Below is the first ever letter from Troy Marchand of Foundry Capital Group. They launched a micro-small cap special situations fund June 2, 2015. This is their 3Q 2015 Letter to investors. It starts out by going over their investment philosophy and then gives their top 5 holdings.
Foundry Capital – Tenets of their Investment Philosophy:
- Long Term Value Oriented
- Concentrated Portfolio
- Look for Catalysts
- Will use Activism
- Prefer Nano, Micro or Small cap stocks as they are most inefficient
- Volatility is NOT risk
Foundry Capital – Top 5 Holdings:
VISI, INAP, TSYS, RST, IPAS
We thought our readers would be interested and we were given permission to post – Read below for their full letter:
Troy Marchand’s Foundry Capital Group letter to partners for the third quarter ended September 30, 2015.
Being our first quarterly letter, we would like to thank each of you for entrusting your assets with Foundry Capital Group. We are truly humbled and honored.
Before we dive into the portfolio, we want to discuss some key tenets of our investment philosophy:
- We are long term, value-oriented investors. Our time horizon is two to three years, and therefore our investment results should be viewed in similar time frames. While we apply a disciplined investment process, the timing of value realization events are often out of our control, so judging the portfolio on any time frame less than three years is not the proper way to think about our results. We are not market-timers or macro-forecasters; we study companies one-by-one to find the very best risk rewards while attempting to be market agnostic; i.e. each stock trades on its own merits, rather than relying on economic factors to move the stock up or down.
- We use the term “Value Investor” to insinuate we buy stocks selling at a discount to intrinsic value, which means we are looking for stocks that for some reason are not getting respect from Wall Street, and thus are trading substantially below the ultimate value of the company, as estimated by us. Undervalued stocks come in many shapes and sizes, such as micro-cap companies, where few investors are looking; illiquid stocks, that most investors avoid; or a variety of other reasons that lead stocks to trade at low valuations. We are seeking to make investments in companies where we believe our downside is very limited. A term we did not coin, but believe represents how we think about our risk-reward in stocks we own is: “Heads we win, tails we don’t lose much”.
- Concentration is crucial to our strategy, which means investing more capital into fewer stocks. We would rather own 15-20 high-quality ideas than over-diversify our portfolio. Concentration allows us to pass on a lot of “pretty good ideas” in order to only invest in “great ideas”. We firmly believe that over-diversifying the portfolio would hinder potential returns rather than protect downside risk once we own more than ten stocks. Concentration can cause more volatility over short periods, but over time that volatility should be to the upside if we are correct more times than we are wrong. Concentration allows us to focus our efforts on fully understanding each company in our portfolio.
- We invest in stocks with catalysts on the horizon, which is often driven by significant change at a company. One catalyst we focus on is investing alongside activist investors. They are often seeking some change in a business in order to unlock hidden value for the benefit of all shareholders. We believe investing alongside a select few activist investors can offer long-term returns above and beyond the market over full business cycles. Our discussions with an activist investor are often an integral part of our own due diligence and research, so that we can truly understand the levers that can be pulled to unlock value. We also have discussions with company management teams and boards of directors, along with writing letters demanding change and support for activist investors. If you would like to see any of our communications with boards of directors, please let us know and we would be happy to provide them to you as we are representing you through this investment. As we see opportunities and needs arise, we will more directly drive change through leading activist campaigns.
- Our belief is micro- and small-cap stocks offer the best risk-reward in the public stock market due to the inefficiencies they exhibit. Large investment firms often times cannot invest in micro-cap stocks, thus fewer investors are looking at the same stocks we are, causing stocks to fall under the radar. Wall Street research does not typically cover micro-cap stocks due to their size, volume and liquidity; which helps to create more inefficiency as less information is available to investors. Some micro-cap stocks can be very illiquid, but we are comfortable being patient to enter a position if we believe unlocking long term value is likely and the position offers a compelling risk reward. This illiquidity and lack of information can cause wild swings in stock prices, many times on no news or retail investors not using limit orders to enter or exit trades, which causes volatility on a daily basis. Over longer periods the volatility should occur to the upside if our thesis is correct.
- Volatility and unrealized losses are not the definition of risk, as risk in a particular stock cannot be calculated by a formula. Risk is the permanent impairment of capital, meaning a fundamental change has occurred, and the stock is no longer worth its estimated value. We attempt to limit risk by investing with a large margin of safety in each investment. The process of figuring out the margin of safety and intrinsic values of each investment is a lot more art than science. There is no set way to view risk or downside in each business. In some cases it may be the assets on the balance sheet: a building, a collection of patents, a strong brand name, a valuable piece of land; in other cases it may be a business segment with a highly defensible position, competitive advantages that produce high cash flows with locked in contracts, high replacement costs or barriers to entry.
“In investing, what is comfortable is rarely profitable” — Robert Arnott
September, from a performance standpoint, will be a month to forget, and while we are not happy with our results, we must all remember that one month is not the correct time horizon to measure performance. For the month of September, the Fund declined by 8.28%, bringing the inception return to date to -13.35%. For the quarter, the fund outperformed the Russell Microcap Index and the Russell 2000 Index, declining 9.71%, but we are not satisfied with the results. However, these results are not outside the range of possibilities given that we manage the portfolio in a focused manner. An unfortunate, but inescapable, trade-off associated with our methodology is that in exchange for returns that should be attractive over a several year