Andrew Walker – Rangeley Capital: Sifting the World

Andrew Walker – Rangeley Capital

Andrew Walker is a CFA and portfolio manager at Rangeley Capital LLC. Andrew’s focus is on micro-cap, deep value, and special situation investments.

Why these three? Andrew believes the three of these offer the greatest opportunity to outperform the market. After all, if you can’t outperform the market then you might as well index.

How do these three offer that opportunity? These offer the greatest opportunity to outperform because the competition as an analyst and investor is much lower. This is true because when focusing on large cap stocks you are competing against incredible competition (in terms of quality and quantity) to try to find value first.

Searching the World

At his core, Andrew is a value investor. This essentially means he wants to always buy at a discount. Where can discounts typically be found? Where no one else is looking and in panic or other special situations.

Andrew’s criteria for investing is to maximize risk adjusted return. A safer company is always desired from a fundamental perspective. The cheaper he can purchase a dollar for and the quicker he can get that return, the better.

The first place he likes to look is to follow activist fillings which can be found at the SEC website. An activist filing is when someone with 5% or more ownership makes a move of some kind. Often these moves can lead to discovering great investment opportunities.

The second place he likes to look is acquisition announcements in order to find what is going on in various industries and to also see where informed investors see value.

The third thing he likes to do is print out lists of all of the publicly traded stocks (8,000+) and work through them looking for interesting opportunities. Usually he’ll look at SEC filings and determine whether they are worth pursuing. Typically, 90% of these can be eliminated very quickly after looking at the filings. Within 10 minutes he can typically rule out a large number of non-opportunities.

The great thing about this third option is that often times opportunities can be found that almost no other person is aware of.

Bonus: Odd Lot Tenders

In the interview, we also jump into the topic of odd lot tenders; everything from how to find them and how to make the investment. Odd lots are interesting opportunities and rarely discussed because anyone who knows about the opportunity wants to protect it from being exposed and potentially lost. These offer the option to outperform with little to no risk.

To find opportunities like these, Andrew subscribes to all activist filings and all tender offering filings through the SEC.

Sifting the World

When sifting through small companies, Andrew goes through the following checks:

  1. Do they have revenue?
  2. How solid is the balance sheet regarding cash and debt?

After these filters, the first thing to do is read through the 10-K (annual report), then read through the last 5 years of financials. This helps gain understanding for what the company does and begin some initial valuation work.

Reading the 10-K starts by jumping through and reading section 1 (business description), section 4 (key risk factors), section 7 (management discussion), and then read the balance sheet and footnotes. This would be followed by a full read through of the entire report.

The next step is looking at any investor presentations and management calls by the company. Then Andrew will look at the 10-K’s for industry competitors.

Bonus: Hidden Pump and Dump Schemes

Andrew even walks through what pump and dump situations can look like (you’ll probably be surprised) and why investing based on an article you read can be a really bad idea.

Wisdom for Sifting the World

As investors, we must have deep conviction based on personal research before making an investment. Andrew references Warren Buffett’s quote about how different we would invest if we were all only able to invest in 10 companies in our lives. We would be forced to only invest with deep conviction.

It’s way better to focus deeply and narrowly than to be scattershot and invest on shallow research and insights.

Most of Andrew’s investing mistakes have come from one of two issues:

  1. An analysis mistake was made
  2. He became excited and purchased before completing his research

The final requirement for Andrew to buy is simple. Is the company undervalued and trading at a discount? Metrics for measuring this can vary by industry. If possible, he likes to talk to management.

Conclusion

Before Andrew makes an investment, he typically will spend 10 hours a day for 7 days researching in order to get to the level of conviction he believes is needed. When’s the last time you spent 70 hours researching before making an investment?

May we all be humbled a bit and convicted to take great care when as we look to put our capital to risk on an investment.

You can find more from Andrew at Seeking Alpha and on the Rangeley Capital podcast.

Thank you so much for joining us at INVESTOR IN THE FAMILY!

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