Hidden Value Stocks issue for the third quarter ended September 30, 2021, featuring an interview with Bedford Park Capital Corporation’s President and CEO Jordan Zinberg.
Interview One: Jordan Zinberg, CEO, Bedford Park Capital Corporation
Background
Jordan Zinberg is the President and CEO of Bedford Park Capital Corporation. Mr. Zinberg has over 15 years of investment industry experience including portfolio management and trading and has served as a director of both private and public companies. Before founding Bedford Park Capital, Mr. Zinberg was a Managing Director and Portfolio Manager at a prominent Torontobased investment management firm. Prior to that role, Mr. Zinberg spent 7 years at one of Canada’s largest investment dealers. Mr. Zinberg holds an MBA from the Schulich School of Business as well as several industry licenses and certifications. He also holds the Chartered Investment Manager designation and is a fellow of the Canadian Securities Institute.
The Bedford Park Opportunities fund has returned 26.4% on an annualized basis net of all fees and expenses since inception (September 1, 2018). Over the past year, the fund has returned 68.7% on a time weighted rate of return basis for the Class A Series 1 units as of August 31, 2021, net of fees and expenses. Year-to-date (August 31, 2021) the fund has returned 39.3%.
Q&A
To start, could you tell us about your background and why you decided to start Bedford Park?
I have been working in the Canadian capital markets for almost 20 years, with the majority of my career spent focusing on investing in Canadian small and mid-cap equities. I always had a long-term goal of starting my own investment firm, and in the fall of 2018, I founded Bedford Park Capital and launched the Bedford Park Opportunities Fund
What distinguishes your investment approach from that of other funds?
I don’t believe any single tenet of our strategy is unique on its own, however I do believe our geographic and market cap focus, stock selection criteria, portfolio construction, and trading style when combined present a very distinct offering to investors. More specifically:
a. Focus on a specific and inefficient segment of the market: we specialize in high quality, non-resource, small and midcap Canadian equities. There is some domestic competition in this corner of the market, however most Canadian portfolio managers concentrate on large caps and if they do move down cap it tends to be in the resource sectors. As a result, we are often able to find high quality growth stocks that trade at reasonable valuations because they are either too small or too illiquid for larger funds and ETFs.
b. Concentrated portfolio: our fund is highly concentrated, which I believe has been a key driver of our results. We typically have approximately 70% of our capital invested in our top 10 positions.
c. Unique trading style: we build new positions in a very systematic way, while simultaneously trading around existing positions strategically. Our experience and contact network allow the fund to either source or provide liquidity in specific stocks opportunistically.
In your Q4 letter, you said you “cannot overstate the importance” of conviction on your investment strategy. Can you explain what you meant by this?
One of my favourite investment expressions is “you can steal ideas, but you can’t steal conviction”. Conviction develops from doing one’s homework, and doing our homework is what allowed us to feel comfortable stepping in and buying stocks during the March lows last year. At that time, we were buying high quality growth stocks for under 5x earnings in some cases. Without conviction, we might have been sellers at those multiples as opposed to buyers.
You described Bedford Park’s biggest winners last year as an “eclectic mix” of stocks. Why have you decided to invest across a broad range of sectors rather than focusing on one specialism?
Once we eliminate energy and mining stocks, our approach is completely sector agnostic. We look for companies that meet our growth and valuation criteria, regardless of sector. Diversification by sector helps to reduce volatility, particularly in a fund like ours that is highly concentrated. Our area of focus is already quite specific, and I would see no advantage to restricting myself to only one sector. In my experience, sector funds present a unique set of challenges for a fund manager. Not only is the potential investor base for a sector fund more limited, if that sector is out of favour for a prolonged period the manager is powerless.
Why do you believe you have an edge when it comes to analyzing small-cap stocks?
Our edge exists in the Canadian small and mid cap equity market exclusively, as opposed to small cap stocks in general. Our team has a great deal of experience and a vast contact network within this segment of our home market. We have been monitoring our investment universe for many years, have deep relationships with management teams, and extensive capital markets relationships. A fund manager sitting on Wall Street trying to compete with us on Canadian small caps would be at a clear disadvantage.
One of your biggest winners in 2020 was Richards Packaging. Can you explain how you first found this idea and what initially attracted you to the stock?
I have been aware of this company for years, but never paid much attention to it until it showed up on one of the weekly screens we run. This screen focuses on underfollowed stocks with specific characteristics. We were initially attracted to the consistently high returns on equity, capital light business model and significant insider ownership. In addition, Richards has a focus on the healthcare sector which has improved margins and helps distinguish the company from its packaging peers.
You’ve mentioned that the firm has minimal capital requirements and a high return on invested capital. What’s the group’s ROIC, and do you think this is suitable in the competitive packing industry?
In 2020, ROIC was over 25% on the back of very strong operating earnings that were enhanced by Covid-19 related sales. At Bedford Park, we use adjusted return on equity as our primary capital efficiency metric, and Richards has achieved an adjusted ROE in excess of 20% every year since 2017. I believe this rate of growth is sustainable given that company’s demonstrated history of execution combined with their increased exposure to the higher margin healthcare segment.
What’s your rating of management’s capital allocation strategy? Do you see more acquisitions on the horizon?
Capital allocation has historically been above average, however I would like to see management more active with respect to M&A. Prior to their acquisition of Clarion last year I don’t think they had made an acquisition for five years. The company has ample capital available to complete future acquisitions and based on their success with Clarion thus far I would imagine that management would be looking to further broaden their health care offering with further acquisitions.
I’m not modelling any M&A in my projections at the moment but based on conversations I have had with management I do believe M&A is an increased area of focus going forward and any future deals would be a catalyst for the shares.
Do you have a long-term price target for the stock?
I don’t have a specific price target however I do feel there is a strong probability that the stock can provide investors with a 20% annual total return for many years to come. Obviously, there is no guarantee that history repeats itself but it is worth noting that at the time of writing, the stock has rewarded investors with a 5 year annualized return of 23% and a 10 year annualized return of 28% (both figures include dividends).
Are there any investments that have not necessarily worked out for you in the past that have resulted in a change in strategy?
When I think about investments that haven’t worked out for me, the mistakes have generally occurred in situations where I have allocated capital outside my circle of competence.
I think there is constant pressure on both professional and non-professional investors alike to keep up with the latest trends in investing. This excitement, whether it is around a specific sector, or a specific company, can cause investors to invest in things that they normally would not. While I try to resist this temptation, and to use discipline when I filter the ideas that are coming at me, I am still guilty of having made some of these types of investments in the past.
