HVS 1Q21: Alta Fox Stock Idea – Pollard Banknote

Hidden Value Stocks issue for the first quarter ended March 31, 2020, featuring Alta Fox Capital Management and their stock idea, Pollard Banknote Ltd (TSE:PBL) (OTCMKTS:PBKOF).

Alta Fox: Introduction

Alta Fox Capital Management is a Fort Worth, Texas-based investment manager that primarily focuses on identifying under the radar, high-quality businesses with competitive advantages at cheap multiples of medium-term (three to five years) earnings power. Last year, the firm was able to take advantage of the market volatility to buy companies conforming to this framework.

Alta Fox’s desire to find undiscovered, high-quality businesses typically leads them to the small-cap space where there is less competition, although that’s not always the case.

Historical Stock, Securities, Certificates, Fund, Bonds

Image Source: Pixabay

Two of the fund’s best-performing investments in 2020 were multi-billion dollar companies. Connor Haley, Alta Fox’s managing partner, attributes some of the fund’s success to studying previous market winners. Over the years, Connor has spent a great deal of time studying great businesses and stock market outliers. This past summer, Alta Fox published a 645-page internal case study titled “The Makings of a Multibagger.”

This research aimed to analyze the top-performing stocks with a market cap greater than $150M and less than $10B in developed markets over the last five years and developed both qualitative and quantitative conclusions. The study considered the performance of 104 stocks, which achieved an average return of 922% between June 2015 and June 2020. The highest performer returned 9,199%.

Key Takeaways

The research generated five high-level takeaways:

  1. Look for businesses with advantageous positioning: 80% of businesses had moderate-to-high barriers to entry and 91% had moderate-to-high competitive advantages.
  2. Spend time on financially healthy companies: 88% of outperformers came from a position of financial health in June 2015 and grew faster than the market might have anticipated. Looking for financially healthy companies, rather than turnarounds, is also less risky.
  3. Acquisitions can create value: While many acquisitions fail to create value, the highest performing stocks often leverage acquisitions to bolster their returns. If you are looking for phenomenal returns, finding companies that make strong acquisitions will increase your odds of success.
  4. Don’t rely on multiples: While it is always better to buy a great business at a low multiple rather than a high one, many of the top-performing stocks began with already healthy multiples – those multiples often expanded even further.
  5. Be open to international companies: Many of the best performings were American (32%); however, the USA was underrepresented in the set, meaning it is less likely that a company in America would achieve > 350% returns compared to some other countries such as Sweden, Australia, and Germany.

Investment In Collectors Universe

One of Alta Fox’s best-performing investments last year was Collectors Universe (Nasdaq:CLCT). In the firm’s Q4 2020 investor letter, Connor Haley explains that the firm had to play the role of a “reluctant activist” with the company. Still, it ultimately ended up producing sizable profit for Alta Fox and its SPV. As per the Q4 2020 letter:

“We began building our position in March of 2020 and bought most of our shares in the low to mid $20’s. Alta Fox first filed a 13D in June and settled with the company in September. The company then received a tender offer in November at $75.25. Alta Fox publicly filed for appraisal rights in December. The offer was recently revised at $92.00/share. Today we updated our 13D filing, as required by the SEC, to confirm our demand for appraisal rights at the updated offer price. We have conducted a tremendous amount of research on this investment and we are in no rush to relinquish our significant stake given the surging demand, a growing backlog, and numerous attractive reinvestment opportunities.”

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