Cable Car invests globally with a broad mandate. The firm conducts rigorous fundamental research on businesses in a wide range of industries and geographies, with the aim of identifying a small number of opportunities with the best balance of potential return and limited downside risk. Cable Car invests primarily in publicly traded equities (stocks), long and short, but it also makes selective investments in private companies and other parts of the capital structure. The firm also uses options and other derivatives, primarily for hedging purposes. Within a few guiding principles, the firm’s strategy is intellectually flexible and opportunistic. Cable Car invests with a long-term orientation, but also seeks to take advantage of special situations that arise in the marketplace.
Cable Car’s concentrated, hedged, value investing approach is summarized below. For further details, including a discussion of the associated risks, please see the firm’s brochure on Form ADV.
Concentrated Portfolios are composed of our best ideas
- Each of Cable Car’s investments has an individually attractive risk/return profile
- Cable Car typically holds 5-10 long positions and 10-15 short positions
- Short positions are smaller for risk management purposes
- Limiting the number of positions allows for more extensive due diligence
Hedged Short positions offset the impact of market downturns
- Protecting capital is Cable Car’s first priority
- Short positions can provide incremental capital to invest in high-quality businesses that have declined in price
- Markets are uncertain — Cable Car is agnostic whether they will go up or down in the short run
- Cable Car’s net exposure is positive because capital has a cost over the long run
Value investing Valuation discipline provides a margin of safety
- Cable Car’s investments are based on proprietary estimates of intrinsic value
- Cable Car seeks to buy assets below and sell assets above the value of their net assets or a fair multiple of their cashflows
- Cable Car does not restrict itself to low-multiple stocks; fast-growing companies can also be mispriced
- Cable Car often adopts a contrarian bias, preferring investments that are out-of-favor or underfollowed
For its core long positions, Cable Car generally seeks opportunities to buy high-quality franchises that can compound capital for many years at high rates of return. Ideal long holdings have well-incentivized management teams, healthy balance sheets, and strong cash flow generation. These companies may be underpriced due to a period of change misunderstood by other market participants, or the valuation may reflect unreasonably pessimistic expectations. Cable Car also attempts to capitalize on short-term mispricing caused by misinterpreted news items, catalysts for change at a company, and corporate actions such as tender offers, distributions, reorganizations, and merger and acquisition activity. Short positions generally exhibit the opposite characteristics of long positions. Cable Car seeks mismanaged, overhyped, or fraudulent businesses, typically with a predictable catalyst for revaluation, as well as otherwise good businesses facing intractable competitive, industry, or regulatory challenges, overly optimistic expectations, or excessive financial risks.
Cable Car identifies prospective investment ideas through news and events, corporate actions, public filings, conversations with other members of the investment community, and observation of companies and industries over time. Investment follows a thorough review of recent public filings and events, followed by detailed financial analysis. Typical analysis includes a bottom-up valuation of the business, identification of key value drivers and risk factors, and construction of financial forecasts under multiple scenarios. Quantitative analysis is supported by extensive conversations with other market participants, industry experts, and company management. Cable Car generally aims to invest with a differentiated view of the industry or company prospects from consensus.
For risk management purposes, Cable Car limits its use of leverage and the maximum size of individual positions. Cable Car also carefully considers opportunities to offset identifiable risk factors in the portfolio. However, investing with Cable Car still involves significant risks, and Cable Car cannot guarantee the performance of its investment program or any individual investment. Prospective clients should refer to Cable Car’s brochure on Form ADV for further details.