Small/Micro-Cap Value

Our strategy invests in companies that have durable, profitable, margin accretive business models with material barriers to entry. The majority of these businesses are fostered and nurtured by founder/owner/operators. The central charter of our philosophy remains; cash liquid balance sheets with negligible debt leverage supported by secular, consistent, sequential, long duration growth. This growth is funded via capital allocation decisions between organic investment in capital expenditures and working capital, debt deleverage and cash dividend payments. We tend to avoid high debt leverage, turn style merger and acquisition cultures, opaque creative accounting, substantial intangible goodwill and/or senior management divorced from insider equity ownership.

Strategy and Philosophy

Fortress Balance Sheets

• The prime focus is cash liquid balance sheets with a minimum of 10% of assets in cash and limited or negligible debt leverage that is less than 30% of cash adjusted tangible capital
• Ample free cash flow of at least 20% of gross EBITDA with a priority to increase capital expenditures to above parity with depreciation and amortization expenses
• Negligible goodwill, where possible, which we define as less than 10% of assets, limiting future accounting impairment charges against equity when brands or merger/acquisitions exhibit loss of accounting or economic value
• Senior management, labor/employees and institutional shareholders bond in a common alliance of interests and control to generate a superior culture and business model

Founder/Owner Operators

• Majority of portfolio capital invested in business cultures which are founded, owned, and operated by a legacy family or insider control interests with a long-term, multi-decade future business plan
• Pragmatic business domains with focused operating segments and avoidance of restructure deals, serial roll-ups, litigation, debt and turn-style M&A cultures
• Long-term operating histories that foster clues to measure future business potential and predictability
• “Margin-of-safety” investment in tandem with and allied with insiders; “invest with owners to be treated like owners”

Strong Risk Controls and Diversification

• Focus on conservative GAAP accounting which limits extensive footnote explanations that may mask dubious business practices
• Easy to understand companies – Avoid turnarounds, serial roll-ups, litigation, debt, other problems
• Avoiding companies with secular deteriorations or disasters that create time waste and forces exit strategies or litigations
• Diversification of holdings with upper limits of 8% company, 10% industry, and 35% economic sector for domestic U.S. common stocks

Forensic Accounting Analytics and Long Term Horizon

• Intensive fundamental, bottoms-up research focused on the analysis of accounting statements in tandem with senior management access via conference calls, investment seminars, company site visits, non-deal roadshows or investment banking syndications
• Core holdings feature “proprietary in-house” coverage measured in years to decades
• Valuation calculations estimate dynamic intrinsic value allowing holdings to achieve “marathon” secular compound growth until market price to intrinsic arbitrage trades to parity
• Acting as long-term value investors, we orientate to a full-cycle (expansion/recession) economic cycle of 6-7 years with portfolio turnover generally below <20%
• Globalized capital formation and international trade has created a vacuum of research coverage in the U.S. Small/Micro-capitalization tranches or “research neglect” from investment bankers
• Private, direct communication dialogue with senior management, divorced from broker analysts and over multiple decades yields unique insight and access which develops a “private equity” simulated relationship
• Proprietary analytical research of financial accounting statements for liquidity, solvency, and profitability metrics, affords our strategy the viability to pursue micro-capitalization size common stocks void of sell-side research coverage