Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Zack Buckley!
Zack Buckley is the Founder and Portfolio Manager of Buckley Capital, a value-oriented investment firm focused on North American small- and mid-cap equities. Buckley Capital takes a private equity approach to public markets, investing in a concentrated portfolio of high-quality businesses with long-term growth potential and attractive risk/reward profiles. Zack has been investing since 2008 and founded Buckley Capital in 2011. He has generated a 14.5% annualized return since inception and a ~22% annualized return since 2020. He has been featured in The Wall Street Journal, Barron’s, Reuters, CNBC, MarketWatch, Business Insider, and other financial publications, and has spoken at numerous value-investing conferences. Zack was previously featured on Sunday’s Idea Brunch in January 2022.
Editor’s Note: Sunday’s Idea Brunch is growing and looking to hire an MBA student for part-time paid work, remote and on your own time. If you are passionate about investing and interviewing great emerging managers, please reach out: edwin@585research.com
Zack, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Buckley Capital? What have been the biggest developments since we last spoke in 2022?
I became interested in investing when I was 16. I grew up in the western suburbs of Chicago, and although my parents were both highly educated professionals, investing did not come naturally to them. I saw firsthand how much stress financial uncertainty could cause, which pushed me to start learning about investing at a very young age. I was a voracious reader in high school and eventually came across Warren Buffett and Charlie Munger. From there, I was hooked on investing.
I was very competitive growing up, both academically and athletically. I was valedictorian of my high school, played several sports, and attended the University of Miami on an academic scholarship. I love investing because I view it as an incredible intellectual competition - I think of investing as one of the world’s most challenging and competitive intellectual games. While I was in college, my father gave me $100,000 to manage beginning on January 1, 2008. It was certainly an interesting time to begin investing, right before the Global Financial Crisis, but it ended up being an incredible learning experience. I was down with the market in 2008 and then up more than 100% in 2009.
Early on, I used Buffett’s career advice as a roadmap. He said to study accounting, so I studied accounting. He emphasized starting early, so I began managing money while I was still in school. And he encouraged working for someone you respect, which led me to Baker Street Capital, where I worked for Vadim Perelman, who was a highly regarded small-cap value investor. That experience helped shape both my research process and, equally importantly, my views on portfolio construction and risk management.
I formally launched Buckley Capital in 2011. By the end of that year, I had raised outside capital and was managing approximately $25 million at age 23. The distinction in our track record is that the period from 2008 through 2010 reflects the personal account I was managing, while the fund itself officially began in 2011. I think the earlier period is important because it shows that I have managed capital through multiple market cycles, including the GFC, and that I have over 18 years of investing experience today.
Over time, the investment process has evolved significantly. We have become more disciplined around concentration, incorporated much more alternative data and primary research, and shifted the strategy to be long-biased. But the core philosophy has remained the same: find high-quality businesses where the market is mispricing long-term value, do the work to develop a differentiated view, and invest with a long time horizon.
How has your investment strategy evolved over time?
The core philosophy has remained consistent, but the process has evolved considerably as we’ve learned from different market environments.
We now have defined concentration limits of 15% at cost and 20% through appreciation, although a typical large position for us is closer to 10%-12%. We want our best ideas to matter, but we never want a single position to create an unacceptable level of portfolio risk.
We’ve also dramatically expanded our use of alternative data and primary research. The amount and quality of information available today is completely different from what existed ten or fifteen years ago, and I think we’ve done a very good job incorporating those tools into a fundamentally driven investment process. We spend approximately $500,000 per year on alternative data and use a range of sources depending on the business, including credit card transaction panels, email receipt data, web-scraped information, web traffic data, and app downloads. The objective is not simply to collect more data; it is to identify the operating indicators that matter to each thesis and incorporate them into our financial models. We also conduct hundreds of public-company management calls and thousands of primary-research calls across the ecosystems of the businesses we follow. We think the combination gives us a more timely and complete view of how a company is performing than any single source could provide.
If I had to choose, I think the primary research is the most important element of our process – having detailed financial models that we can use to test our assumptions, speaking with hundreds of management teams allows us to glean insights about what the business will do and whether it is tracking significantly different from consensus – which usually drives stock price appreciation. Some management teams are aggressive, some very conservative, and some fairly accurate in forecasting their businesses. One of our biggest jobs is to determine which guidance style a management team has between those three. We much prefer the ones that are conservative – and underpromise and overdeliver.
The other major evolution was moving away from short selling. Historically, we ran a long/short strategy, although we were always heavily long-biased, but shorting was a meaningful drag on performance from 2020 through 2022. Beginning in 2023, we became primarily long-biased, and today investors should generally think of us as always running around 100% net long.
What differentiates Buckley Capital?
At its core, investing in stocks is a relatively simple math equation: a company’s sales, EBITDA, or earnings, multiplied by an appropriate valuation multiple, gets you to an estimate of value.
That means investors are essentially trying to solve for two variables: what the business will earn in the future, and what multiple earnings deserve.
The better you can forecast the earnings power of the business, and the better you can determine the appropriate multiple, the better you should be at forecasting where a stock is ultimately going.
On the multiple side, the framework is fairly standardized across the industry. Investors look at public and private market comparables, historical trading ranges, transaction multiples, and the quality and durability of the business to determine what a reasonable multiple should be. Doing this well—and maintaining valuation discipline—is obviously important. We believe the opportunity to create a truly differentiated view is generally much greater on the earnings side of the equation.
That is where we have designed our entire research process to focus.
Forecasting the future of a business is inherently difficult, and management teams approach guidance very differently. Some management teams are conservative and consistently underpromise and overdeliver. Others attempt to guide as closely as possible to economic reality. And some are more aggressive, which can lead to a pattern of overpromising and underdelivering.
We particularly like situations involving management teams with a demonstrated tendency to underpromise and overdeliver. We believe these situations can create significant mispricings because the market often anchors to management guidance and consensus estimates rather than independently determining what is most likely to occur in the business.
This is where our emphasis on alternative data and primary research becomes particularly important.
Our objective is what I call “closest to the pin” forecasting. We are not trying to build a conservative case or an aggressive case. We are trying to determine, as precisely as possible, what is actually going to happen.
We start by identifying the handful of variables that truly determine a company’s earnings. Those variables are different for every business. We then design our research process around answering those specific questions, typically through intensive primary research, alternative data, or some combination of the two.
We take those real-world observations and translate them into assumptions in our financial models. We can then compare our independently derived estimates with management guidance and sell-side consensus.
The most interesting opportunities tend to emerge when there is a significant divergence.
For example, we may conclude through our research that consensus earnings estimates are materially too low. If the stock is simultaneously trading at a depressed valuation—perhaps below its own historical range and at a discount to relevant peers—we may have both earnings upside and multiple upside. That can create a particularly attractive risk/reward.
The second part of our differentiation is velocity.
We don’t want to apply this process to a handful of companies each year. We want to apply it to as many potentially attractive situations as we can while maintaining a very high research standard. Our research organization is deliberately designed around increasing the number of companies we can evaluate with a high degree of precision.
I sometimes think about it almost like a factory. The objective is not to manufacture investment ideas; it is to manufacture well-researched decisions. If we can evaluate more businesses with “closest to the pin” precision, we should uncover more genuine mispricings. And if we uncover more mispricings, we can be increasingly selective about which ones ultimately make it into the portfolio.
That is an important distinction. Increasing research velocity doesn’t mean owning more stocks. It means having a larger pool of thoroughly researched opportunities from which to choose.
Ultimately, we want to invest only when the discrepancy between price and our independently derived view of value is unusually obvious.
That philosophy explains why we invest heavily in alternative data, build a large number of detailed financial models, and conduct extensive primary research. Each is designed to accomplish the same thing: increase the number of businesses we can forecast accurately enough to identify the situations where the market’s expectations are most likely wrong.
Over time, we believe that combination of precision and velocity should improve both our batting average and our slugging percentage: being right more often, while generating larger returns when we are right.
Where do you get your ideas from? What is the primary metric or metrics that you use to evaluate potential investments?
Our ideas come from a wide range of sources, but the common thread is that we are looking for some form of significant mispricing. That can be a temporary operational issue, a management change, an earnings inflection, an industry dislocation, or simply a high-quality business that is less well understood because it receives limited sell-side and institutional coverage.
If I had to identify one primary metric, it would be prospective IRR, but we never look at IRR in isolation. We underwrite what we believe a company can be worth over multiple years and then compare that expected return with the probability of actually achieving it and the downside if we are wrong. A stock can screen with an extremely high prospective IRR, but if the probability of execution is low or the downside is too significant, we may not own it. Conversely, a business with a somewhat lower headline IRR but a very high degree of predictability can deserve a much larger position.
So the framework is really prospective IRR, probability of execution, and downside risk. Those three factors drive both whether we invest and how large we are willing to make the position.
How do you approach periods of significant market volatility?
Volatility tends to create some of our best opportunities because the relative attractiveness of businesses can change very quickly.
During significant drawdowns, we’re willing to reallocate capital aggressively. If one company we own falls 5% while another high-quality business we’ve researched falls 50% without a corresponding deterioration in intrinsic value, we’re willing to sell the first investment and move that capital into the second.
March 2020 is a good example. We viewed that period as an extraordinary investment opportunity and substantially reallocated the portfolio as prices became disconnected from our estimates of long-term value. That’s generally how we think about volatility: not simply as something to endure, but as an opportunity to improve the prospective return of the portfolio.
We have had very strong performance in periods of volatility, while we may be down the month or quarter that the Russell 2000 is down, we tend to rebound and outperform over the next 12 month period.
You have been investing through several market cycles. How has that experience influenced the way you manage downside?
I started managing money in January 2008, so my first year investing professionally coincided with one of the largest market dislocations in modern history. Since then, I’ve invested through a number of very different environments—the Global Financial Crisis, the 2015–2016 small-cap drawdown, 2018, COVID, 2022, and more recent periods of volatility.
Every drawdown teaches you something. Over time, we’ve become more disciplined about position sizing, more sophisticated in how we monitor companies, and faster at reallocating capital when the opportunity set changes.
I think experience is particularly valuable during periods of stress. We’ve been through enough market cycles that volatility doesn’t change our process. If anything, it often creates the environment in which our research advantage becomes most valuable. This is why we have such strong performance in periods of volatility - like 2020 and 2021 as an example.
Dentalcorp is an example where your engagement and thesis culminated in an announced sale at a meaningful premium. What did that investment teach you about when boards are willing to act?
Dentalcorp reinforced that shareholder engagement can be effective when it is supported by detailed fundamental work and a realistic path to value realization.
In May 2024, we published an open letter urging Dentalcorp’s board and management to undertake a strategic review, including a potential sale. We believed the public market was materially undervaluing the company’s scale, recurring demand, leading position in Canadian dentistry, and long-term earnings power. Our analysis suggested that these attributes could be worth considerably more to a long-term financial or strategic buyer than the valuation being assigned by the public market.
Several factors made us believe a transaction was possible. Dentalcorp operated in an industry that had historically attracted private-equity interest, its business model was well suited to private ownership, and its concentrated shareholder base created a clearer path to alignment. A buyer could also retain management and allow existing stakeholders to roll a portion of their ownership into the private company.
The board ultimately formed an independent special committee and approved an all-cash acquisition by GTCR at C$11.00 per share, representing a 33% premium to the unaffected share price and 20-day volume-weighted average price. Management and several key shareholders agreed to roll part of their ownership into the new private company, while shareholders representing a majority of the voting power supported the transaction.
The lesson was that undervaluation alone does not cause a board to act. There also needs to be a credible buyer universe, alignment among important stakeholders, and a structure that offers shareholders both an attractive price and certainty of value. Our role was to identify that opportunity, communicate the case publicly and constructively, and remain patient while the board evaluated its alternatives.
Your idea pitches from 2022, Macy’s (M) and Destination XL Group (DXLG), have generally underperformed. What went wrong with these stocks? And do you still see value in retailers like you did back in 2022?
One thing I’ve learned over the years is that investing is a business of probabilities, not certainties. Despite our overall success in generating a high average annual return, we make mistakes in individual companies all the time. It is a repeatable process that has worked over 100s of companies over almost two decades, but that does not mean we get every investment correct.
Not every thesis plays out exactly as you expect. Retailers in general have had a brutal 5 years, and we have almost entirely stayed out of retail as a result of that. So while I obviously wish those ideas worked out, we realized fairly quickly that there were significant issues these businesses were facing, and we got out having still made a gain in each investment. That is why it is so important for us to have a long-term investment thesis, but also track the business in real time to see how our investment thesis is doing - as oftentimes the thesis can change.
What are some interesting ideas on your radar now?
Basic-Fit (BFIT)
What it is: Basic-Fit is the leading low-cost gym operator in Western Europe. We view it as a high-quality, highly replicable business model with attractive unit economics and a long runway for expansion. Mature clubs can generate roughly 30% returns on invested capital, creating the potential for substantial long-term free cash flow compounding.
Why the opportunity existed: The company expanded too aggressively around COVID, particularly in France, which resulted in staffing problems, inconsistent customer experiences, slower membership ramps, and weaker economics at newer clubs. Investors extrapolated those issues and treated them as structural rather than temporary.
Our edge: