Idea Brunch with Jad Fakhry of Poplar Point Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Jad Fakhry!
Jad is currently the chief investment officer of Poplar Point Capital Management LLC, a Burlingame, California-based fund focused on microcap and special situation investments.
(The last Idea Brunch was with Ryan Rahinsky of Blue Outlier Capital and the next Idea Brunch interview comes out Sunday, February 5. If you know any great investors we should interview, please hit reply and let us know!)
Jad, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Poplar Point Capital?
I decided to start Poplar Point to invest my money, as well as my family’s money in smaller cap companies. Today, we also manage money for some family offices and private foundations. My family and I are still the largest investors in the fund. I have a background in value investing, so not surprisingly, we have a value-oriented approach. We started out specializing in off-the-run special situation investments like liquidations and merger arbitrage, and while we still invest in special situations, it is a smaller proportion of the overall strategy. Although we are value-oriented, we prefer quality companies that have sustainably high returns on invested capital and are well-managed. Also, we have on average held investments for over five years and today we have held some investments for ten years. Needless to say, we take a long-term approach in our investments.
Can you tell us a little more about your strategy of both small-cap investing and special situations and why those go well together? And what are the necessary ingredients for success in both those fields?
Smaller caps are less researched, especially in technical situations like liquidations, so spending some time understanding more complex investments like merger arbitrage, contingent value rights (“CVRs”), etc can really pay off where the spreads tend to be wider.
I think to be successful investing in small-cap companies, you need to get three things right: valuation, business quality, and management/people. You can get one of these things wrong and it is OK, but if you get two or three wrong, the results—especially in smaller cap companies—are disastrous. When you get all three right, the investment results are much better than in large caps for the simple reason that smaller companies are often extremely mispriced.
You’ve invested in a wide range of diverse microcaps including software (SSNT), pharmaceuticals (ENZN), cement (MCEM), and many others. How do you come up with off-the-beaten-path ideas in an industry with so much groupthink?
The companies we research often have little to no sell-side research coverage, and sometimes the management teams have rarely if ever met with institutional investors. Therefore, we think of our research process as effectively creating the knowledge database on a company, because no one has done it before.
We attend investment conferences, attend annual shareholder meetings, and meet face-to-face with companies. One of the core tenets of our research process is that we need to meet with management before we invest, as well as make sure that all of our upfront industry and valuation research is complete. But, for us, meeting with companies is really important because management always has a huge effect on a business, but this is even more important in smaller companies, especially as it relates to capital allocation.
We also run a screening process to generate special situation ideas and maintain an active database of investable companies in our space that we monitor. We use this so that we can act quickly if there is a dislocation in price/valuation.
Some small companies have reputations for self-dealing, incompetence, lackluster disclosure, nepotism, and putting shareholders second. Are there any small-cap management teams that stand out as great and ethical operators?
We agree with this assessment, and often small companies have serious agency issues. That is why we spend a significant amount of time researching management and the Board, as mentioned above. Monarch Cement (OTC: MCEM) is a $400M market cap vertically integrated cement producer that has done well by shareholders despite having a dual-class share structure and two families that control the company. After visiting with management about eight years ago, we invested and have been pleasantly surprised by Board and Management. They have divested low-return and unprofitable ready-mix divisions and improved margins, with EBITDA increasing from $25M to $70M. MCEM has been paying an increasing regular dividend and has initiated a few sizeable special dividends. They have also returned cash via buybacks and a tender offer and we believe that the Board would ultimately sell the company at the right valuation. In fact, we believe there is strong strategic interest in heartland cement producers like MCEM. With shares trading at approximately 4x enterprise value/EBITDA and about 8x enterprise value/FCF, we believe the risk/reward is attractive.
What are some interesting ideas on your radar now?
I’ve got three off-the-beaten-path ideas I’m excited to share:
1/ Armanino Foods (OTC: AMNF — $115 million) is the leading producer of frozen basil pesto in the US, with a 65%+ market share and growing unit volume 5-10% annually. The company trades for 11x P/E (earnings approximates FCF) and has been growing organic sales over 10%+ recently. AMNF has a dominant position and a real moat around its business, making its 45%+ ROIC sustainable.
The new CEO is aggressively growing the business beyond its core food service channels and has expanded within the grocery/mass retail channels, giving the company a long runway for growth. AMNF has very straightforward capital allocation and pays a growing dividend, with a current dividend yield of over 3%.