Idea Brunch with Zack Buckley of Buckley Capital Management
Zack Buckley shares his approach to small cap investing, insights from visiting China, and his top ideas
Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Zack Buckley!
Zack is the managing partner of Buckley Capital Management, an investment adviser focused on value investing with a concentration in small-cap equities. Since its 2011 inception, Buckley Capital Management has returned 379% net of all fees compared to 215% for the Russell 2000. Prior to founding Buckley Capital, Zack was an analyst at Baker Street Capital. Zack has been featured in The Wall Street Journal, Barron’s, Reuters, CNBC, Market Watch, Value Walk, Business Insider, and the Financial Post, and has also been a speaker at several Value Investing Congresses.
Zack, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and what has contributed to your strong performance with Buckley Capital?
Sure, and thanks for having me! I’ve been investing since late 2007 when I invested a small sum of family money. In high school and college, I was a voracious reader and stumbled across books written by or about Buffett, Graham, Lynch, and others. I originally planned to become a doctor (my dad was a doctor and mom was a psychologist), but developed a passion for the markets, and have been obsessed since. Late 2007 was an interesting time to begin investing, as it wasn’t long until I was down over 30% with the market in 2008 during the financial crisis. Early on it taught me humility and a respect for the markets. The following year, 2009, I was fortunate to return 150% percent investing in a variety of companies, some of which were Chinese small caps. I came across a handful of US-listed Chinese companies which seemed incredibly cheap, so I went long and booked a trip to China to visit these businesses in August 2010. My visit to China quickly converted me from a bull to a bear, and I returned to the U.S. and shorted many of the same companies I was originally long. I think this experience ended up contributing to the long-term success of the firm as it trained me to have a particularly critical eye when evaluating companies and also a careful eye towards position sizing. We have always been concentrated, but never overly concentrated in any one particular investment idea. Having my career begin with the financial crisis in 2008 and examining frauds in 2010 made me skeptical of all businesses, and I think a skeptical lens is helpful when evaluating investments. You have ~10,000 different investment options just in the public markets, it’s important to be skeptical to narrow that universe of potential ideas down. Our process since then has focused on quality, value, and growth to find fundamentally great businesses at good prices.
In 2012, you generated some media attention after going to China and touring some companies you invested in. You ended up selling your positions and went short. What did you find in your trip to China and do you have any opinion on U.S.-listed Chinese equities today?
Yes, in 2010 I took a trip to China for two months to visit companies I either owned or had on my watchlist. It was an exciting time to be involved in the incredible boom both the Chinese economy and Chinese consumer were experiencing. When I went to visit, I was astonished by what I found. The state of the operations and the level of fraud that was occurring were alarming. I visited 50 companies during my trip and issues with these businesses ranged from empty warehouses, accounting inconsistencies, fake tours, and bogus sales. At the end of my trip, I thought 2 out of the 50 companies I visited were investable, but those turned out to be more sophisticated frauds too! It didn’t take long to develop serious skepticism, and I ended up leaving China with short positions initiated on many of these businesses. After eventually exiting shorting Chinese frauds, we closed out all direct exposure to China and have not been involved since.
In terms of US-listed Chinese companies today, we do not spend any time on them. After that trip, it would be very hard for me to invest in a small cap Chinese company, I just think the propensity for fraud is too high.
Small cap value has lost some luster compared to the great performance of big tech. Why are you optimistic that small cap value is the right place to focus your research efforts?
We have found a niche combining alternative data sources and investigative journalism style primary research in small cap equities primarily in the consumer and technology, media, and telecom sectors. We’ve always looked for great businesses trading at a low multiple, but more recently our process has improved because of the proliferation of these various data sources. We are large enough that we can afford them (we spend around 600k per year on data), yet small enough to invest in companies that move the needle for us but would not for larger funds. The strong performance of big tech in the last decade was warranted - there are some great businesses in tech, but I would argue the valuations today and therefore the potential prospects for big tech are less exciting. At ~25-30x earnings and high single-digit or low double-digit growth rates, many of the big tech companies just are not cheap anymore relative to other prospects available in the market. Combine that with the Fed raising interest rates, and I don’t think the 5-year return prospects are appealing. In contrast, the average stock in our portfolio trades at 8x earnings and is growing earnings at 14%.
Another way to look at value vs growth is that during the 53 years leading to 2010, value outperformed growth by a significant margin. However, over the last 11 years, the opposite has been true. We believe strongly that this trend will reverse itself, given the fed raising rates combined with the value to growth valuation disparity being particularly large relative to historical norms.