Hidden Value Stocks issue for the second quarter ended June 30, 2023, featuring an interview with Balkar Sivia, CFA, Portfolio Manager Of White Falcon Capital.
Interview With White Falcon Capital’s Balkar Sivia
Q: Could you tell us a bit about your and White Falcon’s background?
White Falcon was founded as an investment partnership in November 2021. We started off with friends and family but have since expanded to managing money for high net worth individuals and family offices. Our goal is to compound capital over the long term. We follow the Buffett partnership model and charge no management fees but have a 15% performance fee with a high watermark.
Before founding White Falcon, I worked at Burgundy Asset Management as a Vice President and Investment Analyst for more than eight years. I started my investment career as an Investment Analyst with Tim McElvaine at McElvaine Investment Management. I have an undergraduate degree in electrical engineering from UBC, but I found my calling in security analysis and investing.
Q: How would you describe your investment approach – would you describe your strategy as value-focused or growth at a reasonable price?
My strategy is unconstrained and opportunistic. One of the goals of White Falcon is not to be in a ‘box.’ We like the diversity of return streams. People forget that when Buffett had his partnership, he divided the portfolio between ‘Generals,’ ‘Controls,’ and ‘Workouts.’ All three categories had different catalysts and timetables for returns. I believe this is an important insight into managing a portfolio.
We divide the portfolio between Compounders, Value Today (including special situations), and Value Tomorrow. The relative weights in each bucket are opportunity dependent. For example, we own securities that are conventionally defined as growth and value. We own commodity producers as well as non-profitable tech companies. We own large and small caps.
The bottom line is that we look at each situation opportunistically. We understand ROIC, but we also understand capital cycles. In all this, valuation discipline is extremely important as we must recognize that what we buy and the price at which we buy are the only two factors we control.
We typically underwrite an investment when we believe that we can get a double on a stock in 3-5 years. This is a 15-25% IRR minus any mistakes we make – and we will make mistakes – giving us our net returns.
Coming into this year, we ended up having a barbell portfolio with commodities on one side and technology companies on the other.
We think commodity companies, especially in copper and oil and gas, are cheap given supply constraints and capital discipline.
All technology companies were being sold in discriminately last year, and this gave us an opportunity to pick up the higher quality technology companies for the portfolio. We are now in a position where we are trimming some of these technology companies as they have run up too much too fast and deploying capital into special situations.
Q: You’ve said you’re looking to own “good quality and growing businesses.” How would you define a “good quality business”? How do you evaluate a company’s competitive advantages?
We look for all the traditional metrics – strong competitive advantages, high returns on capital, strong balance sheet, high reinvestment rates, and a good, aligned management team.
But it is not this simple. You make money in the market when you disagree with the consensus on valuation but also on quality. Importantly, you make real money when the earnings go up and when the multiple goes up. The latter only goes up if the market believes in the durability of earnings and earnings growth which is a key characteristic of a quality company. We look for situations where the market has mispriced quality.
I have now been analyzing businesses for more than 15 years and have developed some pattern recognition to define good businesses and, importantly, good businesses at inflection points.
We maintain a large list of stocks where we have analyzed the stock or industry at one point in time and understand the underlying drivers. Then, we wait for these stocks to correct in time or price and invest if it meets our valuation criteria.
Q: What about management?
Management and alignment of interests is very important, but culture is just as important. We don’t have any hard and fast rules when it comes to management teams but we study their historical track record.
We believe it is not enough to know ‘what’ decisions they made, but one has to know ‘why’ they made some of the decisions. In many cases, we often invest at the point of ‘maximum uncertainty,’ and it helps if you can ‘game out’ what the management is likely to do in that situation and build conviction around your thesis.
At the end of the day, businesses are people working towards something with other people. We have seen enough situations where bad culture led to bad outcomes, and good culture led to good outcomes – even in companies that one would have thought about as lower-quality businesses.
Culture is one of the hardest things to get right but it works wonders in businesses that do get it right.
