Identifying the Next Outsiders

[Compounder]

For what it's worth, Don Braid of Mainfreight Ltd based in New Zealand is cut from a different cloth than most:

 

 

How do you mean? Didn't their European acquisitions, done to grow, turn out a bit of a mess? I also don't recall them ever focusing on the capital structure, reducing the share count, etc?

[saltybit]

Has there been any research done on people with similar early trajectories as the original "outsider" CEOs, but ended up not doing so well?

 

It's not *exactly* the same but you can look at the horizon kinetics wealth master index.  I don't know if it's been verified by a 3rd party but they claim that an index of individuals owning $100M+ of stock has beaten the S&P by 2.7% per year over the past 20 years.

 

http://www.horizonkinetics.com/docs/CC_112_Jun13.pdf

 

There are other studies you can dig up if you're curious that indicate that companies with large insider ownership tend to outperform.  Now a CEO with large ownership is not necessarily a great capital allocator but if you follows siddharth's definition of individuals who benefit by increase in per share value, certainly those with insider ownership would qualify.

 

Thanks for the suggestion!

[Valuebo]

Ha, reminds me I bought the book in Thailand for 125 bath. Still have to read it.

 

I actively lessened the amount of time I look at management and just focus on business and numbers more because there are too many biases and other irrational thoughts that can distort your objective view on a company. This leads to picking stocks for the wrong reasons, overpaying, confirmation bias (meaning you'll ride it all the way down), ...

Thing is, the (management) world is filled with capable and intelligent people so it's very hard to detect who will come out on top and why. A good chunck is luck anyhow.

[SpecOps]

I disagree that having a good capital allocator is a necessary characteristic. Good capital allocation is highly desirable in a larger holding firms with diversified, mature businesses, but for smaller, fast growing operations, I do not believe that "good capital allocators" are necessarily going to perform well.

 

I would prefer buying a firm with an excellent business model that has substantial potential for expansion.

 

I agree, as Buffett says, its great to own companies so good that a moron could run them.

 

The real jewels are these kind of  businesses, but that ALSO have the great capital allocator. Then you have a buy and hold forever type investment.

[giofranchi]

I disagree that having a good capital allocator is a necessary characteristic. Good capital allocation is highly desirable in a larger holding firms with diversified, mature businesses, but for smaller, fast growing operations, I do not believe that "good capital allocators" are necessarily going to perform well.

 

I would prefer buying a firm with an excellent business model that has substantial potential for expansion.

 

There is no “excellent business model that has substantial potential for expansion”, unless someone has decided to allocate capital, and/or time, and/or brain power to it. This is something every entrepreneur knows and understands from the start.

An entrepreneur is someone who shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.

--Jean-Baptiste Say, around 1800

 

Of course, there is luck! But would you really jump in a “wonderful boat” stirred by someone who has just been lucky? Well, then good luck to you! ;)

 

Gio

 

[Guest ajc]

 

I'm not sure if the Outsiders theme has been discussed to death yet, but for anyone who thinks it hasn't this might be worth a read.

 

http://westcoastinvestor.wordpress.com/2014/10/09/jason-industriesjasn-beginning-of-another-outsiders-candidate/

 

 

 

[Tim Eriksen]

 

I'm not sure if the Outsiders theme has been discussed to death yet, but for anyone who thinks it hasn't this might be worth a read.

 

http://westcoastinvestor.wordpress.com/2014/10/09/jason-industriesjasn-beginning-of-another-outsiders-candidate/

 

Took a quick glance and don't see it with this one.  It is hard to be an outsider CEO when you start with a levered SPAC.  Outsider CEOs grow the business and wisely repurchase shares.  Most SPACs by design have substantial warrants, as does Jason Industries.  In addition, this one adds convertible preferred on top of it.  Plus they are adding debt to buy a levered company.  Even worse, it granted substantial founders shares at a bargain price.  Those are huge hurdles to overcome.  If they do well, all these shares convert meaning they will have to purchase businesses better than what they already own.  Oh and the business doesn't look that great on a proforma basis ($3 million of proforma net income for 2013 and that included a $12 million one time gain.  First six months of 2014 it was $1.7 million and that included a $3.5 million gain.)

 

[Guest ajc]

 

 

I'm not sure if the Outsiders theme has been discussed to death yet, but for anyone who thinks it hasn't this might be worth a read.

 

http://westcoastinvestor.wordpress.com/2014/10/09/jason-industriesjasn-beginning-of-another-outsiders-candidate/

 

Took a quick glance and don't see it with this one.  It is hard to be an outsider CEO when you start with a levered SPAC.  Outsider CEOs grow the business and wisely repurchase shares.  Most SPACs by design have substantial warrants, as does Jason Industries.  In addition, this one adds convertible preferred on top of it.  Plus they are adding debt to buy a levered company.  Even worse, it granted substantial founders shares at a bargain price.  Those are huge hurdles to overcome.  If they do well, all these shares convert meaning they will have to purchase businesses better than what they already own.  Oh and the business doesn't look that great on a proforma basis ($3 million of proforma net income for 2013 and that included a $12 million one time gain.  First six months of 2014 it was $1.7 million and that included a $3.5 million gain.)

 

 

 

I appreciate the insights, Tim.

A question if you don't mind: Are the vast majority of SPACs structured this dilutively?

 

It sounds something like what PAH has and I'm wondering if it's always been the case with these vehicles in your experience.

 

Thanks.

 

 

[intothebreach]

"Good capital allocator" is a term you hear a lot lately.  i don't want to show my ignorance, but I'm not sure I know what a good capital allocator is?  It sounds like a finance function, but I have a feeling it isn't?

 

No harm in asking questions, especially with the quality of posters here. Others will surely able to develop on this better than I can, but in my view good capital allocation means a rational use of available resources, starting but not ending with free cash flow generated by a business. I include in this the ability to just say no and not invest because some cost of capital threshold has been crossed.

 

A good example of rational use of resources would be companies buying back their shares when they are clearly cheap (i.e. priced under book value), and also holding off on similar purchases then their shares are expensive. Management burning cash on pet projects or to prop up their self-importance would be the exact opposite. Buffett has written many times on this topic in Berkshire's annual reports.

 

My self-education in investing over the last 7 years has convinced me that, unless a business deals with people's lives (for example a hospital), its most important functions are hiring right and allocating capital as rationally as possible. And since that last part is extremely rare to be encountered in the wild, I'm really glad this thread was created.

 

Happy hunting!

[Guest ajc]

 

Trevor Chang has written a short response to Tim's commentary over on his blog, if anyone's interested

 

http://westcoastinvestor.wordpress.com/2014/10/10/jason-industriesjasn-valuation-update/

 

 

 

[yadayada]

I don't think a ceo qualifies as an 'outsider' just by getting in the company from the outside.

[Tim Eriksen]

 

I appreciate the insights, Tim.

A question if you don't mind: Are the vast majority of SPACs structured this dilutively?

 

It sounds something like what PAH has and I'm wondering if it's always been the case with these vehicles in your experience.

 

Thanks.

 

All the ones I have looked at over the last eight years were fairly similar (inexpensive founders shares and warrants) except that JASN also has convertible preferred shares. 

[Tim Eriksen]

 

Trevor Chang has written a short response to Tim's commentary over on his blog, if anyone's interested

 

http://westcoastinvestor.wordpress.com/2014/10/10/jason-industriesjasn-valuation-update/

 

From the blog I understand that Trevor is a university student, so I do not want to come across as mean or overly critical.  His update shows earnings for past years and projections for 2014 and 2015.  The analysis neglected to include non -controlling interest and preferred stock dividends from results.  This should not be done.  In the first half of 2014 it reduces income from $4.3 million to $1.7 million.  Assuming a $5 million for the full year means his estimated earnings are overstated by more than 100% ($3 million instead of $8.2 million).  The overstated earnings still results in a 2015 estimated PE of 31 (and 64x fully diluted).  If you correct the numbers the PE is well above 60. 

 

It is important to realize that SPACs have great incentive to make a deal, even a bad one since founders shares can likely be sold for a profit even if the stock declines.  While a few big reputable names have used SPACs there reputation is less than stellar.      It is unfortunate that a good thread on the board was highjacked to tout such a stock.