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Idea Brunch with Jon Cukierwar of Sohra Peak Capital Partners
A masterclass in off-the-beaten-path investing
Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Jon Cukierwar!
Jon is the Founder and Principal of Sohra Peak Capital Partners, a concentrated, long-term-oriented public equities investment partnership he launched in July 2021. Prior to founding Sohra Peak, Jon worked at Phoenician Capital, a New York-based hedge fund founded in 2007, managing over $200 million in assets. Previous to that, Jon had begun his professional investing career as an analyst at Robotti & Company, a New York-based hedge fund founded in 1983 by Bob Robotti, managing over $500 million in assets. Accredited Investors can access Sohra Peak’s letters to partners at the firm’s website here.
Jon, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Sohra Peak Capital Partners?
Many thanks for having me on Sunday’s Idea Brunch, Edwin. I launched Sohra Peak Capital Partners in July 2021, which you can call a longstanding culmination of my interest in investing. Going all the way back to college, I’d just wrapped up my sophomore year when I encountered probably the greatest stroke of luck of my life. I happened to meet a Columbia Business School professor at a Manhattan event who was kind enough to share with 19-year-old me his EMBA syllabus. I got to reading Buffett, Graham, and Fisher, and quickly realized that “value investing” in the sense of buying shares of a business for much less than what it is worth made all the sense in the world to me. My long-term goal became to one day be in a position to manage money and become a “great” investor. Working backwards, I knew that meant I would have to learn from already-great investors, so getting a job under a manager with a great track record and a philosophy along the Graham-Buffett spectrum became my near-term goal.
After college, I landed a job at Citi in NYC doing Corporate M&A, but frankly always viewed that as a stepping stone to breaking into value investing. The turning point came one night at the office when I decided to Google “list of investment funds.” A generic website had an Excel sheet of 10,000 U.S. hedge funds with the only filter being state, which narrowed the number down to about 1,000 New York funds. I spent three weeks of downtime working through this list copying and pasting each company one by one into Google and recording who they were and what they did. Eventually, I narrowed the list to fewer than 10 investment managers I’d like to work for, and cold emailed them all. One of the responses came from Bob Robotti, a renowned value investor with a 30+ year track record of beating the market. He agreed to meet, we met, and he extended to me an offer to work for about as close to “free” as possible. The “I’d work for you for free” adage suddenly became a real decision that I had to make. After weighing this tradeoff with the long-term benefits of learning in an environment of great investors, I accepted his offer. In hindsight, it was the best career decision I’ve ever made. Bob is as terrific as they come, and the learning opportunity proved to be once in a lifetime. Since then, I’ve been investing professionally, and have watched my investment approach continuously evolve. My last three years prior to launching Sohra Peak were spent at Phoenician Capital, where I learned a great deal under another manager who sported an excellent long-term record.
So, yeah, launching Sohra Peak Capital Partners has been everything that I’ve been working towards for some time coming to fruition. It has been a fulfilling journey so far and I am quite excited about the partnership’s prospects ahead.
You heavily invest in small-cap companies overseas. Why?
While my investment approach is global in nature including the U.S. market, you are correct that my holdings are meaningfully weighted towards internationally listed companies. My penchant for small-cap, overseas companies can be broken down into those two precise categories of small-cap companies and overseas companies. Where these two categories intersect is where I am most often finding wide disparities between price and value. Let me explain.
Small-cap market inefficiency is widely documented. Being among the first investors to study an unfamiliar micro- or small-cap company, as opposed to being the 10,000th investor to study a well-known large-cap company, terrifically improves the probability that the investor will uncover valuable data points that are not yet reflected in the stock price. I looked up exact data using Capital IQ last June when I was preparing to launch the partnership and I found that the average U.S. large-cap company, defined as possessing a market cap above $10B, had 26.1 sell-side research analysts covering its stock. In contrast, many micro- and small-cap companies have zero research analysts covering them at all. Sometimes they might have one or two analysts from second-rate research shops, but that is it. Therefore, the odds that I should find a mispriced investment that can deliver above-market returns improves dramatically.
This phenomenon has also been evidenced statistically dating back almost a century. The Dartmouth data library provided by Kenneth R. French, the father of CAPM and the three-factor model, shows that since 1927, equally weighting the smallest decile of companies in the U.S. would have averaged a 15.72% compounded annual rate of return, outperforming the largest decile companies by more than 6 percentage points annually. This difference in returns exists because of the information inefficiency discussed but also because of the structural reason that micro- and small-cap stocks are largely uninvestable by large U.S. fund managers. As of 2017, the top 500 U.S. asset managers managed on average $20B of equity. Books of this size mathematically cannot buy micro- and small-cap stocks that will be meaningful to their portfolios because of insufficient size and liquidity. Low sell-side coverage upon which managers often rely, and in today’s age low alternative data coverage, also act as deterrents to larger managers towards buying these smaller companies. This creates an opportunity for investors in micro- and small-caps to buy before much of Wall Street can. Then, as the eventual winners among the small-cap companies grow their profits over time, many eventually become large enough to attract ample sell-side research coverage and become more liquid, making them much more investible for large U.S. fund managers. This increases the likelihood that they will become priced efficiently, to the benefit of earlier investors such as ourselves. For these structural, recurring reasons, I believe it will remain a competitive advantage to hunt for opportunities in small-cap companies for many years to come. Although companies are electing to become public at later stages today than they have historically, my experience indicates that while the pond has shrunk, there are still plenty of under-the-radar small public companies today that are building great businesses of the future. And internationally, small companies have largely not seen the VC boom that we’ve seen in the U.S. and many still go public at very early stages relative to U.S. companies.
International market inefficiency is something I have learned about from experience. Simply put, internationally-listed stocks are sought after by fewer investors and, all else equal, are typically available at lower valuations and more likely to be inefficiently priced. If you take a look at any given point in recent history, the average Cyclically Adjusted Price-Earnings (CAPE) ratios for international stock markets are typically lower, and frequently much lower, than the CAPE ratio of the U.S. market. I am not talking about nascent or emerging nations either, but strong developed nations such as Canada, Australia, the U.K., the developed European nations, and others. Of course, there is good reason why investors pay higher prices on average for U.S.-listed stocks than for stocks listed in other developed nations including higher demand for dollar-denominated assets, high geopolitical stability, higher comparative returns on equity, and other reasons. But, some unquantifiable percentage of the difference in valuation between U.S. and other developed nations I believe is due to home bias, or the bias for people to invest a disproportionately high amount of their portfolio in their home nation while underweighting stocks listed on foreign exchanges. The result, I have found, is far less documented but quite similar to the disparity between small-cap and large-cap stocks, where internationally-listed stocks of similar profiles to their U.S.-listed equivalents receive far less research coverage and are significantly more likely to be inefficiently priced.
The other benefit of giving yourself freedom to invest globally is the substantial expansion of your investible universe. As of last July, using reasonable criteria such as a minimum daily volume threshold, I found that the number of companies that met my partnership’s investible criteria in the U.S. was 2,819, whereas globally the number was 14,728. Increasing your investible universe by such a high order of magnitude is of immense value. Not only is your overall opportunity set bigger, but from my experience, the quality of your newly added opportunity set is higher, too, since internationally-listed companies are more likely to be overlooked than their U.S. counterparts, especially the micro- and small-cap companies. For these reasons, I believe that growing the size and quality of your opportunity set reduces the need to compromise investment standards, quells the temptation to chase the complex, and ultimately improves your long-term return potential. This also means that a portfolio with this investible universe seeking the best opportunities possible should be expected to invest 80% or more of its capital in international opportunities. Consistent with this notion, over 80% of my portfolio is invested in businesses with core business operations overseas, mainly in developed nations.
To quote one of the all-time greats Julian Robertson, “One of the best ways to do well in this business is to go to areas that have been unexploited by research capability and work them for all you can. … In baseball, you can hit 40 home runs on a single-A-league team and never get paid a thing. But in a hedge fund, you get paid on your batting average. So you go to the worst league you can find, where there’s the least competition.” I agree with his view unconditionally.
Can you please tell us more about your investment framework?
Sohra Peak makes long-term, concentrated, high conviction investments. Forming high conviction views about what a business’s future will look like requires deep fundamental research. The good news is, the cheaper the price you pay for a truly durable, growing business, the less certain you need to be about its future free cash flows to still avoid losing money on your investment. It is overplayed, but Buffett’s rules numbers 1 and 2 about not losing money really are essential. Much of investment success is winning by not losing. I prefer both, to have as much conviction as possible about a company’s future free cash flows and to also pay a cheap price. Not many of these “no brainers” exist out there, though having a global investible universe helps tremendously. Investors tend to exhibit overconfidence bias in their ability to forecast the long-term future of a business 10 years or 15 years out, but they do it anyway, despite there being few businesses in the world that anyone can forecast 15 years out with confidence, especially as technology changes today’s business models at a faster pace than ever before. I tend to keep my time horizon to between 3-5 years, and in exceptional cases 7 years. This still means that as long as a business continues executing and the valuation remains reasonable, I’d be thrilled if I ended up holding my portfolio companies for many, many years, perhaps decades. As a hypothetical example, if you can pay 10x trailing free cash flow for a business that you feel quite certain is going to grow its free cash flows per share by +20-30% annually over the next 3-5 years, then you are almost certainly not going to lose money, and will probably make quite a bit of money. You don’t need to take on the added risk of forecasting beyond 5 years in this case to justify your investment. A handful of my investments to date have met similar profiles.
This also means that, while I build full-fledged financial models for every holding, I am looking for companies where the price and value disparity is so obvious, you don’t need a complicated spreadsheet to tell you that a given business is a good investment. Building financial models are important because they allow you to forecast future financials congruent with a company’s unit-level economics, to keep growth forecasts grounded with cash realities, and to keep easier tabs on future Owner’s Earnings scenarios, as a few reasons. Models provide me with high utility. I don’t rely on them as heavily as others might for valuation, though. If you are convinced a company is trading at 4-5x its free cash flow in 1-2 years, you don’t need an Excel model to tell you that this investment is probably going to do very well. And, if you do need an Excel model to tell you that something is a smart buy or not, then the opportunity is probably not near obvious enough, and you probably don’t have much.
My investment framework is built around this long-term, high conviction, no-brainer investment approach. Assessing business quality, management quality, and reinvestment opportunity are of paramount importance. Business quality includes elements such as competitive advantage, unit economics, and returns on incremental invested capital. Management quality includes elements such as alignment, demonstrated skill, ambition, culture, and integrity. Business and management quality are equally important, and deeply entrenched with one another. A business operating in an industry with notoriously poor economics can seldom be saved, even by the most talented of chief executives. Likewise, almost any business that swaps high-quality executives with low-quality ones will see its competitive position and results erode over time. Warren Buffett has quipped that some companies like Coca-Cola have competitive positions that are so strong that they could withstand a ham sandwich being appointed as CEO. I am not confident that my ability to assess business quality is as good as Buffett’s, so I place a strong emphasis on management quality. Reinvestment opportunity is essential for long-term investments because a business needs the ability to reinvest most or all of its free cash flows into high returning opportunities in order to compound its intrinsic value per share. The ideal high business quality, high management quality company would also have a large total addressable market that offers the opportunity for high magnitude, long-duration growth. Tying everything together is price paid and value received. Finding the most obvious disparities between price and value, where value is the net present value of future free cash flows, will always be the partnership’s north star criterion.
What are some of the common red flags or positive signs you look for in your research process?
There are many examples of common red flags and positive signs to be found on both sides of the aisle.
Let’s start with some of the positive signs. Because I am seeking to own companies for years, I tend to look at first glance for attributes that suggest a durable, growing company with aligned, capable management. Some attributes that might evidence this include a long history of revenue growth, stable or growing margins, high and consistent returns on capital that suggest the existence of a competitive advantage, and high insider ownership that demonstrates alignment of interests, to name some. Being able to quickly understand what the company is in the business of doing is important. The simpler, the better. Chasing complexity or fooling yourself into digging deeper into a company with a business model you don’t quite understand, just because the numbers look good, can be perilous.
If a company has a demonstrated history of compounding free cash flow per share over a material period of time, barring certain exceptions, it is imperative to me that the same top executives who were responsible for that performance are still leading the company, and are still hungry to continue winning. A demonstrated history of success or evidence of a company building towards something great is essential to me because, if there is little or no track record of these managers succeeding at this company or at a similar company, the only alternative to predicting future management success is to attempt to qualitatively judge management. There is little evidence that investors have consistent success qualitatively judging management, and in fact, I think this can be dangerous. CEOs are typically excellent salespeople, and psychologically speaking, humans by nature are optimists. If an investor likes a business plan, they are also often ready to be sold. I prefer to see hard evidence that top management has an enviable track record or is well on their way to building one.
Founder CEOs have received an uptick in adoration over the past several years, but for many of the right reasons. All else equal, compared to an externally hired CEO, a founder CEO tends to have significantly higher ownership in the company, a stronger personal interest in seeing the company succeed, a stronger influence over the company’s culture, and a better understanding of the intangible competitive advantages unique to the company, all of which under the right leader I believe are advantages. At the same time, it is not a one-size-fits-all criterion. For example, the CEO of a 10-person company might not the best CEO of a 1,000-person company, so each situation should be examined for its quirks. Additionally, I have seen successful case studies where the founder CEO leaves their perch due to exceptional circumstances (transition to Chairman, deteriorating health, death) and an internally promoted hire, typically a longstanding employee, succeeds the CEO role and picks up where the founder left off.
There are many companies that might meet the criteria above but, for unique reasons, are not screening well at the moment. While screening for strict criteria is quite efficient, an A-to-Z approach is best for finding the diamonds in the rough.
Red flags are everywhere. If I had a dollar for every red flag I’ve come across during my career, I’d be running a billion-dollar partnership. I analyze companies with a skeptical mind, with a suspicious mind. There are obvious areas of the market where red flags are almost expected. For instance, OTC stocks or the SPAC boom that has taken place over the past two years. SPAC incentives tend to be ludicrously bad, and many SPACs have seen spectacularly poor returns in recent months. Generally, qualitative red flags could include items such as annual reports that paint the company’s purpose as an obvious money grab, large acquisitions or new product segments that don’t seem to make much sense, poor capital allocation, management optimizing for metrics that are more likely to destroy long-term value than to build it, or externally-hired CEOs with bad track records and bad incentives, to name a few. Quantitative red flags could include items such as heavy insider selling, poor and declining returns on capital, heavy customer concentration, a trend of revenue decline, a trend of margin decline for the wrong reasons, or overleverage, to name a few. All of these red flags on the quantitative side and many on the qualitative side are superficial and easy to spot within the first hour or two of digging into a company.
There are deeper layers of red flags as you dive into the research process which are harder to spot but can be of grave importance. For instance, using a blackline tool to compare a company’s annual reports year-over-year for all additions, removals, and edits of language. Through this practice, I have found unsettling changes to risk factors, revenue recognition policies, and auditor opinions which have turned potential longs into untouchables. I use a host of other checks and balances that a short analyst might use such as looking for inexplicable changes in auditors, curious correspondence filings between company and regulator, operating cash flows that consistently fall below net profit for unclear reasons, and stomach-churning lawsuits involving members of management. These are all practices, and then some, that you must be quite familiar with as the author of The Bear Cave, Edwin!
Some of the biggest red flag gems that can be uncovered, which are probably interchangeable as risks, occur when you understand the company well enough to convincingly accuse the CEO or other management figurehead of lying about a key element in the narrative. These findings can be powerful enough to underwrite the company as a convincing short. For instance, understanding the economics of a company well enough to realize that the CEO’s long-term operating margin target is unattainable, or realizing that key KPIs the CEO likes to tout are highly misleading.
One more interesting red flag, and this probably doesn’t get talked about enough and might be a controversial discussion point, is what I see as the danger of social proof bias in investing. One interesting phenomenon I have seen is an unusually high occurrence of blow-ups in stocks where many, many extraordinarily smart investors are long at the same time. Although there are a handful of high-profile case studies of this, it has been especially powerful for me to witness several examples of this myself in recent years. I truly think it boils down to the fact that, if one or more investors that you hold in high regard invest in a company, you immediately become biased and become less likely to try and assess what can go wrong with a lens of intellectual honesty. Social proof bias is difficult to overcome. How can a dozen highly successful investors all get blindsided by the same company? I can’t think of any other explanation. When I see a stock nowadays held by people I hold in high regard and/or developing a “cult” following, while I used to light up with excitement, I now become almost extra cautious. Many of these stocks will go on to become great performers, but you have to be careful to not let your bias get in the way of your analysis. One good solution to prevent this is to screen for your own ideas.
What advice do you have for an individual investor who wants to start investing for the long-term in high-quality companies overseas? How should they start? What broker should they use? What are some common mistakes others make?
I would say that individual investors should always first try and reflect upon what type of investors they are. As written in The Money Game by George Goodman, “if you don’t know who you are, this is an expensive place to find out.” International investing carries the risk of further complicating this, because the further away from America you look, the more different humans and cultures can be in ways that you can’t fathom without visiting those countries yourself or getting to know people who are from those countries. For that reason, I strongly prefer international companies with simple business models, monopolies, consumer staples, and/or highly recurring revenue, to discount this risk. For example, if you see a business model in another country that succeeded in the US and you think you have found “the next [fill in the blank successful U.S. company]” in that country, proceed with caution. While I don’t traffic in large-cap companies, international large-caps are a good way to help avoid this risk since their business concepts are more likely to be already proven, though of course the trade-off is expected return on investment. Overall, though, if you pick your spots well, I think there is good opportunity for individual investors. Even if you expand your investible universe just over the border to Canada, I’ve found there is very little culture risk as described above, and small-cap companies there are less efficient than their U.S. counterparts.
To start investing overseas, the best retail option I can recommend would be Interactive Brokers. For years, they have allowed retail investors access to invest in stocks listed on many international exchanges. I believe just the other week they launched a new “Global Trading” app that makes it even easier for retail investors to buy internationally listed stocks. This is a neat development because it is a step towards normalizing global investing and giving people the opportunity to do something about home bias. From a cynical point of view, I should be keeping quiet about such developments, because the fewer investors that are looking overseas, the more alpha that is available to me. Joking aside, I hope more brokers such as Fidelity and Schwab follow suit.
Jon, 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?
Many of the early things I do are look for the positive signs and red flags we discussed earlier. I suppose taking a step back, I run my own screens using downloaded company data on Excel across my 14,000+ company investible universe. I typically screen by country. My experience has taught me to realize that different countries experience different macroeconomic impacts in different years than others, so once you familiarize yourself with these patterns, it becomes much easier to pick up on hiccups in the histories of company financials. Knowing a country index’s valuation multiple also helps to keep a specific company’s valuation multiple in context. For example, a solid-looking company trading at 18x trailing P/E might look interesting relative to the S&P 500 which carries a P/E ratio of 26x, but might look slightly expensive relative to the U.K. FTSE Index which carries a P/E ratio of around 15x. If you screen by country, it is easier to observe these patterns and enables you to focus more of your attention on the business itself. I eventually make it through the entire screen, but I start by tightening my filters (about 15 in total) for companies with the most favorable metrics. Then, I start plugging companies one by one into my research platform.
During that first hour, I will run through the financial statements looking for some of the items we discussed. Is the company a serial acquirer? This is not completely exclusionary, but M&A has a questionable track record on value creation. For every one smart acquisition by an otherwise healthy organic grower, there is at least one foolish acquisition pursued by management for all of the wrong reasons. Many people like to look at ROE, but I prefer at first glance to look at ROIC. Even If I don’t know much about the company, if it has posted consistently high ROICs for years, then that suggests to me that the company may possess one or more sustainable competitive advantages. In a perfectly competitive environment, a company is supposed to earn its cost of capital, so a company persistently earning significantly above its cost of capital must possess a qualitative element that is allowing it to earn higher profits than its competitors. It is my job to find out what that competitive advantage might be. There are a handful of variables that should be taken into account when examining ROIC. For example, ROIC can be misleading for companies that consistently return capital through dividends. Sure, that company might have a competitive advantage, but a consistently high dividend payout ratio implies either its reinvestment opportunity is limited or, worse, management would rather distribute most or all profits as dividends than compound those profits in light of a durable competitive advantage. The best scenarios in this realm are companies with high sustainable ROICs that have the opportunity to and are always reinvesting 100% of their free cash flows.
If the company is mildly interesting, including trading at reasonable valuation multiples relative to growth, I will visit the company’s IR website. Occasionally, depending on the country I am examining, I have to check if the company’s filings are available in English. If they aren’t, and since I am not fluent in any other languages (my hands are full enough with the English language), then the company is simply uninvestible. Despite the proliferation of high-quality, affordable translation services that now exist to translate annual reports and other key documents, if the documents aren’t filed in English, then the company’s IR and management contacts often don’t speak English either. Should crisis strike, not being able to communicate with anyone at the company is a non-starter for me. On the IR website, if there is an investor presentation, I read it. I remind myself not to be swayed by how sharp the PowerPoint might look, or to be discouraged by how downtrodden it might look. Especially within small- and micro-caps, companies are less likely to direct resources towards hiring professional designers to spruce up their investor decks. Many spectacular returns have followed crummy-looking decks, and many crummy returns have followed spectacular-looking decks.
I’ll also typically visit the company’s website to view their products/services from a customer’s point of view. I’ll read news articles on Google, watch videos on YouTube, find reviews on trustpilot.com, etc. I’ll do what I can, quickly, to try and get a more realistic sense of how a consumer might view this product/service before I get too swept up in the numbers or what the IR website is selling me. Almost every management team prepares its IR documents as sales pitches (the rare ones that don’t, put a pin in those companies). The consumer’s opinion of the product is paramount. Often times there is a large disconnect between what management wants you to believe about the product and how consumers actually view the product. I’m sure every reader can think of such an instance.
Do you do anything that few others do?
I would like to think so. From a high-level perspective, I think that my partnership’s investment approach is pretty unique. Combining the elements of concentration, global mandate, and micro- through mid-cap is not common at all based on my observations and conversations with others in the industry. The way I invest is a reflection of where I see the most market inefficiency and where I can earn the highest returns on my own capital, given that I have almost my entire net worth invested into the partnership. I’ve learned that it also happens to be highly differentiated.
From an idea generation perspective, I enjoy sourcing many of my own ideas. I certainly derive value from having a wide network of investors whom I perceive as smart, and I hope they derive some value from me too. The highest returning investments I’ve uncovered by a wide margin though, both at this partnership and prior, have been companies I’ve found by screening on my own. One of the more surprising revelations to me when I entered this industry was how often people rely on others for idea generation. There is nothing wrong with this when done in an intellectually honest way, but I’m not so sure that is always the case. As I mentioned earlier, original idea generation does help because if nobody you know owns or has seen a company before, it forces you to conduct a more honest analysis. Screening takes time, and it can be frustrating going through hundreds and hundreds of companies without finding anything exciting, but eventually you do find those gems.
I’d also like to think that, from a research perspective, my due diligence efforts go the extra mile. In micro- and small-cap land, much of the data hedge funds often rely upon such as sell-side research, expert transcripts, and alternative data simply don’t exist. This makes it harder for an investor to gain conviction, which is terrific, because it means opportunity for those who are willing to roll up their sleeves and find the important answers for themselves. Somebody smart once told me that there will always be lucrative opportunities by doing the tedious things that nobody else likes to do. I think there is a lot of truth in that. I just came back from a week-long research trip in a quite overlooked country. Each day, I had a full agenda, and I was prepared. I met with three management teams, including two companies of interest and one of a competitor, all at company headquarters. I spent two half-days traveling with management-arranged company employees to visit each company’s warehouses, branches, and customer sites where I was given tours and full range of Q&A to better understand the specifics of how the businesses worked. For one of the companies of interest, I spent two days dedicated to walking all over town visiting 38 unique stores belonging to the company itself and 11 competitors’ brands, comparing specific data points. For another company of interest, I am in the process of conducting online surveys with up to 700 B2B customers through sources that I was only able to learn of through my conversations with employees, and with questions that are now only apparent to ask thanks to the learnings from my trip. This boots-on-the-ground diligence allows me to confirm or disconfirm critical hypotheses about my thesis. Not only were my hypotheses confirmed, but I learned a great deal of new, relevant information that would not have otherwise been available to me, and my conviction levels increased significantly. If you are serious about deep fundamental research, then there are valuable data points you can’t learn from your computer screen in NYC. As a mentor of mine phrases it, there is no substitute for “tasting the ice cream” that your company is selling.
The top management team of one of the companies I visited told me that I was the first U.S. investor to ever visit them. In this instance, I can say with certainty that this is something not only that few others have done, but that no others have done. The entire top management team including the CEO spent four hours with me answering all of my questions. I was floored. Being among the first investors to visit these small-cap companies in foreign countries is how I imagine Peter Lynch might have felt in the 1970s and 1980s when he would visit U.S. small-cap companies that were off the grid. One company he visited if I recall correctly required a plane, a boat, and then another boat to reach headquarters, where he would learn that he was the first investor to show up at their headquarters in years. In his words, “When a company tells me that the last analyst showed up three years ago, I can hardly contain my enthusiasm.” Being the first U.S. investor to ever visit a company was a good feeling for me because it reassures me that my competition amongst other investors is on the thinner end of the spectrum and that there is a likelihood that I can develop a profitable variant view.
What are two interesting ideas on your radar now?
A couple of interesting ideas that I’ve talked about are Goeasy Ltd (TSX: GSY), a $1.7Bn USD market cap company listed on the Toronto Stock Exchange, and Mader Group (ASX: MAD), a $0.4Bn USD market cap company listed on the Australian Securities Exchange.
Goeasy is a Canadian non-prime consumer lender. Since 2011, management has compounded EPS at over +30% per year and improved operating margins from 8% to 37%. The non-prime consumer loan market in Canada is quite large with a TAM of CAD $186Bn, of which Goeasy is one of two dominant installment lenders and currently only captures a 1% market share. The history of the industry is fascinating, but in short, this 100-year old industry practically reset after the Great Financial Crisis, and Goeasy’s management was savvy enough to enter by offering a personal loan product to non-prime consumers with enormous demand but little supply. These are consumers whose credit is too low to receive sufficient loans from traditional sources such as banks and credit cards, but good enough to avoid paying exorbitant APRs to payday lenders. What is perpetually misunderstood about this industry is that, during recessionary periods, loan charge-offs among non-prime consumers are far more stable than among prime consumers. Many investors consider this to be a cyclical business, but that is far from the truth. Goeasy enjoys several advantages over competitors. It has access to significantly lower borrowing rates thanks to its relatively long underwriting history, its brand awareness and trust amongst its high-touch consumers is best-in-class, and they have significantly more proprietary data than peers which allows them to underwrite better loans. Management is constantly thinking of new products to introduce to its customer base, which should further drive future growth in addition to current products already tackling a large TAM. Once a customer enters the Goeasy ecosystem, they are becoming increasingly more likely to take up additional loans as Goeasy adds more products to its catalog. The company currently trades at a trailing multiple of 13x normalized EPS and I expect it to grow EPS at a rate of around 20% over the next three years.
For readers seeking a more complete version of my Goeasy thesis, you can find it by visiting the following podcast link.
Mader Group is an Australian-based, asset-light maintenance service provider for heavy on-site mining equipment. Founded in 2005, the company is by far the largest within its maintenance service niche with 38% market share in its core Australia segment, and has compounded its revenues at a +42% CAGR over the past 12.5 years. Its namesake founder Luke Mader achieved industry dominance by solving a problem for mine site operators much more efficiently and at a lower cost than the industry incumbents. 17 years later, the competitive landscape remains almost as docile as it did back then, where the second-biggest non-OEM competitor has just 1/8th the number of technicians as Mader Group. Despite its high market share, the company is still growing rapidly with recent expansion into the U.S. and Canadian markets, whose collective TAM exceeds that of Australia and whose competitive landscapes appear just as ripe for disruption as Australia’s. Early growth rates in North America have been in the triple digits. Furthermore, the company recently announced expansion into several new maintenance verticals including power generation asset maintenance, railroad maintenance, fixed plant and specialist services maintenance in new Australian east coast geographies, and a component exchange program. Mader Group earns a company-level 27% return on capital and most recently grew its net profits at a +39% YoY growth rate for the half year ending December 31, 2021. Insiders own 77% of shares and the CEO stands to earn an estimated $10MM+ in share awards if organic net profits compound at a +25.4% rate or higher through FY 2026. The company’s stock price has run up significantly in recent months, so it isn’t as cheap as it recently was and currently trades at a trailing multiple of 26x EPS. I expect it to grow EPS at rate of around 20-30% over the next three years.
For accredited investors seeking a more complete version of my Mader Group thesis, you can find it in Sohra Peak Capital Partners’ Q3 2021 letter to partners.
There are a couple of new, little-known ideas on my radar that I am awfully excited about. At some point, I’d love to talk about them.
What would you like Sohra Peak Capital Partners to look like 10 years from now?
I’d like to change very little. Perhaps expand my team and naturally evolve as an investor, but keep unchanged my goal of compounding our partners’ capital at high rates over the long-term. I thoroughly enjoy investing. There’s nothing else in the world I’d rather be doing. It’s become both a profession and an obsession. Each day doesn’t feel much at all like work. If we were to suddenly live in a society where all occupations yielded identical incomes, I would still choose to wake up each morning and practice investing. When Sunday’s Idea Brunch becomes a smashing success in 10 years, hopefully you will still have me as a guest!
Jon, thank you for the great interview! What is the best way for readers to follow or connect with you?
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