Daniel Kim used to sit on the other side of the table. Today he is a fund manager, but in his previous career as an investor relations officer for Samsung Electronics in Seoul, Kim was responsible for speaking to some of the firm’s biggest shareholders in North America.
‘That experience was quite unique. I was able to see through a different lens how the buy side and the market participants carried out their investments and their analysis,’ he said. ‘It has been helpful for me to understand the benefit and also some of the limitations of corporate dialog.’
Kim is now chief executive and chief investment officer of the $812.8 million boutique asset manager Blackcrane Capital. He draws on his knowledge of corporate finance to invest in companies that he believes have long-term potential upside but which are misunderstood by the markets in the short term.
The Bellevue, Washington-based firm puts this approach to work on its flagship international equities strategy, Blackcrane Overseas Alpha, which has $812.5 million in assets and is offered through separately managed accounts, commingled funds and subadvisory relationships.
The strategy utilizes a distinctive investment process, which is backed by Kim’s philosophy that buying companies with attractive investment characteristics does not necessarily generate positive alpha. Rather, for Kim, alpha is explained by the gap between market perception and reality.
Screening for errors
To narrow down the global equity universe to a highly concentrated portfolio of 39 holdings, Kim and his team start with a systematic screening of the 6,000 names in the investable universe using the firm’s proprietary software called ‘Information Screen.’
‘We screen for companies that have had an earnings announcement in the past 24 hours and prioritize the largest divergences relative to consensus estimates for the big hits and misses,’ he explained. ‘We do this is because by definition at that static moment in time, the company is misunderstood by the markets.’
To set his picks apart from a traditional equity screening process, Kim has put in place a minimum 10% upside on earnings target criteria for each of his portfolio positions.
‘We can only consider buying a stock if we have explicitly modeled out and projected operational earnings and if our profit forecasts are at least 10% above Wall Street expectations over all time horizons,’ he said.
This process means that only a few candidates make their way through the investment analysis process, which requires the team to look at both near-term quarterly earnings and long-term multi-annual earnings, in addition to a range of qualitative factors.
Hong Kong-listed, Macau-based casino operator Galaxy Entertainment Group is one name that passed this scrutiny. ‘Over the next few years, there is going to be significant expansion in the airport there, as well as light rail from greater China heading directly into Macau. That will increase tremendously the volume of consumers entering in the Macau peninsula. Galaxy Entertainment is positioned to take advantage of that opportunity.’
The stock also fits into Kim’s criteria of being ‘misunderstood’ in the short term, because consensus estimates on Wall Street do not look favorably on the firm’s incremental profitability. ‘One of the reasons is that during the last reporting period, there was a negative hold factor,’ he said. ‘The casino had a negative hold impact, which depressed Ebitda margins temporarily. But essentially the consensus on Wall Street is using a lower run rate to make their forward-looking projections.
‘This is one example of how the consensus may misproject due to temporary negative factors that are set to be lifted. The consensus uses that lower level to extrapolate and make their future projections,’ he explained.
Another example of an apparent miscalculation by the market is Norwegian seafood firm Marine Harvest, the world’s largest salmon farmer. ‘Essentially, the global capacity for available land and water areas have been used up, so Marine Harvest is the largest player within the space. Norway as a country represents 55% of global salmon production. It’s a very finite, visible supply-and-demand scenario,’ Kim said.
In the short term, global trade tensions could impose temporary negative effects on the imports and exports of salmon and other seafood products, but Kim sees long-term potential for exponential growth in China.
‘If you look at year-to-date exports of salmon out of Norway, China represents approximately 1.7% now. This has risen from 0.1% from last year,’ he said. ‘A 1.6% increase may not seem like a lot, but if your country produces 55% of the entire world’s salmon production and one country increases by 1.6%, that’s a pretty big deal.’