INVESTMENT PHILOSOPHY

Steel City Capital adheres to a value-oriented investment strategy in its pursuit of attractive investment opportunities.

Shares of stock represent a fractional ownership interest in a business

  • We consider ourselves first and foremost as business analysts, not stock analysts

  • We approach buying stocks as if we were buying the entire business outright and retaining management

Price is what you pay, value is what you get

  • We believe that from time to time stock prices will deviate from a company’s intrinsic value 

  • We require a margin of safety at the time of investment

Volatility is not the same as risk

  • We define risk as the probability that an investment will experience a permanent loss of capital

  • We welcome periodic volatility, as it creates unique opportunities to deploy capital

Temperament – not intellect – is an investor’s most important asset

  • We approach each trading day as an opportunity to take advantage of “Mr. Market”

  • We believe in being greedy when others are fearful, and fearful when others are greedy

You can’t take the same actions as everyone else and expect to outperform

  • We invest in unloved, underappreciated, and misunderstood companies

  • We seek to understand the consensus view and identify what the market is overlooking

WHAT WE BELIEVE

INVESTMENT CRITERIA

Steel City Capital employs a bottom-up, research intensive investment process. Investments are selected based on a mixture of quantitative and qualitative criteria.

LONG STOCK SELECTION

We like to own great businesses that can compound shareholder value over time. We seek to purchase these businesses at sharply discounted prices relative to our estimates of intrinsic value

  • Low valuation metrics are a starting point, but we seek to differentiate between “cheap” and “cheap for a reason”
  • Attracted to consistently high returns on invested capital which is indicative of future ability to create shareholder value

  • Prefer management teams with a strong capital allocation track record and financial alignment with shareholders

  • Healthy balance sheets are desirable. Not all debt is “bad” but a company’s capitalization should reflect its financial and operating risks

  • Catalysts are preferred but not required

SHORT STOCK SELECTION

We like to establish short positions in businesses whose fundamentals are likely to deteriorate in the foreseeable future and whose stock prices are materially above our estimates of intrinsic value

  • Expensive valuation metrics are a starting point, but we believe that “expensive” can become “more expensive”

  • Target businesses with consistently low returns on invested capital which is indicative of low barriers to entry, no competitive advantage

  • Managements with misaligned incentives and a history of poor capital allocation are likely to destroy additional value

  • Highly levered balance sheets are “ticking time bombs.” There may be enterprise value, but it probably belongs to lenders

  • Catalysts are strongly preferred

IDEA GENERATION

We believe there are several dynamics that will provide for investment opportunities regardless of market conditions.

GAAP is Crap (sometimes)

  • Generally Accepted Accounting Principles (GAAP) can distort the underlying economics of a business

  • Examples include expensing vs. capitalizing expenditures; historical cost accounting; equity method accounting; and non-cash expenses resulting from M&A transactions

Expectations Mismatches

  • Expectations mismatches can occur for a variety of reasons including broad market sentiment or changes in a company’s business model that have yet to be fully appreciated by investors

  • The expectations pendulum can swing in both directions with investors being either unduly pessimistic or unjustifiably optimistic

Size Matters

  • A small capital base enables investors to “go fishing” in segments of the market that are off limits to larger institutional investors

  • Low liquidity and limited research coverage can contribute to shares being unloved, underappreciated, or misunderstood—all characteristics that contribute to mispricing