As suggested by the title, this is the second part of my reflections of Day 1 of Best Ideas 2017.  The prior installment is here.  To cite Mark Zuckerberg, “perfect is the enemy of the good” – in that these comments are written with the effort to share candid thought in an appropriately deliverable-ready manner, while aware there’s a bit of room for further improvement.  Onwards with part 2!

Best Ideas 2017 showcases the wisdom of 40+ carefully selected investment managers, over a two-day window.  We aspire to excel at a few key moving parts, outlined (and hopefully explained) below:

  1. Depth and detail is better than quotable ‘sound bites’ (which, inevitably and wonderfully, leads to some presentations that extend beyond an hour!)
  2. Unlike traditional events, we have “unlimited shelf-space” (the challenge, as such, is to tap into the advantages of extensive breadth while remaining vigilant towards quality and selectivity)
  3. We take enormous pride in “curating a community” (meaning, attendees are actually participants – engaged, involved, and interactive)

The third element of the above is best exhibited in live events of Best Ideas 2017, in which instructors both share direct perspective with participants and engage in interactive participant discussion.  Along these lines, John Lambert of GAM delivered a wonderful tour-de-force of fundamental research into a compelling value-oriented idea (depressed valuations, depressed expectations, highly interesting as get into the moving parts) and I thought one question posed by a featured instructor from Latticework 2016 (who will go unnamed) was quite thought-provoking, and John’s answer similarly illustrating.  Again, this is what makes Best Ideas 2017 so much fun, and so interesting, to me.

While David Rolfe needs no introduction, John Mihaljevic in his welcoming comments pointed out that Wedgewood Partners is a firm whose 13-F filings The Manual of Ideas research staff closely watch; we classify Mr. Rolfe as a Super Investor.  As David explained, his investment organization has been intimately familiar with Apple Corporation since 2005 (!) and David very generously shared his current investment thesis and addressed a series of thoughtful (and at times, surprisingly direct) questions. Similar to the live session with John Lambert noted above, I was amazed at the caliber of inquiry our participant community came up with, and I was similarly humbled by the opportunity to listen to spot-on answers from a veteran expert.  Definitely a highlight of the day.

In Part 1, I touched upon my love for “GoodCo – BadCo” style investment situations.  Over the years, I’ve also come to appreciate the nuanced (and difficult) art of “buy a balance sheet, sell an income statement, get there with the cash flow statement” — as an oversimplified framework that enables buying low and selling high.   Naturally, Steven Kiel‘s presentation grabbed my eye, as, in his words, summarizing his Best Ideas 2017 presentation:

“This concept is when a company with a strong balance sheet attracts investors focused on capital preservation and downside protection, but the company also has the potential to generate significant earnings and cash flow.”  

As a small footnote as well, which I believe deserves to be mentioned, Steven is battle-tested:  He is a veteran of Operation Iraqi Freedom and currently holds the rank of major.

Ian Clark, as The Manual of Ideas team has come to clearly realize and hopefully others do as well, has a remarkably sharp mind and a serious passion for understanding the finer-workings of key industries and sectors.  Hopefully, we’ll see this list continue to expand!  Ian, generously, shared his updated thoughts on the oil-rig industry and cycle, and explained nuances of power generation — a space he knows quite well. In addition to founding Dichotomy Capital, Ian has first-hand operator experience with hydroelectric power production facilities. (!)

A good elevator pitch jumps off the page in the first few seconds, which, I think, is precisely the case below: 

“The company is at least 2x larger than its nearest competitor. It has overhauled its capital allocation and operational strategy in the last three years..boasts a capital-light ‘services’ business model, converting 50-60% of adjusted EBITDA to FCF, and an enterprise client retention rate in the high-90s (in percentage terms)..can grow organically 8-12% for the foreseeable future while increasing EBITDA margins by ~50%, a true capital compounder in the small-cap arena (market capitalization of $550 million, EV of $640 million). The shares trade at ~8.1x/6.3x 2017/2018 EBITDA (our estimates… well above the Street), a substantial discount to intrinsic value.”

Naturally, I loved the opportunity to hear Charles Hoeveler get into the fine details and very much hope he’ll return next year!

Continued