Investment Process

Discretionary idea generation: ideas come from many different sources- they are a dime a dozen. Although we maintain a range of monitors across global equities, half of the ideas come from any of the following sources:

• News: all varieties of events or developments related to global markets, economics, politics, in addition to legislative or regulatory developments;
• Our views on actionable ongoing events or thematic situations;
• Discussions with other investors or people in various industries;
• Social media: Twitter, Reddit, and investor sites.

We're always switched on to and monitoring what is going on around the markets we're active in, and we're always looking for as easy a win as possible- the proverbial “money sitting in the corner looking to get picked up”- and although such situations are surprisingly common, oftentimes the best opportunities require some leg work to reach conclusions, and the initiative to act on them. In general, however, we're partial to keeping it simple- no long leaps, and almost no long-term projections or DCF modelling. We're typically looking for ideas that are characterized by one or more of:

• A high degree of certainty on near-to-medium-term fundamentals;
• A misperception or over/under-reaction that's led to significant possible mispricing;
• Asymmetric payoff;
• Under the radar and/or avoided by institutional/sophisticated investors;
• Catalyst and/or theme-based.

Research: once an idea is through to the research stage, before reading any document longer than a few pages, it is immediately subject to preliminary research in an effort to get to a quick 'no' or a 'maybe later' or a 'too hard- either outright no or maybe later', be it through an understanding of why the implied risk is unbearable, or through the presence of many unknowns. If the idea survives these initial tests, deeper work begins.

Of course, the analysis is situation-dependent...

M&As and other special situations tend to be (but not always are) characterized by binary, timed outcomes and “known quantities”, but sometimes timelines change and situations can be fluid, so the analysis tends to be geared towards the involved parties, their prerogatives and motivations, and the extractable value within that context. Other special events require an assessment of ongoing sentiment and the fundamental and structural realities that determine anticipated investor reaction, or that of other involved parties.

Our involvement in thematic or macro-driven situations has been rare in the past, simply because compelling pitches are hard to identify and parameterize, but when we do have conviction, we tend to bet in size. This analysis tends to involve more of a top-down assessment of first and second-order effects of major developments and anticipated investor reaction within a specific asset, asset class, or a region/thematic index.

Most of our work is focussed on picking what we believe to be mispriced stocks. Deeper work within the research process for a potential long typically looks something like this:

• How does the business make money and what are its costs?
• Metrics on quality, growth, and value:
  1. Margins (and their trend);
  2. Leverage (and its trend);
  3. Return on capital/equity (and its trend);
  4. Top, bottom-line, EBIT(DA) growth;
  5. Valuation multiples, NAVs, liquidation values.
• Is it cheaper than peers and/or its own historical valuation? Is there a good reason?
  1. Macro/sector/industry pressures regarding revenue and/or costs- Are they a long-term concern?
  2. Uncertain return on recent/upcoming CAPEX?
  3. Outlook: what are analysts expecting and why?
  4. Badly managed with toxic debt/bad capital structure (i.e convert death spiral, etc.)?
• Ownership structure + Management:
  1. Major shareholders?
  2. Is management heavily invested(ing) and/or otherwise incentivized/aligned?
• Catalysts:
  1. Any developments afoot? M&A, offerings, buybacks, activist, legal? Will/should there be?
  2. Management/shareholder changes?
  3. Upcoming earnings?
  4. Industry/sector/country turnaround?
  5. Just too cheap, after considering the above?

Much of the above process is done in reverse for potential shorts, with added focus on excess debt and valuations, and, of course, avoiding blown accounts.