With this article, Signal from Noise inaugurates a Question & Answer format, to be published occasionally as we run across portfolio managers with investment themes and stock ideas relevant to  subscribers.  It’s our intention to familiarize you, if briefly, with the views of successful money managers, some you might have read about, but, more importantly perhaps, some you might not have.

This week’s Q&A was conducted recently with Lloyd Khaner, who runs the New York City-based Khaner Capital LP, which began operations in 1983. Lloyd’s been at the helm for the past 22 years, since 1997,a time in which the investment style shifted from a “cigar butt,” deep value fund to one focused on value stocks with high quality management and at least 50%-100% upside in their stock price over the next three years.

Q: Describe briefly the fund’s investment stock picking thesis?

A: Find great managements and invest with them. Our proprietary “CEO Family Trees” identifies future leaders that have been trained by the best in their field. We track these CFOs, COOs, and other key executives and wait for them to land at a new company. This often creates an opportunity for us,  especially true in a company turnaround. We have successfully invested in over 75 such situations and invariably it comes down to applying great new management to a fixable situation. Our hurdle rate is a minimum of 100% upside, so we pass on the vast majority of companies we consider. Our ultimate stock investments go from being turnarounds to value to growth and they last for years.

Q: How does this method distinguish itself from conventional methods.

A: We are stock hunters, not gatherers. As opposed to sitting in the office reviewing research and making phone calls as a “gatherer” does, we attend conferences, analyst days, visit company operations and headquarters and basically go anywhere to find the next superior investment. Our most recent trip was to Nunavut, Canada, just below the Arctic Circle.

We couple this search with a focus on companies that most of Wall Street has given up on or doesn’t understand, so we often find ourselves alone at meetings. We might track a management’s progress for a long time before making an investment. We have the luxury of time because our backlog of stock ideas reaches back 30 years. There are times when we’ve waited over 7 years to invest in the right management at the right company at the right price.

Q: What has been your performance this year vs. peers and the market.

A: Year-to-date 2019 Khaner Capital is up 15% net of all fees, as of last week. This performance has us roughly 2.5 times better than our peer hedge fund HFRX HF Index but a few percentage points behind the broad market. This also holds true for our 3-year performance as well as our results since 1997. Historically, our short-term and long-term outperformance versus the market kicks back in during periods of market weakness while our outperformance versus our peer index extends even further.

Lloyd Khaner-General Partner

While we have had years up 40%+, I believe our true differentiator is our ability to protect our gains in difficult environments like 2000-2002, 2008 and 2015. This has allowed for significant compound results while using little to no leverage. Our portfolio consistently offers less risk than if you just owned the market.

Q: What are the main contributors to that 2019 performance?

1) Zynga Inc. (ZNGA). CEO Frank Gibeau joined the company four years ago from Electronic Arts. He and his team turned around operations, transforming it into a leading mobile game company. Basically, Zynga went from being a one-hit wonder with Words with Friends to a Forever Franchise Games creator with a growing stable of free-to-play/freemium games that have stood the test of time.

The company is building and improving its game line-up with focused R&D as well as smart acquisitions and joint ventures. And now, bookings, revenues and margins are rising, and we see them continuing their ascent for years.

2) Sirius XM Holdings (SIRI/LSXMA).  CEO Jim Meyer showed up six years ago and it has been straight up ever since. Left for dead and on the verge of bankruptcy, the extraordinarily talented financial powerhouse Liberty Media swooped in and took control of Sirius XM. Now, it’s a dominant player in mobile entertainment with its in-car satellite radio and internet streaming services. It’s also a gushing free cash flow machine generating between $1.5-2.0 billion dollars per year. Another ultimate investment for us, this phoenix is now in growth mode.

SiriusXM is aggressively buying back its own stock, meaning its Liberty tracking stock, LSXMA, will soon go over an 80% company ownership threshold. Once this happens, consolidation may be forced. This is good news for the LSXMA tracking stock, which we own, that currently trades at a 28% discount to the SIRI stock. Why? Hard to know but this has happened many times with Liberty trackers and in the fullness of time the spread has always narrowed.

3) Brookfield Asset Management (BAM) CEO Bruce Flatt runs the biggest, most successful global company you have likely never heard of and has been doing it for seventeen years. With a market capitalization of $50-plus billion, Brookfield is the major player in real estate, infrastructure, renewable power and private equity, to the tune of $300+ billion. Their average annual investment track record exceeds 17% and the capital keeps pouring in as investors and funds worldwide are desperate to find large, long-term, high performing investments. Brookfield could benefit from an accelerating avalanche of capital coming their way.

Fortunately, the world is in the midst of a 50-year transition from public to private ownership of assets like pipeline, bridges, roads, solar arrays and other large projects that Brookfield will invest in along with their own investors. This will generate a fee for Brookfield as well as a return on their investment and should continue for a long time.

4) Agnico Eagle Mines LTD (AEM) CEO Sean Boyd has spent the last fourteen years building this company from a single gold mine to the third largest, best run, highest cash flow generating miner in the world. I took a trip up to their mines in Nunavut to see for myself, and in the harshest conditions on earth, the operations ran like a well-oiled machine. As a hedge against inflation and geopolitical risk, AEM is potentially interesting.

Soon AEM will be producing two million ounces of gold per year and generating more cash than they have the need for. This sets up for a powerful period of returns for shareholders and AEM is as shareholder focused and friendly as any company we have ever known. They recently raised their dividend by 40%. Lastly, they have a solid ESG rating which is becoming more and more important as is especially rare among mining companies.

Thanks, Lloyd.