Idea Brunch with Colin King of Circle City Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Colin King, CPA, CFA!
Colin is a co-founder and partner at Circle City Capital, an investment firm that takes controlling stakes in private businesses with strong long-term track records. In addition, Colin is President of Profit Mastery (a financial education and consulting firm), and an active value investor in public equities. Before founding Circle City, Colin was the CFO at a niche private equity firm and an equity research analyst at Kirr, Marbach & Company.
Colin, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and what you are doing with Circle City Capital Group?
I run a small-ish holding company consisting of 4 operating businesses (consumer goods, décor, Montessori supplies, and financial training) with a 50/50 business partner. On the side, I write about stocks and invest in public companies. As a HoldCo, we have broader ambitions to either raise money for public activist investments or use our own capital for it.
I’ll try to keep a lengthy journey as brief as possible…
I started my career in Big 4 accounting which was an excellent training ground for financial statement analysis. I finished the CFA and spent 6 years on the buyside at a fund with a concentrated GARP + special situations strategy (my PM handed me a copy of Greenblatt’s You Can Be A Stock Market Genius on my first day of work, which was pretty cool). I soaked up as many of the classic investing books, fund letters, VIC pitches, etc, as I possibly could and fortunately had great mentors during these formative years.
Around 2015, I was exposed to the world of private businesses and the idea of buying a small business at 3x earnings while being an absentee owner (an idea I no longer subscribe to), so I spent my free time looking for small companies to buy and operate, with a dream of creating my own Berkshire (another idea I no longer subscribe to).
In 2018, my partner and I formed a 50/50 holding company to buy a small trucking business (since exited) and snowballed that into 15 acquisitions ranging from blue jeans to flannel shirts to artificial flowers to financial education. These were done mainly with our own money and SBA financing, but in one case we raised some friends and family money.
We both chip in wherever is needed but the concept of “critical mass” is very real. As a company gets larger, you go from wearing 10 hats down to 4 hats and eventually down to a single hat. I’m currently occupying the CEO position at our financial education business, Profit Mastery, and serve in a CFO capacity for our other businesses.
Today, we have 4 “platforms” in our HoldCo and learned we’re better at finding, structuring, and closing acquisitions than we are at running them; so we’re open to deals but more likely to work with an operating partner or take a minority stake. This is partly why I’m interested in small-cap activist investing… it would be exciting to partner with solid operators to add value.
It’s a 100% opportunistic approach to private company investing. We like the businesses we own and have flexibility to patiently put our money to work where we find good opportunities in need of our skills. It’s definitely a “no shot clock” game for us.
Can you tell us a little more about your research and investment process both with private companies and public stocks?
My investing process is rooted in a deep value and special situations framework. I’ll look at just about every beaten down low multiple stock, upcoming spin-off, or inflection story. But it’s more nuanced than that… I don’t want to buy a cheap stock just because it trades at 5x FCF… I prefer some combination of catalyst, inflection, or unrecognized / underappreciated / underfollowed aspect.
On the private side, we’re looking for situations where we can add value and pay a fair price without that value-add. Our acquisition strategy looks for very long-tenured businesses (ideally a 20-40 year corporate history), minimal technology investment, and minimal (ideally zero) marketing spend. Imagine what a 40-year-old business with no tech stack or marketing would look like. These require a lot of heavy lifting, but they usually have solid brands, products, and customers to build on. We’ve had more luck finding C+ businesses (with A products and customers) and bringing them to a B level than competing against search funds for B+ or A- businesses. We’ve never bought a company with more than $1m EBITDA so generally we’re not competing with the search fund / ETA crowd.
On the public side, I bucket my holdings into three categories:
Core – high-quality businesses with stable cash flow and clean balance sheets I could hold for years
Generals – special situations like spin-offs, post-reorgs, inflection points, or plain vanilla cheap companies
Options – balance sheet-driven bets, net-nets, or levered companies with asymmetric upside
Positions are sized informally based on conviction and valuation — in aggregate, Core names usually have fewer holdings and larger weightings while Options are smaller and collectively capped around 5–10% of the portfolio. This approach is my “secret sauce” where I have a big chunk of my portfolio working for me over many years and still actively working catalyst driven ideas.
My definition of “quality” probably differs from the typical “wide moat” crowd. General characteristics I’m looking for are – healthy cash generation, manageable balance sheet, stable revenue and earnings (even if not growing), high revenue visibility, and a rational management team that will keep things down the fairway. By this definition, I’d probably consider a company like Ziff Davis (NASDAQ: ZD — $1.52 billion) a “quality” business even though 9/10 other investors would disagree. On the special situation side, I like quirky aspects like a wide spin ratio (i.e. 50:1), minimal coverage/attention, using a spin as a deleveraging event, carve out a crown jewel segment, etc.
I keep a running list of my investment philosophy and process here. If I could sum up my strategy in a single sentence, I’m simply looking for cheap and stable cash flows.
You’ve described yourself as an “accountant turned investor turned entrepreneur.” How has your accounting background influenced you as an investor and operator? Has your experience dealing with private companies changed the way you research public ones?
The blend of experience in accounting, investing, and business ownership has been incredibly valuable.
My ability to understand financial statements and the linkage between them has improved a ton over the years. I’m regularly using traits from good public companies to look at private businesses and vice versa.
Accrual accounting is great, but I tend to rely more on cash flow and the balance sheet because they’re more revealing of reality in a business. Knowing how hard it is to accurately forecast and produce linear financial results in my own business has made me skeptical when I see earnings that are “too smooth.”
Understanding the drivers and key variables for each line item on a P&L has become more important to me. If a management team believes they can grow earnings 10% per year but revenue isn’t growing (or maybe declining), then how do they plan on making that happen? Or guidance is implying earnings growth while input costs are clearly trending downward. Or revenue is flat but SG&A continues to grow, it makes me wonder what the heck is in there. Ultimately, it makes you realize how little information we have as minority investors in public companies (i.e., disaggregated expenses, KPIs, fixed costs, variable costs, contribution margin, revenue details, etc.). Granted, competitors could use that information too and the audit work might make it impossible; still, you have to understand you’ll never get a fully detailed view of any business.
Last, I’ve done enough acquisitions personally and professionally to know they are very difficult, very expensive, and very rarely play out exactly as planned. Early in my career, I would take management at face value when guiding on M&A, but now I’d prefer to wait and see how big acquisitions play out before getting interested in a stock. As an example, I’m currently watching Celanese (NYSE: CE — $5.14 billion) blow up from a “transformational” acquisition a few years ago.
Which sectors or industries are you most excited about right now, and why? Are there any themes or trends in the market that you believe offer especially attractive opportunities at the moment?
Here are a few themes I’m excited about right now.
1) Generics
This is probably my favorite thematic bet for the next 10 years. You have an industry that was growing and deal-making up to 2015-2016. Generic pharma was flooded with supply after the FDA lowered the bar for generic drug approvals in the 2012-2013 timeframe. The industry “peaked” when Teva spent $40bn for Allergan’s generic business in 2016. Prices collapsed, supply left the market, plants were closed, and debt was slowly and painfully repaid for 7-8 years. Today, the market still values the industry at LSD earnings multiples (TEVA, VTRS, OGN at 3-5x and Sandoz at 10-11x) despite a much brighter growth outlook and cleaner balance sheets.
A few shared attributes make the entire industry interesting right now… First, many of them have a “biosimilars” portfolio which are very hard to replicate generic versions of biopharma drugs like Humira. This sub-segment of the pharma industry is growing 20-30% per year. Next, generic drugs are finally turning to positive growth thanks to industry rationalization, and the outlook is solid with a huge wave of blockbuster drugs coming off patent (Keytruda, Eliquis, and Stelara are ~$50bn per year alone). Last, tons of debt was repaid since 2016. TEVA repaid $20bn debt since 3Q17! As a bonus for the truly patient investor, you’ll see GLP-1 patent expirations starting in the 2030s for an added leg to the growth story.
I like Sandoz (Switzerland: SDZ — CHF15.8 billion) as a true GARP name. They have a best-in-class balance sheet and the most exposure to fast-growing biosimilars. It trades at 10-11x earnings with less than 1.5x leverage and an expectation to double FCF by 2028.
Organon & Co (NYSE: OGN — $2.49 billion) is in a tough spot with the highest leverage and a dividend commitment that constrains capital allocation. VTRS sold their biosimilar business at a good multiple and divested other assets to repay debt; they’re now committing to capital returns at a low multiple but the stock has been a dud for a long time. TEVA looks well positioned for growth and a capital allocation inflection; they repaid debt down to 3x leverage and anticipate MSD organic growth while trading at 6x earnings.
2) Balance sheet transformations
Less an industry theme and more a situational theme. I love finding companies that undergo a transformational balance sheet change whether through years of slow-and-steady debt repayment (TEVA, TAP, CVEO) or through divestiture of a major business unit (HBI, SOLV, and BAX are recent examples). Typically, they’ll get both a valuation uplift from the perception of being less risky and, more importantly, they have more flexibility to deploy cash toward other value-creating uses like buybacks, dividends, M&A, etc. TAP and CVEO are both candidates here. Both of these companies spent 7-8 years slowly repaying debt and very recently came under their targeted leverage ratios. We’re talking 5-6x leverage coming down to 0-2x leverage while maintaining consistent cash generation. Think about that, you have a business with zero flexibility for 7-8 years now having all options on the table! It’s fun to think 5 years into the future with the same level of cash generation, where that money will go if not needed for debt.
What are some interesting public equity ideas on your radar now?
I like (and own) some of the ideas already mentioned (Sandoz, TEVA, TAP, CVEO), but below are two names I especially like today: