Steven Kiel Of Arquitos Capital On Firms With Valuable NOLs

This is part two of the first of a weekly, exclusive, ValueWalk interview series. Throughout this series, we will be publishing weekly interviews with up-and-coming value-oriented hedge fund managers.

This week’s interview is with Steven Kiel, President and Chief Investment Officer of Arquitos Capital Management.

Arquitos Capital is modeled on the partnerships managed by Warren Buffett from 1956-1969. The fund uses a bottom-up, company-specific approach, identifying situations where significant mispricing exists.

[buffett]

And this approach has, so far, yielded some highly impressive results. Arquitos Capital’s annualized return since launching on April 10, 2012, to the end of June was 33.2%. To the end of June, Arquitos Capital was up 2.5% for 2015.

More exclusive ValueWalk coverage on Arquitos:

• Arquitos Capital Management 1Q15 Letter To Partners
• Arquitos Capital Partners Up 8% Net In Q2
• Arquitos Capital Up 58% In 2014 After 47% Return In 2013
• Arquitos NOL Newsletter: Intrawest Resorts Holdings (SNOW)
• Arquitos Capital Up 22% YTD; Bullish On ALJJ
• Arquitos Capital Up 41% In 2014; Analysis Of SWK NOLs

See part one here. Part two of the interview below.

Interview With Steven Kiel Of Arquitos Capital Management

Rupert Hargreaves: How do you approach valuation, and what type of returns do you target?

Steven Kiel: I don’t target specific returns. I think doing that at the portfolio level will get you into trouble. My first step is always to examine the downside. This usually leads to focusing on the balance sheet first. There aren’t as many net-nets as in the past, but you can find hidden value in companies that put them close to that level. That’s a good place to look, but screening for net-nets isn’t going to get you very far unless we’re in a period of broad market stress. In normal times, those companies have already been picked over for the most part.

A few of my best investments have been net-nets but did not show up on screens at the time. There are several examples of companies that became net-nets because they sold a subsidiary or, for a few nanocaps, sold a piece of real estate, but the transaction hadn’t closed. The company wasn’t going to show up on a screen because the transaction wasn’t reflected in the financials. You had to read the filings and form an opinion on the transaction or the likelihood of it closing or changing.

I wouldn’t call that a valuation approach, but I like to look at those types of situations. On the earning side, I’d typically assess it with some sort of normalized earnings or normalized multiple. Anything on the upside from that is a bonus. It’s great, but rare, to find a company where the value compounds at a steady enough pace, and you can ride along.
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