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