10 Questions With Lee Kronzon, Portfolio Manager

Since inception, Gator Capital Management has utilized a disciplined approach to select small-cap and small/mid-cap companies. Portfolio Manager Lee Kronzon discusses what he believes makes Gator unique and differentiates his investment style.

PORTFOLIO MANAGER

Lee Kronzon, CFA

Portfolio Manager

Gator Since 2013

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      1. What makes Gator unique among asset managers?

        Gator is unique in its investment focus on business ownership. We look to own great businesses for the long-term rather than just rent shares of stock for the short term. We invest in high-quality businesses that we know and understand, and attempt to purchase shares with a valuation margin of safety. We believe we concentrate our investments in our best ideas, and we seek to minimize turnover to reduce our tax burden and trading costs.

        Our team at Gator is close knit. I have known Derek Pilecki professionally for over 10 years. We worked together prior to Gator as part of the Fundamental Equities Group at Goldman Sachs Asset Management. Each member of the Gator team differentiates themselves through entrepreneurial and collegial work environments and every portfolio manager invests a substantial portion of his own net worth in the strategy he oversees, and assumes full responsibility for the strategy’s success.

      2. How would you describe your investment approach?

        Reflecting Gator's distinctive investing philosophy, I invest for the long-term in a relatively concentrated set of public equities issued primarily by domestically-listed small/mid-cap firms that I believe are high-quality yet undervalued based on fundamental analysis with perceived catalysts to close the valuation gap.

        Most importantly, I am quality-driven as I focus my investing in best-of-breed businesses with superior business models, strong and sustainable competitive advantages, and shareholder-friendly managements. Therefore, I am fundamentally focused and invest based on in-depth research and bottom-up analysis of each portfolio company's business and prospects.

        I am also growth-oriented yet valuation-sensitive, seeking to invest in the equities of firms that not only offer sizable and visible sales, earnings, and free cash flow growth prospects, but also offer a margin of safety (trade below my estimate of fair value) and asymmetric risk/reward profiles (high upside return potential and low downside risk potential).

      3. What differentiates the Gator Small/Mid-Cap Strategy?

        The strategy’s key differentiator is its relentless focus on business quality. I firmly believe quality is a key determinant of business success and therefore separates long-term investment winners from losers. Most other investment strategies are typically focused on either growth or value attributes, but less so on quality.

        I also believe that the intersection of quality with growth and value provides investors with a superior set of investable companies. I seek to provide my investors with the "best of all worlds" rather than limiting my scope to a narrower subset. The strategy’s other key differentiators include a flexible mandate to invest across all sectors and regions, a high "active share" with a portfolio built independently of specific index benchmarks, alignment of financial interests between myself and investors, and my accessibility to investors.

      4. Are you a growth or value investor?

        The answer is "yes" to both of the above. How is that possible? Because I believe the distinction between growth and value investing is a somewhat artificial one that is propagated by rating agencies like Lipper and Morningstar. Like the great investor Warren Buffett, I believe that growth and value are intimately intertwined in that growth is a key factor in determining value. For example, greater and/or more predictable profit growth generates greater value, so investors will pay up for more profit growth. In other words, growth and value are two sides of the same coin. I am happy to invest in growth, as long as I do not overpay for it. For this reason, I seek growth AND value - maybe I am being greedy, but why not aim to offer investors "the best of both worlds?" Perhaps the best way to describe me is as a core blend investor focused as much on capital preservation (value) as I am on capital appreciation (growth).
      5. Are you a bottom-up or top-down investor? Where does the macro environment fit into your analysis?

        I am a fundamental or “bottom-up" investor rather than a macro or “top-down" investor, as I believe it is inherently easier to identify the long-term direction of a company or industry rather than that of the economy. I incorporate my expectations of the economic environment via firm-specific scenario analyses rather than general macro models. For example, I model bear/base/bull cases of negative-growth/low-growth/high-growth that could be driven by economic contraction/stagnation /expansion and assess their impact on a company's earnings and cash flows. This has led me at times to overweight certain sectors and industries and to completely avoid others. I believe that the more I know about the business fundamentals, the more informed my investment decisions will be regardless of the macro environment.
      6. What are the most important qualities you look for in a small and mid-cap company?

        1) Relatively unique products that provide compelling value propositions to customers; 2) Superior business models (e.g., solid sales growth and visibility, margin scale and leverage, strong free cash flow generation, and high returns on investment); 3) Strong and sustainable competitive advantages (e.g., business "moats" such as economies of scale, high switching costs, a robust ecosystem and strong network effects,); and 4) Shareholder-friendly managements (e.g., strategically visionary, operationally effective, and financially prudent) that ideally have their own "skin in the game" and are focused on a return of capital as well as return on capital.
      7. What is the time frame between discovering a company and buying its stock?

        It varies greatly, but typically ranges from several weeks to several months depending on the amount of analysis and due diligence required. It may take only several weeks if the company meets all my investment criteria in terms of business quality, growth prospects, and attractive valuation. This is the time it usually takes me to develop a thorough investment thesis by analyzing the company's key regulatory filings and recent earnings reports, reviewing available research, conducting my own business checks if possible, visiting the company and/or interviewing management if accessible, etc. It may take longer if a company meets my quality and growth criteria but not my valuation criteria. In that case I will add it to my watch list and wait for the right time to buy it (e.g., a significant stock price pull-back on a temporary or non-core concern, or on an unrelated market sell-off). This can take several months or even years, and some stocks may never become cheap enough for me to buy. But fortunately there are plenty of fish in the investment sea!
      8. How do you weight your evaluations versus those of outside analysts?

        I seek to come with my own independent analysis when evaluating an investment. Sometimes I utilize outside analysts as sources of investment ideas and information, but not as sources of investment due diligence and judgment. Outside analysts often have different agendas (e.g., pleasing their clients or talking their own book) or conflicts of interests (e.g., seeking banking work from companies they cover). As a business buyer, I believe it is important to do my own primary research. As a disciplined and systematic investor, I also know my own investment criteria best. Only by doing my own analysis can I work to gain unique insights or develop an investment edge that will increase my conviction in my investment thesis.
      9. How do you track a company once you own it?

        I continuously monitor an investment once it is made for business developments and update my investment thesis and action plan accordingly. For example, I review news flows for the fund's holdings and financial filings (e.g., material events and insider transactions) on a daily basis. I also review a portfolio holding's investment conference presentations and any available buy-side or sell-side research on a weekly basis. Moreover, I review a portfolio holding's changes in short positions and institutional holdings on a monthly basis. In addition, I review a portfolio holding's earnings reports and related materials (e.g., earnings call transcripts and financial filings) on a quarterly basis. Furthermore, I review a portfolio holding's annual report, letter to shareholders, and proxy statement on an annual basis. Finally, I contact a portfolio holding's management team whenever I have pressing questions to ask.
      10. What do you do when the price of a stock you own goes down?

        It depends. Most small/mid-cap stock prices typically fluctuate at least 1-2% per day, so I focus on more significant price declines. The first thing I try to find out is why the stock price declining. If this is due to a broader market, sector, or industry sell-off, then I will use it as an opportunity to add to the portfolio position if it is below my target weighting and the risk/reward profile (upside return potential versus downside risk potential) is attractive. If the stock price decline is due to a business-specific concern, then I ask myself whether it is a strategic issue (e.g., a major customer loss) or a tactical one (e.g., a minor contract loss). If the issue is tactical, then I will use it as an opportunity to add to the portfolio position if it is below my target weighting and the risk/reward profile remains favorable. If the issue is strategic, then I will review, re-evaluate, and revise my investment thesis accordingly. I will only add to the portfolio position if I believe the updated risk/reward profile remains attractive and the issue is temporary and fixable.