Overview
Kestrel specializes in analyzing restructurings, such as corporate share repurchases, spin-offs and asset sales, in order to identify companies where management is actively working to increase shareholder value. Our experience and research, over more than thirty years, convince us that companies selected from this segment are more likely to produce superior long-term returns for their shareholders.
We invest in companies with managements who have implicitly identified their stock as undervalued and who are taking concrete steps to improve their share valuation. For this reason, we find the risk/return relationship of our approach to be particularly attractive.
Our Investment Approach
A Purely Bottom-Up Value Manager
We are a contrarian, value-oriented investment manager. As a purely bottom-up investor, our portfolio may include stocks that exhibit characteristics of other investment styles at any given time. The degree to which our portfolio resembles other styles from quarter-to-quarter is merely the result of our unique bottom-up investment process, rather than any preconceived mandate or sector view.
Negative Screen Approach to Stock Selection
When it comes to picking stocks we look at things differently. Our process is meticulous; we follow all the stocks in our defined universe (U.S. companies listed on a national exchange, with market capitalizations of $100 million to $3.5 billion, that are undergoing some sort of voluntary restructuring) and then apply a negative screen to eliminate companies that don’t meet our requirements, be they fundamental, or governance related.
We’ve found that our negative screening process helps us avoid the bias that occurs when managers become enamored with their stocks. We would characterize our approach as objective and systematic. This is not to say that we are a quantitative manager; we use traditional tools in our analysis, with a strong focus on cash flow and thoughtful consideration of company-specific corporate governance.
Why Small-Cap Orientation?
Kestrel’s small-cap orientation stems from our observation that shares of companies lacking institutional coverage are more likely to be inefficiently priced. We also find that companies in the small-cap arena provide us with clearer management signals, an important component of our investment process. In contrast, restructurings at larger capitalized companies are undertaken more regularly, and are motivated by a host of other factors unrelated to share valuation.
Unconstrained, Long-Term Focus
We are not constrained by industry considerations; companies undergoing restructuring can be found across sectors and the available opportunity set at any given time tends to reflect where value is present. We are not market timers nor are we macroeconomic forecasters; we believe that our comparative advantage resides in discerning unrecognized microeconomic trends and identifying misperceived factors. We avoid the pitfalls of Wall Street’s notorious short-term focus by holding individual stocks for an average period of eighteen months to three years.