Rutabaga is a value manager that invests in turnarounds. We look for companies that have experienced a temporary deterioration of their profit margins. We seek to reduce the risk of this approach by focusing on companies that have strong market positions, durable capital structures, and sustainable competitive advantages.
Our fundamental, bottom-up research process strives to identify catalysts for change that will boost profit margins, driving significant earnings acceleration, which should in turn deliver significant stock appreciation. An ideal situation is when we enter a stock that has disappointed investors and has depressed valuations but where we think earnings have good recovery potential. Low expectations combined with improving prospects provide us with very attractive risk-reward opportunities.
We recognize that turnarounds take time and are rarely linear. As a result, we spend a lot of time evaluating the balance sheet and liquidity of potential holdings to ensure they have the durability to survive even if the turnaround is delayed. We also are willing to evaluate earnings power 3-5 years out, which is usually a longer time horizon than most other public market investors.
Once we establish a position, we monitor the company’s execution against our thesis. If it works, we typically see an increasing stock price as reported financials improve and other investors become more interested. If a company executes poorly, experiences market share loss, or sees a material deterioration in its capital structure, we will liquidate that holding.
We use a team vote to initiate, adjust or exit positions, with the majority vote prevailing. All portfolio managers vote equally. Positions are normally established at equal weights. Portfolios typically have 20-40 stocks, so tracking error versus indexes should be expected.