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Idea Brunch with Lawrence Creatura of PRSPCTV Capital
Lawrence Creatura shares his investment philosophy, research process, and his favorite idea
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Welcome to Sunday’s Idea Brunch, a weekly interview with underfollowed investors and emerging managers. We are very excited to launch our fourth issue with Lawrence Creatura!
Lawrence is the managing partner of PRSPCTV Capital, a long/short equity fund which he founded in 2016. Before that, Lawrence was a portfolio manager at Federated Investors and Clover Capital for 20 years. Lawrence is also the author of Long and Short: Confessions of a Portfolio Manager: Stock Market Wisdom for Investors.
Lawrence, you start your book by recommending that readers consider quitting individual stock investing. You highlight that “most people don’t have the right stuff” to be great investors. What is the “right stuff” and what draws you to investing and gives you the confidence that you can outperform the market?
The “right stuff” is different for different people. It’s like looking at history’s great quarterbacks. The outliers all have something special about them, but no two are the same. Each has a unique strength. Accuracy, strength, speed, longevity, strategy… There is no fixed recipe for getting the ball across the goal line.
I don’t feel particularly gifted in any way. It’s just that over the course of what is now decades, there seems to be a positive feedback loop. I enjoy analysis, so I do a lot of it, which hopefully makes me better at it, which causes me to enjoy it more. And so on. It all gets a bit easier after the first 20,000 mistakes. This is my comparative advantage.
I have only realized this recently about myself, but I enjoy the process of searching for hidden things. As a child, I read books about Houdini’s secrets, the Bermuda Triangle, and buried treasure. My favorite participation sport is orienteering, which is basically running around looking for markers hidden in the woods. When I am golfing, I enjoy looking for lost balls more than I enjoy playing the game, which also explains the quality of my golf game. So “the right stuff” for me, personally, is simply that I enjoy searching. And equity analysis is a complex, never-ending search. It’s the gift that keeps on giving.
There are two really interesting things about trying to produce great investment returns. The first is that there is a huge range of variability around outcomes. You can do a perfect job of analysis, and still lose your face. Or you can do a poor job, and still get lucky. You have to be very careful about what you learn from your successes and failures.
The second thing is that the market is an unstable system. In most endeavors, there are guardrails that help define and determine outcomes. Lawyers have laws, accountants have GAAP, Chemists have PV=nRT, physicists have Newton’s laws. The guardrails for the stock market are set much wider, and sometimes the investing “laws” that we come to believe fail dramatically. The rules change from time to time. Part of the attraction is that it’s a really difficult problem to solve, and for this reason it is never boring.
Your “right stuff” can be totally different. Just like the quarterbacks. You can think of all the usual things… Being smarter, faster, better networked, etcetera. However, it is important that you have some sort of comparative advantage, otherwise you are entering the battle unarmed.
What is an interesting idea on your radar now?
Let me begin by saying that this is not investment advice and everyone should do their own research.
Canada Goose (NYSE: GOOS — $4.31 billion) seems interesting here. It has been in stock market purgatory since before the pandemic. In calendar 2018 they did $516 m (Canadian dollars) in revenue, and the stock peaked at $70. This fiscal year they are expected to do over $1 billion, and the stock is at $36.
Some investors believe that it is not a legitimate global brand. However, brands move in cycles, and some of the strongest brands today including Timberland, Lululemon, Levi’s, and The North Face, all had some tough innings. Today it seems like Canada Goose’s tough innings are behind them.
Global brands are incredibly hard to create in today’s world, as all of our attention is being fractured into ever-smaller personalized bubbles of awareness. Mass advertising is dead, and even the largest legacy advertising opportunities are all now shrinking every year. You only have to look at viewership trends of the Oscars, the Emmys, MTV Music Awards, or the Superbowl to confirm this trend. For this reason, existing global brands, like Canada Goose, are increasingly valuable.
During the pandemic the company made a morally strong (but financially uncertain) decision to redirect all of their production from fashion wear to scrubs and patient gowns, saying “Now is the time to put our manufacturing resources and capabilities to work for the greater good.” Recently they have also announced that they are abandoning fur as a raw material, which is another step in the right direction.
Looking forward they are moving to fill out their representation geographically by expanding to new territories, and extending their product line to non-parka soft goods. They just announced a new footwear line which will be debuting on November 12th, and this feels like it could be a catalyst.
The company’s production is virtually all North American, and all of their cut and sew occurs in Canada. This means that they should be unaffected by all of the recent supply chain noise.
One risk is that a significant part of their demand growth comes from China, so that is something to be conscious of.
The management team is comprised of perfectionists, who believe in the integrity, performance and aesthetic of their products, fair treatment of their largely domestic workforce, and representation and respect for the indigenous Canadian population.
Looking backward, it seems like the stock is fairly valued for the results it has recently delivered. However, in coming quarters, it seems that the company’s strong ethos, combined with a near-term catalytic product introduction, and an inexpensive valuation relative to similar global brands, should lead to a more valuable stock.
In your book, you also share an analogy that investing is not about what you think, but it is about predicting what others will think in the future. Can you give some examples of how this has played out in some of your past investments?
Understanding the company is less than half of the job. Understanding what others think about the company is part of it too. But understanding what others will think about the company tomorrow is what really matters. This is most important because it has not been priced yet by the market. Getting your perspective forward in time, so that you can see what investors will perceive and believe and feel in the future,… this is very valuable if you are correct.
The reason this future perspective is more valuable than ever, is because it is one of the last sources of alpha that remains intact. When I began my career, information moved into stock prices quite slowly. Peter Lynch could drive by the company’s parking lot, count the cars, and make a reasonable guess about the strength of the quarter. This type of analysis, based upon slow assimilation of information, is now dead. Now a satellite images the company parking lot, computers price the latest insider trade in milliseconds, and natural-language processors scan the conference call for word selection and tone. Everything which has occurred historically, and everything that is happening in real-time, is quantized and priced very quickly.
As an aside, I think this is why traditional fundamental value investors have had such a hard time over the last decade-plus. Their previously dependable sources of outperformance are being scooped by quants.
What has not been quantized yet, however, is the future. Because it doesn’t exist yet. This is what makes it so valuable. So, if our vision of a company’s future is different from everybody else’s, and we are correct, it can be very rewarding.
In the early summer of ’20, we began looking at the boating industry. Recall this was the very beginning of the pandemic, when consumers were focused on where they would get their next roll of toilet paper. The consensus belief at the time was that nobody was going to spend tens of thousands of dollars on a boat during a global medical apocalypse. This was a reasonable description of what was happening in the moment, and the stocks were absolutely obliterated. But at this time, thinking forward, it started to become clear what types of activities might continue despite the pandemic. Outdoor activities. Activities that you do with members of your isolation pod. Activities that you do when you have a lot of free time. Boating seemed like it might be a fit.
We started doing channel checks with boat dealers, and on one of our first calls the store manager said “I can only talk for a few minutes. We are so busy I just had to put my mechanic out on the sales floor.” Hmmm. A few calls later, a salesman told us “My main competition is kid’s sports, and there are no kid’s sports this year.” We ended up calling about 60 retailers, and we quickly understood that the boating industry tomorrow was going to look very different from the boating industry yesterday. But this wasn’t in the data yet… the needle hadn’t moved on orders, sales, inventory draws, or analyst estimates. It wasn’t quantized. It was a spectacular set-up, which ended up working very well for us.
What are some of the first things you do when researching a company? What does that first hour of research look like for you? Do you do anything that few others do?
It takes me much more than an hour to get to a position where I can begin to make a judgement. In order to find something that is mispriced or misperceived, you first have to understand where everyone is anchored.
In the beginning, we do a lot of the normal leg work just to understand consensus beliefs. We go through the K’s, proxys, investor deck, earnings transcripts, sell side research, and then do some Porter-style analysis. I don’t think there is anything particularly unique about our work at this stage, but you have to do it. This stage is like looking at a painting at auction. You might see a very pretty picture, but until you know how old it is, who painted it, its individual history, and what other similar works have sold for, you have no idea why bidding starts where it does. The opening bid reveals current consensus beliefs. It’s the same with stock prices.
A big part of the challenge is that most companies are correctly priced most of the time. Current valuation almost always accurately reflects the most likely version of the future. So you have to look at a lot of caterpillars, and every so often we spot one that looks like it could be a future butterfly, even though it is still priced like a caterpillar. These ones generally have some sort of emerging embedded call option within their businesses. It could be a new product line, or IP-based shift, or a new external driver like a movement in consumer preference. There are many variations.
At this stage we usually contact management, which is where I believe we begin to add more value. I have had over 13,000 management conversations in my career so far. Management teams tell us that the nature of our questions is different than most investors, and this is a big part of our special sauce. We also spend a lot of time coming at the company from the outside, talking to competitors, supply chain, channel partners, former employees, and customers, which gives us a level of microeconomic granularity that a lot of other investors don’t have.
At the end of our process, we assign payoffs and probabilities to different future scenarios for the company, and calculate an expected value. I don’t think one of them has ever been exactly correct, but it is an incredibly useful framework when we roll forward in time and evaluate the status of our hypothesis.
Are there any common red flags or bullish signs you look for in your shorts and longs?
Life is too short to spend it with management teams that don’t tell the truth. There is a line between optimism and deceit, and in a world with more ideas than time, it just isn’t worth crossing.
On the positive side, measures of social velocity have become more valuable in recent years. Tweets, likes, follows, Google trends, and share volume itself are now more important confirmatory signals. This is because as a society we are increasingly networked, and information that used to travel linearly now flows in geometric fashion. Emerging trends always resembled a snowball rolling down a hill, but now the hill is steeper.
Lawrence, any closing words or final thoughts you would like to share with our readers?
I am not certain about this yet, but it feels like the job of analysis is getting a little bit easier. Between the passive allocators who don’t really care what they are buying, the quant allocators who are incapable of looking forward, and the Twitterverse socials whipping stocks around on shallow information, there seems to be a lot of new sources of error in the system. It seems like mispricings are occurring more frequently.
I used to feel lucky if we got one or two really good ideas a year. Now it seems like we are getting one or two per quarter. I am having a lot of fun in this environment, and I am very eager to see how we perform in the future.
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