Idea Brunch with David Bastian of Kingdom Capital Advisors
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview David Bastian!
David is currently the chief investment officer of Kingdom Capital Advisors (“KCA”), a Virginia-based registered investment advisor he launched in January 2022 with Michael Cooper. Before launching KCA, David honed his investing skills at PricewaterhouseCoopers, assisting on buy-side due diligence for large private equity funds. KCA focuses primarily on small-cap investment opportunities and is active on Twitter/X @kingdomcapadv.
David, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Kingdom Capital Advisors?
Sure! I love numbers and math. I studied at Penn State to be an actuary but I found the stock market more interesting than calculating pension benefits. I used what I learned at PwC and applied it to small-cap investing, with good success. I published on Seeking Alpha to start building a public record and improve my investment process.
I was able to grow my personal investments at an exceptional rate, which provided me the financial freedom to leave my career. I wanted to create a vehicle to invest money on behalf of friends and family, with the hope of duplicating my earlier success. I learned early on that simply sharing investment ideas was counter-productive. I was faster to know when a story was broken, when it was time to double down, etc. You can’t borrow someone else’s conviction.
So, I launched KCA with a small number of investments from friends and family members. Mike and I have been fortunate to grow the firm over the past two years with investments from some clients whom we have yet to meet in person. However, the mission remains the same and we steward our clients' investments as we do our own.
David, what are some of the first things you do when researching a potential investment? What does that first hour of research look like for you? Do you do anything that few others do?
I like to look for red flags on misaligned management, historical business/stock performance, catalysts, etc. The sooner I can find the key bear arguments on a position, the faster I can determine if there’s a good reason for a stock to appear cheap. I’ll often check old pitches on ValueInvestorsClub, MicroCapClub, and Seeking Alpha to see how reality has lined up with investor expectations. At the end of the day, someone has to sell me the stock, so I want to make sure I understand why someone would take the other side of my trade.
How do you evaluate the management teams of the small-cap companies you analyze? And, in your view, who are some of the most talented leaders in the small/micro-cap space today?
Evaluating management was perhaps my steepest learning curve when transitioning to portfolio management. I wanted to believe fundamental analysis was sufficient to identify market inefficiencies and that’s simply not true.
I try to determine how management is incentivized, which helps understand management’s alignment with shareholders. There is no shortage of mismatched incentives in the markets. Look what happened to E&Ps a decade ago. Management teams were incentivized to increase volume with little regard for earnings, which led to over-drilling and numerous bankruptcies.
In search for a “margin of safety” we often analyze companies trading at a steep discount to their “Sum of the Parts” valuation. However, you must have a catalyst for unlocking this value. If the catalyst is a sale of the company, you need to have insiders aligned with this vision. You won’t often find management teams eager to sell their business – i.e. work themselves out of a career – simply to realize value for shareholders.
I prefer getting involved with management teams with a track record, even if it’s not at the current business. “New” stuff is shiny and fun but look no further than the rise and fall of SBF. I like the ability to review how management has treated investors. If they show you who they are, believe them.
Lastly, meeting with management is important to me. There is a lot to be gained by speaking live with someone and maintaining a routine cadence of communication. I want to invest with teams I trust and respect, not those simply telling me what I want to hear. This can be a good way to pick up on “thesis drift”, when the original story starts to change. Thesis drift is deadly.
A couple of good examples of this in our portfolio are the leadership teams at A-Mark Precious Metals (AMRK) and Unit Corporation (UNTC). We’ve really grown comfortable with the incentives for each management team, their track records, and their approach to capital allocation, and appreciate the consistent messaging from each team.
You tweet about a pretty diverse universe of stocks – ranging from a fast-growing restaurant chain (CAVA) to a microcap Pennsylvania coal miner (CSO.V). How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?
I talk to a lot of people, read a lot of stock pitches, and try to assemble a “coverage universe” of ideas I find interesting. Some are actionable while others deserve to be revisited in a few years. Some are multi-decade value traps that eventually have their day – like P&F Industries (PFIN) which recently got bought out at a >100% premium. I’ve had that on the list for years but didn’t own it on the one day that mattered. Regardless, having a coverage universe lets you react to developments directly and not just pile into “popular unpopular” ideas that so often make the rounds.
Corsa (CSO.V, CRSXF) hit my radar in early 2022 when metallurgical coal prices went through the roof. The stock proceeded to sell-off because they signed sales contracts well below the elevated spot prices. I put it on the watchlist, and when they signed good 2023 contracts no one cared because the sting of the year prior was still fresh. Even after recent operational challenges, my initial investment has doubled, and I anticipate additional upside in the coming years.
Cava Group (CAVA) was a fun setup to review. I’ve been eating their food since they opened here in the DC area. A lot of vocal value investors were salivating at the opportunity to short the IPO, and I wanted to lay out why it might not be as egregiously priced as people expected. It’s an expensive business for sure, but the concept is much more profitable and scalable than the oft-compared Sweetgreen (SG). It’s down from peak, but still up around 50% from where it went public.
At the end of 2020 – I was fortunate enough to have someone recommend Destination XL (DXLG). No one was tracking a beaten-up retailer with a long history of underperformance. However, the company finally got its act together right into Covid lockdowns, then got a surprise index delisting, all while conservative assumptions showed they had the liquidity runway to survive:
To be clear – it’s rarely this easy. Most stocks that are discarded or beaten up have earned the punishment. That said, passive flows drive so much buying and selling in today’s market that opportunities are created for patient investors.
Seneca Foods (SENEA) was kicked out of the S&P 600 this year and compounded the selling with a bad quarter of significant inventory build. Several people flagged it on Twitter, and it ran from the 30s to the 50s on earnings recovery. The stock was picking up more eyeballs after a recent deal with B&G Foods (BGS) for their Green Giant brand. A stock is less interesting to me when it appears in a bunch of value fund letters, but there’s alpha to generate if you get in front of the moves.
Small/microcaps have broadly underperformed the S&P 500 index for the last decade. Why is now a good time to invest in smaller companies?
Well, I’ll start by noting that smaller companies are often not good investments. There’s a reason that most historic index returns come from a very small subset of stocks. The more time I spend with small stocks, the more I become skeptical and cynical. There are plenty of opportunities, but there are more bogeys. I think the proliferation of PE buyout funds has reduced the quality you find in the market today, compared to the early days of Benjamin Graham and Uncle Warren buying growth stocks at bargain multiples. If you think you’ve found something, it’s very important to think about why such an opportunity might exist.
That aside, I like that passive investing and flows are dominating the market today, creating opportunities in stocks if you’re patient. As small caps continue to be sold off indiscriminately, you’ll find more opportunities. Russell rebalancing, tax loss season, earnings over-reactions, dividend cuts, bankruptcy emergence, and spin-offs all create opportunity.
I’m not confident that we’re heading for the golden age of small/microcaps, just that there will always be misunderstood situations that can be exploited.