Carbon Beach’s holdings fall into two broad categories:
- Special situations; and
- Deeply undervalued or out-of-favor securities
Special situations are corporate event-driven opportunities. They have three defining characteristics:
- The return on investment depends on a corporate act—board-level action like a merger, takeover, liquidation, spin-off, or similar—rather than an improvement in the underlying business.
- The return on investment can be calculated with something approaching mathematical certainty. When combined with a known timeline, this calculation can be converted into an annualized figure.
- The security must be undervalued. This reduces the risk and produces the opportunity type most highly prized by investors—asymmetric returns, meaning low or no downside, and a higher, surer upside.
The main attraction to special situations is that the return doesn’t depend on the direction of the stock market. Returns depend on the execution of the corporate event, not on whether the stock market goes up or down. It is only incidentally “stock market” investing.
Generally undervalued or out-of-favor securities
We prefer those that can first survive and then recover fundamentally. We want companies with cash-rich balance sheets and businesses with strong operating earnings. We hope to eventually enjoy both improved business performance and a narrowing of the price-to-intrinsic value discount.
We invest with conviction, holding only our best ideas. Our portfolios hold sufficient positions to reduce the risk of loss from any individual stock, but few enough to capture outperformance. As a result, our performance will be highly idiosyncratic
We seek a dialogue with the managers of our portfolio holdings, pushing for the highest standards of corporate governance, and recognition of shareholders’ rights.
Evidence-based, research-intensive process
We conduct research into security valuation and portfolio management, and invest on the basis of those findings–not on conventional wisdom.