SA Interview: Small And Microcap Investing With Greystone Capital

SA Interview: Small And Microcap Investing With Greystone Capital

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Greystone Capital is a long only, equity focused Registered Investment Adviser focused on identifying mispriced small and microcap securities in order to build a concentrated portfolio of high conviction investments.

Why the focus on small and microcaps, how to identify mispricings that never show up on screens and risk management for a concentrated portfolio are topics discussed.

Greystone Capital shares a long thesis on 1847 Goedeker.

Feature interview

Greystone Capital is a long only, equity focused Registered Investment Adviser located in West Chester, PA. The firm utilizes a fundamental research process focused on identifying mispriced small and microcap securities in order to build a concentrated portfolio of high conviction investments. We discussed the importance of identifying who the incremental buyers are of a stock, the opportunities created by passive investors and quant strategies and their intensive due diligence process.

Seeking Alpha: Walk us through your investment decision making process. What area of the market do you focus on and what strategies do you employ?

Greystone Capital: Greystone was founded as a long-only concentrated investment firm, so I spend most of my time doing investment related research and analysis, with the aim of owning anywhere between 10-15 stocks at one time. As a result, I end up saying ‘no’ to most ideas, and many more sectors, sub-sectors and industries. I’m looking for specific ideas whose share prices I believe have a reasonable chance of doubling within 3-5 years using conservative estimates and business assumptions. I spend all of my time in the microcap and smallcap spaces, with my sweet spot being companies between $100mm and $1.0 billion. I’ve touched on my preference for small companies in many other places, but I believe they provide opportunities for outperformance as they can often be mispriced for a variety of reasons. Building a portfolio of 10-15 stocks only means the bar for inclusion is very high and I have to make sure I’m doing deep fundamental research on the businesses we own. This allows me to go deep and develop conviction prior to making an investment, or while owning a particular business.

I spend the majority of my time doing two things, managing the current portfolio and researching new investment ideas. I’m not against putting on ‘starter’ or smaller positions for things that look very attractive but don’t meet all of my investment criteria, or where I have yet to develop strong conviction. I might trade in and out of these names occasionally, but for the most part making an actual investment decision doesn’t happen too often. The process can be broken down simply as research, filter, monitor and then potentially purchase. I’ve developed a watch list of businesses over the years made up of companies I like, strong management teams, formerly owned businesses and companies representing themes I find attractive. This list is constantly being updated and monitored but outside of this, ideas can pop up anywhere. I read a ton of writeups, blogs, substacks, spend a lot of time on sites like Seeking Alpha, and talk to a lot of investors. This usually leads to interesting things to research. During times like these, the watchlist grows and certain candidates look better and better everyday.

From discovery to investment, the decision making process involves a few different steps including running a particular business through my intensive research framework. For a number of reasons, a new idea could present itself as attractive and actionable and worthy of further due diligence, at which point I will read the filings, learn about management, dig into the unit economics, read everything I can find about the industry, scour the internet for articles on the company and then put together a basic model or valuation framework. That part of the process provides me with enough information to get a sense of what might happen moving forward. The real work starts after this and involves determining ‘reality’ by speaking to everyone and anyone I can who has an expertise about the business or industry. Depending on what’s required, I will speak to former employees, former managers, competitors, suppliers, vendors and investors in the space. At a high level, this allows me to do two things: one, determine if what I believe will happen is likely to happen, and two, figure out what I’m missing or how I could potentially lose money. Not many investment ideas make it this far in my process, and even fewer go from this to portfolio inclusion. As I mentioned, the bar […]

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