Idea Brunch with Abby and Jim Zimmerman of Lowell Capital

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Abby and Jim Zimmerman!

Jim Zimmerman founded Lowell Capital in 2003, a Los Angeles-based investment firm focused on long-term, value-oriented investing. He works alongside his daughter, Abby Zimmerman, who joined the firm in 2019. Together, they focus on underfollowed small-cap companies with strong free cash flow and conservative balance sheets.

Jim and Abby are currently the Chief Investment Officer and Research Analyst, respectively, at Lowell Capital. Before launching Lowell Capital, Mr. Zimmerman was a Managing Director at two boutique investment banks as well as a First Vice President in Corporate Finance at Paine Webber. Abby previously worked as a consultant at Michael Page before joining the firm.

Lowell Capital emphasizes patience, rigorous fundamental analysis, and a long-term perspective, with a focus on downside protection and disciplined capital allocation.

Jim and Abby, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Lowell Capital? Could you also share a little about your dynamic working together?

Thank you for the opportunity, Edwin. We are big fans of Sunday’s Idea Brunch and truly appreciate the invitation.

Lowell Capital was founded in 2003 after many years in investment banking, where I saw firsthand that the best businesses were often the ones that generated strong cash flow and didn’t rely heavily on outside financing. Over time, and heavily influenced by Warren Buffett and Berkshire Hathaway, I wanted to build an investment approach centered on long-term ownership, disciplined capital allocation, and a focus on simple, high-quality companies with strong free cash flow and conservative “Ft. Knox” balance sheets.

We’ve invested our own capital alongside that of high-net-worth individuals and family office partners, with an emphasis on steady compounding and capital preservation rather than maximizing short-term returns. We also hold meaningful cash, which has always been a natural part of our philosophy.

My daughter, Abby, joined the firm in 2019, and working together as a father-daughter investment partnership has been very rewarding. She brings thoughtful research, structure, and a fresh perspective to the process and plays a central role in our idea generation and diligence work, while I contribute experience and pattern recognition developed over decades. There’s a lot of debate, collaboration, and shared commitment to doing things the right way - even when that means passing on what feels popular.

We focus on underfollowed, misunderstood small-cap companies with “Ft. Knox” balance sheets and strong free cash flow yields, aiming to own durable businesses that can steadily compound value over the long term.

Can you tell us more about your investment process and why you typically hold meaningful cash?

Our primary focus is on the steady growth and compounding of capital with heavy emphasis on companies with strong free cash flow characteristics and “Ft. Knox” type balance sheets. We like simple, resilient, and sustainable business models that we can hold for many years.

We primarily focus on small-cap value. Small caps are a less closely followed area of the stock market and there is often less research coverage and investment banking focus on these smaller companies. We believe this creates opportunities. We want to focus on less crowded and less efficient areas of the public equity markets. There is a better chance of finding a mispriced security which is what we’re looking for.

We believe there are over 5,000 publicly traded companies in North America alone and a large majority have little research coverage. This creates opportunities to find undervalued small and micro-cap stocks with strong free cash flow and “Ft. Knox” balance sheets and management teams focused on driving shareholder value. We look at thousands of companies to find just a handful that fit our investing approach of strong free cash flow and “Ft. Knox” balance sheets.

We believe we are invested in high-quality businesses that can compound capital over several years. As a result of their high ROIC, our investments generate large and sustainable amounts of free cash flow as they are not capital-intensive. This creates a strong foundation for disciplined long-term compounding.

We do not try to time the market. We stay focused on what we can control, which is our deep research-intensive process of business analysis and our due diligence process. This includes making sure we know the company’s fundamentals, the “competitive moat” of the company, its growth path, its balance sheet, and detailed conversations with the management team. We’re looking for just a handful that have a clear growth path. Our objective is to buy growth companies at value prices.

We often maintain a cash position in the 20-30% range, and have gone higher at times. This may look unusual in an industry that tends to remain fully invested. For us, we see cash as our margin of safety. It enables us to manage through challenging periods, protect capital, and act decisively when attractive opportunities arise. We are comfortable holding significant cash when we don’t see enough opportunities that fully meet our criteria. Cash is not a drag to us. It is valuable optionality. It allows us to act decisively when mispricings occur and prevents us from forcing capital into mediocre ideas just to stay fully invested.

Our primary goal is to avoid permanent loss of capital. As Buffett says, “Rule number one: don’t lose money. Rule number two: don’t forget rule number one.” We define risk as permanent impairment, and our cash discipline is a direct expression of that philosophy.

Part of your research process involves speaking with management teams. What red flags or positive signs are you looking for in these meetings? What advice would you give your younger self or new fund managers to get the most out of management meetings?

We view the management teams of our investments as our partners. We want to work with people we like and trust. We look for authenticity, honesty, and alignment with shareholders.

Positive signs include:

• A clear understanding of their business drivers

• Willingness to discuss mistakes and challenges

• Evidence of long-term thinking

• A solid track record of results

• An “under promise, overdeliver” philosophy

• Capital allocation discipline

Red flags include:

• Overly promotional tone

• Avoidance of difficult questions

• Inconsistent messages

For younger investors, our advice would be to prepare deeply, listen more than you speak, and focus on asking questions that reveal incentives. We’ve found many of the most meaningful insights come from listening to how management talks about the business. Does management under promise and overdeliver? Do they take responsibility for their mistakes? Are their incentives tied to long-term value creation or short-term share price movements? Asking questions about how they think about capital allocation, what could go wrong or what keeps them up at night, and how they would fare in a recession, can provide tremendous insight into how management thinks about the business. Oftentimes, we find it to be more valuable to hear how management thinks about the business long-term, as opposed to focusing too much on highly detailed financial questions.

In a fast-changing world, how do you ensure the durable competitive advantages of your portfolio companies are actually durable? Have you ever seen technology or other forces disrupt what seemed like a strong moat?

We try to assess durability through several lenses. We want to understand why customers choose this company today and why they are likely to keep choosing it tomorrow. This leads us to look for customer stickiness, repeat purchasing patterns, pricing power, and long-standing relationships that are difficult to replicate.

We are also laser-focused on free cash flows and returns on capital. We monitor how free cash flow and returns on capital behave through different environments. Durable businesses tend to show consistency through downturns, not just strength in good times. We also spend a significant amount of time reading conference call transcripts and 10-Ks, and regularly speaking with management to understand how they think about competition, their advantages, and reinvestment.

We have seen moats erode. Retail has been one area where we’ve learned this firsthand. In cases where a business model looked stable on the surface but was structurally vulnerable to changes in consumer behavior or digital competition, cash flows deteriorated quickly. These experiences reinforce the importance of continuing to revisit our thesis. We constantly re-underwrite the durability of the business so that we can continue to strengthen our conviction in the business. If we recognize the competitive position is not as strong as we thought or free cash flow begins to structurally decline, we act quickly and we are able to get most of the capital back. Our emphasis on strong balance sheets also provides an added layer of protection, allowing businesses time to adapt and evolve if needed.

In a world that is constantly changing, we believe the most durable advantages often come from simplicity, not complexity. The fewer things that have to go right, the better. We remain skeptical, curious, and ensure we are constantly testing our assumptions.

What are some interesting ideas on your radar now?

Three names that we like today are: