Idea Brunch with Clark Square Capital

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Clark Square Capital!

Clark Square Capital is a professional investor who shares content with 15,000 followers under the pseudonym @ClarkSquareCap on Twitter. Previously, Clark Square worked as an analyst on the buy-side covering the technology and consumer sectors. Currently, Clark Square works as a full-time private investor and shares his writings on overlooked and off-the-run investment ideas in his newsletter. Clark Square is a member of the Value Investor’s Club (VIC), the MicroCapClub, and the Manual of Ideas (MOI).  

Clark Square, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your investment process?

Hi Edwin, thanks so much for having me on!

I am originally from Monterrey, Mexico – a city in northern Mexico known as the largest industrial hub in the country. Growing up, I went to an American school in Monterrey, and was fortunate to be able to pursue my undergraduate studies in the US after that. Once I graduated, I had the opportunity to join a management consulting firm, which was a phenomenal place to start my career.

During my last years at University, I accidentally stumbled into the world of investing when I found an old copy of Peter Lynch’s One Up on Wall Street. Reading the book, I was hooked. Post graduation, I started working as a consultant, but I spent most of my spare time following the market and picking stocks for my own personal account. I quickly realized that I wanted to pick stocks professionally. This led me to getting my MBA with the aim of transitioning into investment management. I then landed a seat at a small, concentrated fund in Chicago where I took on coverage of technology stocks. After, I joined a much larger buy-side platform where I focused on covering global consumer companies, mostly outside of the United States. There we looked at all sorts of interesting companies: consumer staples in India, restaurants in China, specialty retail in Brazil, and so forth. After a few years on the buy-side, however, I decided to leave my job to become a full-time private investor.

In the last couple of years, I have solidified my style and approach. My investment process is focused on building a portfolio of roughly 15-25 ideas. I aim to build a portfolio that is diversified across sectors and geographies, as most investors would. But I also aim to have different types of ideas with different duration profiles. I want a mix of securities: some that will have a short-term payoff (special situations, usually), ideas that will pay off in 12+ months, and some ideas that I can hold for longer than that. I don’t have a specific limit, but the idea is that I want to avoid making the same bet in 15 different ways.

As a private investor, I am flexible on pretty much everything: market cap, sector, geography, maturity of the business, and quality of the business. However, I’ve developed a few basic guardrails that help me narrow down the opportunity set.

Fundamentally, I look for three things:

1. I want to understand why a particular stock is mispriced. This can be caused by many different types of factors: technical selling, extreme pessimism, low market cap, a lack of liquidity, etc.

2. I want to see some fundamental development that will close the mispricing gap. Usually this can be an inflection in fundamentals or a corporate action (spin-off, divestment, etc.). The idea is that the fundamentals have to be improving.

3. I want to see a situation where there is a big margin of safety. I like ideas where there is something that protects you in case you are wrong, either a large cash balance, ownership in assets, unencumbered properties, or something of that nature.

Usually, this type of opportunity leads me to funky situations in parts of the market where most people are not usually paying attention. My sweet spot tends to be in the micro and small-cap universe, usually below $1B USD in market capitalization. In terms of geographies, my portfolio is roughly 30-50% US stocks, with the remainder being a mix of European and Latin American stocks as well. My opportunity set is pretty large, so my ultimate goal is to have a portfolio that is entirely unique and my own.

Clark Square, you have been on Twitter for a few years. Can you tell us more about how you came to the platform? What has your experience been like writing anonymously on Twitter?

Twitter is a funny place. While a lot of people focus on the negatives, I think that if you are sharing and engaging positively, it has a way of rewarding you many times over. This interview, for instance, would have never happened if I wasn’t so active on Twitter. I’ve also made many great friends on Twitter with whom I talk constantly. People are also very generous with their time and ideas.

I started my Twitter account back in 2018 when I was an analyst covering tech. At first, I was mostly a lurker. But eventually, I started posting investing articles, quotes, and interviews that resonated with me. And slowly I began to get people following me. Eventually, I transitioned into posting more of my own thoughts and investment ideas. It took me a while to find the confidence to share these publicly. But I’m really glad I did.

The writing process itself has been helpful in how I think through ideas. It forces me to develop more clarity of thought and guides me to the places where I need to do more digging. Moreover, it’s been an amazing experience having a lot of people read my work and comment positively on it. I know that not all of the ideas will be good, but my philosophy is that I want to keep getting reps in, getting feedback, making incremental improvements, and doing it again. 

A few years from now, I hope that I look back on my work from today and find it embarrassing, as that will mean that I’ve gotten a lot better at it, and that’s really all that I can hope for.

You have a pretty diverse portfolio – ranging from a microcap European travel agency to a left-for-dead ad-tech company. How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?

It’s a great question. I think this comes down to a couple of different things. The first part is that this aligns well with my personality. I’m very comfortable operating on my own and have always hated the notion of being a part of the crowd. This means that I just naturally gravitate to parts of the market where few other people are looking.

The other part is by design. When I started off as an analyst covering tech companies at a $200m AUM fund, I quickly realized that the US markets can be fairly efficient, particularly on the larger cap end of the spectrum. I also saw who my competition was. I was competing against the best and brightest, with unlimited research budgets, access to management, and tools that we couldn’t afford. Ultimately, this made me think a lot about how I could add value as an investor. It made me think about game selection and how I could turn small into an advantage. I kept this in the back of my mind for a few years.

Eventually, I transitioned into being a private investor with a very small pool of capital. While most investors focus on the same 100+ stocks, there are large parts of the market that are neglected, where there is limited to no analyst coverage and no estimates; parts of the market that are too small for the average fund to quickly get in and out of. There, I knew that I could use my small size to my advantage. In areas where there are no published opinions, I can form my own by putting in the work.

Putting in the work in areas where people are not paying attention can often lead to great finds. Earlier this year, for instance, I noticed that a small Brazilian grocery store operator, Companhia Brasileira de Distribuição (US ADR: CBD) was trading at a $800M USD market cap but was set to spin-off its larger, and more profitable Colombian operation, Grupo Exito, which is also publicly traded on the Colombian exchange with a market cap of $1,300M USD. CBD also held shares of a French e-commerce company and some debt. But it did not take much insight to see how mispriced the situation was, as the company that would be left behind stubco was trading for a negative implied value. Despite being covered by multiple analysts in Latin America, most local investors simply did not seem to notice or care.

That opportunity has worked out nicely so far. While the spin-off has yet to be completed, Exito has received two bids from a Colombian billionaire who is interested in taking control. The situation is still interesting as these bids essentially set a floor on the potential value of Exito, while the market still gives little credit to the company’s core grocery operations in Brazil, which could be worth upwards of $1,200m or so.

What are some interesting ideas on your radar now?

I will touch on three ideas that I think are very compelling. I have written these up on my Substack as well, so feel free to read the full writeups there.

1/ Gravity Co [US: GRVY. Market cap $501m USD] – is a Korean video game company that trades exclusively in the US as a sponsored ADR. This makes GRVY an orphan asset, and the company has no analyst coverage; liquidity is also limited to $1.6m USD/day. The setup, however, offers an incredible risk/reward profile, as the company will finish the year with roughly 70% of the market cap in net cash. The business itself is also a good one. It is capital-light, high margin (OPM in the 22-23%), and generates meaningful cash. I estimate that the company will earn roughly $100m in free cash flow this year. The company has done a great job in monetizing its key IP, the Ragnarok franchise despite the IP being developed in the early 2000s. While the stock itself has been cheap in the past, the fundamentals inflected in Q4 2022 given the launch of the game Ragnarok Origin in new markets. The acceleration in profitability makes the story much harder to ignore and is likely to lead to a re-rating. If this does not happen, investors are well protected by the significant cash on the balance sheet.