Idea Brunch with Rajiv Tarigopula of Calvera Capital

Rajiv Tarigopula shares his research process, thoughts on insider buying, and four interesting ideas

Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Rajiv Tarigopula!

Rajiv is currently Managing Partner at Calvera Capital, a long/short equity fund. Rajiv was previously CEO of a healthcare revenue cycle company he acquired, led business development for a public biotech company, and began his career on the investment team at Blackstone.

Rajiv, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Calvera Capital?

Edwin, thanks very much for having me. I was born and raised in St. Louis, Missouri and still have family there today. Shoutout to all the Cardinals fans reading this!

I launched Calvera Capital earlier this year with a longtime colleague of mine, Guy Dietrich. We met at Harvard almost a decade ago – he was doing a fellowship as I was finishing my economics studies and a master’s degree in computational science & engineering. Guy has been a fantastic mentor of mine for many years and brings incredible experience from his 40-year career on Wall Street. We’ve invested together informally as I progressed in my career and went to Stanford for my MBA. We’ve refined our strategy after deep analysis of where we can consistently generate alpha and are committed to building a world-class investment management business together. Our mandate is to allocate capital to achieve the highest returns for the lowest amount of risk.

Our investment approach is inspired by insights from my time on the investment team at Blackstone, where I observed larger hedge funds and institutional investors managing such sizable amounts of capital that their minimum check size constrained their investable universe to larger capitalization companies. There’s significantly less efficiency in small and mid-cap companies, and we are more often competing against retail investors and passive funds rather than professional investors.

As a more nimble investment manager focused on finding public market mispricings, I like this segment of the investment universe. Great distortions in price relative to a company’s intrinsic equity value occur frequently, and as a result, we reach conviction in our investment decision-making on the back of deep fundamental research.

Wall Street typically focuses a lot on modeling and financial statements. You are unique because you have a Wall Street background but have also been in the trenches founding and growing companies. Has being in the trenches changed your view on investing and do you see common themes Wall Street misses by focusing on numbers too much?

A big theme of ours at Calvera is relying on quantitative decision support. While we’re fundamental investors at our core, we’re big believers in data-driven decision-making. Acquiring and operating a private company has certainly influenced my view of what it takes to run a business. A few takeaways: operating a company and executing against a plan can be extremely challenging and requires enormous discipline, particularly in the environment we’ve experienced over the past several years. We love investing in high-quality management teams who are quick to effectively adapt to changing environments. It’s not just about the CEO, it’s ultimately about having the right people throughout the organization. Managers, team leads, board directors, and advisors make the critical difference in success or failure. Having the right partners matters tremendously in achieving great outcomes.

Great leaders who build a data-driven culture and hold themselves and their organizations accountable drive incredible value creation over time; conversely, poor culture can invade every corner of an organization.

We think evaluating management team quality is a critical part of investing in smaller companies. Wall Street can sometimes focus on getting every basis point of pro forma margin modeled precisely when, especially for these smaller companies, it can be false precision.

My experience investing in and managing small companies does give us useful insights in evaluating businesses for our portfolio. It also helps us build rapport with management teams – especially those that have zero or limited analyst coverage and are thrilled when professional investors want to engage.

What are a few interesting ideas on your radar now?

Qurate Retail A shares (NASDAQ: QRTEA) offer a compelling long investment opportunity at today’s $3 billion market capitalization. QRTEA is backed by John Malone and Greg Maffei, who are top decile capital allocators and have focused on shareholder return of capital with billions in special dividends – both cash and preferred stock – over the past couple of years. In fact, the company has returned more than its entire market cap in special dividends since last spring.

The company is perceived in some corners of the value investing community as a value trap or “melting ice cube”. However, it doesn’t screen perfectly by many commonly used investment tools given the nature of its capital return profile and complex capital structure. I think it’s fundamentally misunderstood as the company owns a high-quality portfolio of cash-generating assets with strong brand recognition among consumers – including QVC, HSN, and Zulily. Qurate also has a strong balance sheet with manageable debt levels and has consistently generated double-digit EBIT margins.

Management has executed successfully over the past decade, increasing annual revenue from $9.6 billion in 2011 to over $14 billion in 2020. The company’s gross margin profile has remained remarkably stable over that period, with +/- 200 basis points of variability throughout the past decade. This speaks to the company’s established and stable business model – there’s a lot of noise around e-commerce market share erosion in a post-pandemic environment, but the company has great exposure to e-commerce (at higher margins) in Zulily and other assets.

I’d also note that Maffei, when he was CFO of Microsoft, generated over $1 billion in pre-tax premium income from selling put warrants without ever getting assigned. He’s executing on the same strategy at Qurate as part of a $500 million share repurchase plan. Even if the company gets assigned the shares, it’s an effective share buyback strategy which also benefits long-term shareholders. I think QRTEA should be trading at a much lower 7-10% free cash flow yield, not the >20% pro forma free cash flow yield it’s trading at today.

Another idea on our radar is a company we’ve followed for years – Six Flags (NYSE: SIX).