During his recent interview with Tobias, Connor Haley, Founder of Alta Fox Capital Management, discusses how investors can find investing gems that don’t screen as cheap. Here’s an excerpt from the interview:
Tobias Carlisle: Tell us a little bit about your fund. How’s it structured? And what are you hunting for?
Connor Haley: Yeah, it’s structured as a traditional hedge fund. The bread and butter of the strategy is what I call gems, which are underappreciated, high quality, small cap, tend to be growth businesses that in many cases haven’t leveraged their fixed costs yet. There’s an exciting story brewing and the evidence is there, but you have to search pretty deep and you also have to take a long term time horizon to really understand the normalized earnings and free cash flow three to five years out. Trying to find things they don’t screen as particularly cheap on traditional metrics. But if you look under the hood, there’s a really exciting bottom-up story there with an incentivized management team.
Connor Haley: That’s the bread and butter. And then, complimenting that I have the general’s portion of the portfolio, which tend to be a little bit higher cap, a little bit lower turnover, but tend to be your traditional compounders which provide a nice, stable base for the portfolio and require less maintenance time candidly, which allows me to then really dig in to some of those small micros. And then the last portion of the portfolio is special situations, which tend to be higher turnover, very opportunistic, spinoffs, liquidations, post-bankruptcy and things like that.
Tobias Carlisle: And you short too?
Connor Haley: I do short as well. I categorize the fund as long biased. Shorting is opportunistic, within my mandate I don’t have to have any short exposure. It’s really shorting for absolute P&L, occasionally to hedge out various specific risks within the portfolio. But definitely long biased and opportunistic on the short side.
Tobias Carlisle: Just to go back to one of the things you said about the gems. You talk about … They haven’t quite go over their fixed costs yet, they look like they’re under earning a little bit because the business is still in that very early growth phase and you’re projecting out that in three to five years they get over, they start eating those fixed costs and then you see the true strength of the business. Is that what you’re driving at there?
Connor Haley: That’s right. And it’s not always that a fixed cost story, but it often is the case. And it’s really looking for things that have really great unit economics and what can it look like at a bigger scale. And so it could be a franchise or that it just has a corporate function that that drains a lot of cash, but you don’t need to grow it significantly as you triple, quadruple quintuple your units. That can be a really exciting story down the line. It could be a payment processor. There’s a lot of different types of these businesses which … You really need to understand the unit economics and then the industry dynamics. And if you can do that, you can develop a differentiated view three to five years out, and hopefully by the time its screen’s really cheap, it’s at a much higher price. And that’s typically normally a time I’d be exiting.
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