from 25 down to 10.
• At 10 dollars with 8 dollars per share in cash, he felt the short was done and covered.

Transition to a long position and subsequent run

Business improvement and value case[45:57]
• Derek continued following the business and was impressed by changes: cost cuts, introduction of new products, and a couple of profitable quarters.
• He liked their product roadmap and saw potential to accelerate customer growth.
• After a Q3 2023 earnings miss driven by two environmental factors he judged temporary, the stock traded down to about 8 dollars, near cash per share.
• He bought around 8 dollars and notes the stock subsequently increased more than 14x within less than two years; he still holds a small position.
Technical base and sentiment shift[46:56]
• Technically, the stock had built a large base from March 2022 to November 2023, trading sideways and setting up for an eventual move.
• He saw limited downside given the cash backing and saw the period as "marking time" before a move higher.
Impact of crypto and product expansion[51:52]
• A few weeks after he bought, the SEC approved a Bitcoin ETF, sparking a crypto rally.
• Robinhood benefited as one of the few ways to gain crypto exposure without owning coins directly.
• Customer deposits as a percentage of assets rose from about 18% to 40% during 2024, indicating deepening engagement.
• They kept rolling out products: futures trading, joint accounts for spouses (which surprisingly had not existed), and planned short-selling capabilities.
Managing the position and avoiding selling too early[52:43]
• Derek began hedging the position late last year and through the current year and is now almost entirely out, retaining a small "tag-end" piece.
• He views this trade as an example of avoiding the value-investor mistake of selling as soon as a price target is hit, since markets can take stocks far beyond initial expectations.
• When the stock was around 30 dollars and consensus earnings around 1.50, his own models suggested Robinhood could earn 3 dollars in 2026, making the valuation still attractive at 10x those potential earnings.
• He emphasizes ignoring the stock's past levels and instead asking where it could reasonably go based on future earnings and what buyers at high prices might be thinking.
• He notes that stocks with upward momentum tend to keep moving higher, an uncomfortable but necessary reality for value investors to accept.

Operating leverage, other brokers, and WEX thesis

Operating leverage lessons from recent winners

Clay's observation on operating leverage[54:22]
• Clay says recent years taught him how powerful operating leverage can be as companies scale revenue, citing Uber, Spotify, and Robinhood.
• He notes Robinhood's net income went from a more than 3 billion dollar loss in 2021 to a 1.7 billion dollar profit in the last 12 months as revenue grew on a relatively low cost base.
Derek's supporting example: Anywhere Real Estate[55:22]
• Derek agrees and mentions Anywhere Real Estate (formerly Realogy) as another stock with significant operating and financial leverage.
• Anywhere runs brands like Coldwell Banker as a relatively fixed-cost business while commissions vary with real estate transaction volumes.
• He says the stock is far below its level during the housing boom, but EBITDA could "explode" if existing home sales return to 5 million units annually.
• He reiterates that operating leverage is often underappreciated as a source of upside.

View on Interactive Brokers

Business quality and missed upside[55:53]
• Clay says he is a happy customer of Interactive Brokers and notes the founder-led firm has grown accounts steadily, with the market finally recognizing its quality.
• He expresses some disappointment at not having participated in Interactive Brokers' strong stock run.
Derek's limited exposure[56:15]
• Derek owns a few Interactive Brokers shares in a mutual fund he manages but not in his hedge fund, saying he was too disciplined on price and the stock ran away from him.
• He has used Interactive Brokers as a prime broker and praises its efficiency and low costs.
• He sees significant operating leverage, a conservative balance sheet, and notes its credit rating is higher than Morgan Stanley's, making it a safe place to custody assets.
• He calls it a great business.

WEX Inc. investment thesis

Overview of WEX and its business segments[57:22]
• WEX is a financial technology company with three segments: fuel cards, health savings accounts, and corporate payments.
• About half the business is fuel cards for fleets; drivers use WEX cards at gas stations, inputting mileage and passwords to reduce shrinkage and provide data on drivers.
• They operate a bank whose low-cost deposits from health savings accounts fund receivables from the fuel-card business, creating integration benefits.
• The corporate payments segment (~20% of business) has struggled, particularly in servicing online travel agents where Expedia and Booking.com have insourced some activity.
Valuation, activism, and capital allocation[58:49]
• WEX stock has gone nowhere for about eight years, leading to significant valuation compression.
• Earlier in the year, WEX did a tender offer at 154 dollars per share.
• Management has publicly stated they will not make more acquisitions and will instead use free cash flow to pay down debt incurred for buybacks.
• The CEO personally bought shares, and an activist investor has been involved for about three years, which Derek believes disciplines management.
• He views the current multiple as low: around 8x EBITDA, with the stock at roughly 170-175 dollars, versus about 240 dollars a year ago.
Stock dislocation after tender and growth initiatives[59:24]
• After the tender closed at the end of March, the stock traded down to about 120 dollars around Liberation Day, below the tender price.
• Derek found it notable that the company had just bought back 10% of shares at 154 dollars, implying a strong view of value, yet the market priced it at 120.
• He also notes management is reinvesting somewhat, with more marketing in fuel cards and additional sales hires in other segments, which he expects to modestly accelerate revenue growth.

Tender offers as a signal and deleveraging as a catalyst

Mechanics of a tender offer[1:01:28]
• Derek explains that instead of buying back stock slowly in the open market, a company can announce a tender to repurchase a set percentage of shares within a price range.
• Shareholders submit shares at prices they are willing to sell within the range; the company then determines a single clearing price where it can buy the targeted amount.
• In WEX's case, the range was 150-170 dollars, and the clearing price ended up at 154 after gauging shareholder willingness.
• He notes this indicated shareholders and management had different views of value, with management confident they were not overpaying.
Why tender offers matter for investors[1:01:28]
• Buying back about 10% of shares in one move is a strong signal; Derek believes companies rarely do such large tenders unless they view the stock as undervalued.
• He says tender offers are not extremely common but form a good hunting ground for value ideas, though not all tenders lead to price appreciation.
• He recalls General Dynamics doing a tender in the early 1990s, which Buffett bought into because he saw the tender as strong evidence of undervaluation.
Deleveraging and multiple expansion[1:02:43]
• Clay points out that part of Derek's thesis is that WEX's leverage depresses its valuation and that paying down debt should lead to multiple expansion.
• Derek compares this to private equity, where leverage is a major driver of returns.
• He notes WEX's leverage is about 3.5x, less than typical 5-6x private equity deals but still enough to magnify equity returns.
• As WEX grows modestly and pays down debt, natural deleveraging should make investors more comfortable assigning a higher valuation multiple.

Closing and where to learn more

Derek's contact information and materials

Website and investor letters[1:05:40]
• Derek directs listeners to GatorCapital.com, where they can sign up for his newsletter or email him at his firm address to receive investor letters.
• He notes he sends four letters a year, each discussing one stock idea or portfolio action intended to be additive to readers' investment processes.
Mutual appreciation and future appearances[1:06:04]
• Derek thanks Clay for having him on and praises Clay's generosity with time and questions.
• Clay reciprocates, saying he enjoyed the conversation and hopes to have Derek on again in the future.

Lessons Learned

Actionable insights and wisdom you can apply to your business, career, and personal life.

1

Setting a high return hurdle, such as targeting ideas that can realistically double in three years, forces you to concentrate capital in only your most compelling opportunities rather than diluting returns chasing small gains.

Reflection Questions:

  • • What percentage return do I currently target for new investments, and is that threshold high enough to keep me focused on my very best ideas?
  • • How might my portfolio look different if I eliminated any position where I could not clearly articulate a path to at least a substantial upside over a few years?
  • • What specific criteria could I write down to quickly filter out ideas that are merely "okay" so I preserve capital and attention for truly asymmetric opportunities?
2

Combining value discipline with an awareness of momentum and technical bases can improve timing, helping you avoid buying too early, selling too early, and fighting powerful trends.

Reflection Questions:

  • • When I buy a stock because it's cheap, do I also look at the price trend and ask whether the market is still pricing in worsening news?
  • • How could I incorporate a simple rule about waiting for a base or improving trend before entering, without abandoning my fundamental analysis?
  • • What past trades of mine would have been improved if I had let winners run longer instead of selling just because a target price was reached?
3

In stressful market episodes, focusing on what you would do if you were the only investor in your fund helps strip away external pressure and keeps decisions aligned with long-term rationality rather than short-term fear.

Reflection Questions:

  • • How do my decisions change when I feel watched or judged by others, and how might that be distorting my investment choices?
  • • What mental cues or routines can I use in a crisis to step back and ask, "If this were my own capital only, what would I do right now?"
  • • Which current holding is most influenced by my fear of short-term drawdowns rather than a clear long-term thesis, and what adjustment would a truly long-term view suggest?
4

Selective use of leverage-both at the portfolio level and via investing in companies that are prudently leveraged-can magnify returns, but it requires strict attention to downside risks, business quality, and deleveraging paths.

Reflection Questions:

  • • Where in my portfolio or business am I implicitly relying on leverage or fixed costs without fully accounting for the downside if conditions deteriorate?
  • • How can I better distinguish between situations where leverage is increasing discipline and value creation versus those where it mainly amplifies fragility?
  • • What is one leveraged position (or obligation) I could model under a severe stress scenario to understand whether I am truly comfortable with the risk-reward?
5

Structural industry trends-such as increasing competition, technology-driven deflation, or regulatory shifts-can compress margins and returns over time, so even in familiar sectors you must be selective, opportunistic, and willing to adapt your playbook.

Reflection Questions:

  • • In the industries I invest in or work within, which structural forces are likely to reduce average profitability over the next decade?
  • • How might I shift from a blanket, long-term exposure mindset to a more selective and tactical approach in sectors facing mounting competitive intensity?
  • • What metrics or signals could I track regularly to alert me that a once-attractive industry is becoming structurally less rewarding, so I can adjust before my returns suffer?
6

Corporate actions like large tender offers and clear commitments to de-lever can be powerful signals of undervaluation and future multiple expansion, especially when combined with insider alignment and activist oversight.

Reflection Questions:

  • • When I review potential investments, do I give enough weight to capital allocation signals such as buybacks, tenders, or debt paydown plans?
  • • How could I create a simple checklist to evaluate whether a buyback or tender is likely to be value-creating rather than just financial engineering?
  • • Which current or watchlist holdings might merit a fresh look precisely because recent corporate actions suggest management believes the stock is mispriced?

Episode Summary - Notes by Sawyer

TIP758: Current Market Conditions & Investment Opportunities w/ Derek Pilecki
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