Matthew Sweeney: Finding “Ugly Ducking” Companies That Are Actually Swans

Johnny HopkinsMatthew SweeneyLeave a Comment

Tobias recently interviewed Matthew Sweeney, the Managing Partner at Laughing Water Capital on The Acquirers Podcast. Coincidentally, Sweeney recently released his Q3 2020 Letter in which he discusses how to find “ugly duckling” companies that are actually swans. Here’s an excerpt from that letter:

My almost 5 year old son has become fond of saying, “if it looks like a duck, and quacks like a duck, it’s a duck!” when we visit the pond that is not far from our house. While at this point in his life he believes that the function of this expression is humor, as he matures he will come to realize that it is a very useful mental model for most things in life.

However, in the investing world identifying ducks that look and act like ducks is rarely profitable. The money is made through variant perception, and in my view the more apt metaphor is the “ugly duckling” that is actually a swan. This is especially true in today’s world, where so much of the market is dominated by quantitative strategies that have no choice but to fill their spreadsheets with that which is readily visible.

The two businesses described below certainly appear to be ugly ducklings. One is recovering from an accounting restatement and exchange delisting after churning through five CFOs in quick succession. The other has a history of too much leverage and under-investment. Yet, in my view looking past the headlines shows a lot to like. Both businesses are attached to recession resistant end markets, both businesses have steady and growing revenue streams, and both businesses are likely to experience margin expansion in the quarters and years to come.

Importantly, following recent change, both businesses are now run by people that have had tremendous previous public company success, and have chosen to put their own capital to work to help nurture these ugly ducklings into swans. Further, both businesses were available to us at low prices due to easy to understand constraints faced by non-economic sellers. Lastly, while both businesses have the potential to develop into compounders that feed our portfolio for years to come, in the near term, both stocks are likely to see a wave of forced buying as they are added to indexes and ETFs.

You can read the entire letter here:

Laughing Water Capital – Q3 2020 Letter

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