Professional Documents
Culture Documents
Street Capitalist Paul Sonkin
Street Capitalist Paul Sonkin
Paul Sonkin: I bought my first stock with my bar mitzvah money. I went to
college and when I graduated it was when Drexel had just went belly up and I
was looking for sell side research positions, couldn’t really find any because all
the assistant positions got taken up by those ex-Drexel people so I worked at the
Securities and Exchange Commission which was a lot of fun spending a year and
a half there spending a year and half at Goldman Sachs. My career was going in
one direction and my interests were going in another so I went back to business
school and I graduated in 1995. I worked for Chuck Royce for 3 years and then
worked for First Manhattan which is Sandy Gottesman’s firm for a year and then
I started Hummingbird about 10 years ago. That’s sort of a nutshell.
Tariq Ali: You often hunt in the nano-cap space, how do you find out about
these companies? Is it like Buffett said, that you need to just “Start with
the A’s” or do you use things like screens or local news periodicals?
Paul Sonkin: You know I’d say that most of my ideas come off of the new lows
list. I take that that’s sort of the best hunting ground. And then the other thing
that I do is I have these lists of companies i’ve owned before or am interested in.
And then I get the news headlines for them on a daily basis and then I do a lot of
keyword searches for like spinoffs, liquidations, merger arbitrage, stuff like that.
And then I go to conferences I source my ideas pretty much from everywhere.
The only place where I don’t source my ideas from is Wall Street. Not a lot of
Wall Street research at all.
Tariq Ali: Yeah, that 52 weeks low list really exploded a few months ago.
Paul Sonkin: Yeah. And I guess that in times like that there’s so much to look at
you can almost close your eyes and buy anything.
Tariq Ali: A lot of the companies you invest in are pretty small. Do you
ever interact with the management of companies you invest in? How
receptive are they to your ideas? Many of these companies have small
shareholder bases, do you ever have to work with them to help promote
changes in these companies?
Paul Sonkin: I guess. Yes and no. Sometimes they are very receptive sometimes
they’re not receptive. I would say that we always talk to management over the
phone and we’ll sort of have them walk us through the story and we’ll discuss
their capital allocation decisions and just you know, go through various things
like that.
Tariq Ali: And one thing I noticed is that some of the companies in this
size range may have an incredibly small shareholder base. Do you ever
work with these shareholder bases?
Paul Sonkin: Yeah, it’s very common.
Tariq Ali: And the other thing I noticed with some of them is they don’t
register with the SEC, is this ever a problem for you? Do you ever have
issues trusting their financial statements?
Paul Sonkin: No, I’d say that usually the financial statements are pretty good
with the ones that don’t file. Sometimes they just file once a year. But it’s sort of
like how the old pink sheets used to be.
Tariq Ali: You teach students value investing at Columbia Business School.
When analyzing securities in the micro-cap/nano-cap space, are the
methods different than researching mid-caps / large caps?
Paul Sonkin: Well yeah. You know it’s always easier to analyze something that’s
simpler than something thats more complicated. So think of it as if you were
dissecting a human body as opposed to an amoeba. You know when you have a
company where there are just fewer moving parts it’s just easier to do the
analysis. So that’s why we’ll keep track of 100 different companies and it’s pretty
easy to do that because there’s just less to analyze.
Tariq Ali: I saw in another interview, you mentioned how the portfolio
works at Hummingbird where you almost allocate 50% of the portfolio to
arbitrage situations. Could you talk a little bit about position sizing — does
your firm put limits, do you have a hard formula for that kind of thing?
Paul Sonkin: You know I’d say that we used to have much more stringent limits
but what we’ve found is that lately there aren’t that many interesting arbitrage
deals. So we have allocated a lot more money to the general portfolio. So its
become a little bit overweighted in that respect.
Tariq Ali: About the arbitrage part of the portfolio, with my own portfolio
I’ve participated in a few small, odd-lot tender kinds of things. Does your
firm deviate from small micro-caps/nanocaps for arbitrage or do you stick
in the same space?
Paul Sonkin: You always want to look for a catalyst but sometimes there is no
catalyst. So with Steinway (NYSE:LVB) there’s no real catalyst there. Earnings
will recover and that will be the catalyst but the catalyst isn’t obvious and when
it is obvious it’s too late.
Tariq Ali: Do you think you could walk us through a failed past
investment?
Paul Sonkin: I guess like other value investors, we’ve paid homage to
newspaper stocks. We had one called American Community Newspapers
(OTC:ACNIQ) which we thought they had a little bit of a different business
model because while they were dependent upon advertising they weren’t really
dependent on subscription revenue. What happened was that business just
completely imploded. So I think that all value investors have paid homage to old
media companies and that was one failed investment that we had.
Occasionally we’re going to get caught in other situations where you get
involved and the problems are more than you thought. So a company like that
was Meade Instruments (NASDAQ:MEAD) where we were an activist and got a
board seat. By the time we got inside we realized that the business was in much
worse shape than we would have thought. We would have done fine except the
economy was the kind of nail in the coffin.
Tariq Ali: Could you talk a little bit then about shareholder activism. Is it a
strategy you actively utilize at Hummingbird or is it more of a strategy of
last resort?
Paul Sonkin: We don’t go into any situations with the intention of being
activists. There are some people who do that and it’s just not a focus for us. I
guess there are cases where we felt as though they weren’t being fair for
shareholders and we stuck up for our rights but I don’t see us going on boards in
the future.
Paul Sonkin: I think it’s a very very well run company. I think that they had
some challenges with some of their customers getting financing but I think that
long term it’s going to be a great investment because it’s a play on server farms
and on these data processing facilities. Even though near term they may not put
up great numbers. I think that long term they’re capable of some meaningful
earnings growth and generating a lot of free cash flow. I was sitting with the CEO
of the company about a month ago and if you just look at the companies that
they’ve done initial build outs for I think they can get about $400M of revenue
just by building out the facilities that they’ve already started to work on. Because
when you put up a facility if they put up a 150,000 facility, they may only build
out 20,000 feet but as more tenants come in they get that add on work.
Tariq Ali: As a teacher, do you have any advice for students of value
investing right now?
Paul Sonkin: I think that it’s a great time for young people to be getting into the
business. If you look, a lot of the firms were created after the aftermath of the
20’s and there were a lot of firms created after the 70’s. I think that there are a
lot of firms that will be created out of the aftermath of 2008. So I think that it’s a
good time to be getting into the business. Usually, the advice that I give my
students is to keep your eyes open and your mouth shut. One of the pearls of
wisdom that I give them is if your boss asks you for a red umbrella, don’t bring
him a blue one and explain how it’s going to keep him dry. Just give your boss
what he wants. I think that there are a lot of people who start working that get
off on the wrong foot.
Tariq Ali: Thank you so much Paul for taking the time to do our interview.
We wish you the best of luck!
For his search strategy, It looks like following the 52 Week Lows is your best bet.
In addition though, Sonkin mentions that he employs keyword searches to find
things like liquidations and other special situations. There’s a few ways to do
this. One, you can set up alerts with the SEC database to send you a message
whenever a particular company has filed a document you’re looking out for.
Different SEC filings correspond to different corporate events, there are filings
for spinoffs, material events, tender offers, and so on. Or, you could rig up your
own Yahoo! News Alert so that whenever a story comes with a particular trigger
word, such as liquidation, you’d get notified so you can quickly act. Other things
are more simple. For example, Sonkin mentioned that he keeps a list of
companies that they watch. These are things you just have to do on your own, it
becomes easier after you’ve analyzed more and more companies. Right now I’m
throwing a number of companies in the too expensive pile, but I look at how they
perform over time. Eventually maybe something will happen to cause a company
to fall below its intrinsic value and because you’ve already done work on it, you’ll
be able to act quickly.
I hope you noticed that when I said small companies, I meant it. Fortress
International only has a market cap $13.67M, Southpeak Interactive trades at
a $24.78M, Rand Logistics at $37.13M, and Steinway at about $102M. My guess
is that most of these companies will have little by way of analyst coverage or
attention on Wall Street or CNBC. The advantage is simple: less coverage means
there’s less eyes on them and produces greater opportunities for you, the small
investor. The market in these area is generally less efficient and the businesses
are actually rather simple. I think that companies of this size are better for newer
investors because like Sonkin says, they’re much easier to analyze. Steinway is
going to have less moving parts than a company like Kraft and it means you can
hone in on your analysis better.
I also thought it was interesting that Sonkin sees some of these companies as
ones with great long term prospects to grow as business. I know that other
investors only venture into companies of this size range in order to find net-nets
or special situations, but it seems like Sokin is taking a much comprehensive
approach. To find these kinds of companies you’re probably going to have to
broaden your search a bit in order to find them, since they may not come up on
an ordinary screen. Sonkin’s Fortress International investment is probably the
best example of this.
I haven’t read any of the books that Sonkin mentioned but Hidden Champions
looks to be very interesting. The book is a study on small companies (that most
people may never have heard of) that are market leaders in their respective
areas. Such a book could probably prove helpful for analyzing some of these tiny
companies from a qualitative perspective.