Praetorian Capital Management

May 15, 2020

Harris " Kuppy " Kupperman — the founder of Praetorian Capital Management and CEO of Mongolia Growth Group — made his way into the investment arena more or less on a whim. In the midst of the Asian Financial Crisis in 1997, when Kupperman was still in high school, he found himself befuddled by the amount of money being lost by what he perceived as renowned and educated deep-thinkers. "I just said to myself: 'I'm going to figure this thing out,' because I feel like it's solvable," he said on the " Value Hive Podcast ." "I had cleaned pools that summer, and so I had a couple thousand bucks in my bank account and I put it into a brokerage account (these were back in the days where you had a dial-up modem) and I started investing. "  As is true for most first-time investors, Kupperman wound up losing what he refers to as "a bunch of money." But he didn't let that initial feeling of being chewed up and spit out by the market deter him. "Eventually, I kind of cracked the code," he said. Shortly thereafter, during Kupperman's senior year of college, he was asked to manage funds for his father's friends, to whom he'd been giving stock tips. He started a fund with just two clients and $90,000 in assets under management. In time, he'd wind up managing millions. "That's where it's all grown from," he said. "I've been doing this for the better part of 20 years now." Three bullet points Before we dive into the three bullet points that dictate Kupperman's investing decisions, it's important to note that an emphasis on value lies at the heart of his strategy. He also utilizes an approach that is comprised of about 80% fundamental analysis and 20% technical analysis — an approach he says allows him to identify an entry point with lower risk. "Three bullet points on a napkin is about everything you need in an investment thesis," he said. "Complex models — usually, due to the complexity — people think that they understand it really well because it's a really complex model, and often times they miss the one key factor that actually matters in the whole investment." But in Kupperman's view, an investment thesis can be boiled down to just three questions. 1. How do I not get hurt? To Kupperman, this bullet point is focused on the downside of a potential investment. In order to quell the probabilities of losing your capital, he says to focus on the company's balance sheet strength, net cash, and debt levels. 2. What's happening that's going to unlock this capital (value)? Kupperman refers to this bullet point as "the core of the thesis." In short, it's identifying a catalyst — whether it be secular, company specific, or something under-the-radar that the market has yet to catch onto — to unlock value and increase share price. 3. Am I getting in cheap enough that this is not priced in yet? The adherence to this idea leads Kupperman to scour the stocks that are making new 52-week lows. In doing so, he can look for turnaround opportunities that the market may not have sniffed out yet. What's more, Kupperman gains an advantage by employing a longer-term time horizon. He's not interested in what next quarter's earnings look like, he wants to know what earnings will grow to in three to five years. At this point in the cycle, Kupperman says that he find himself investing in "truly terrible businesses," because that's where the opportunities are. However, that doesn't mean not doing his due diligence. To him, if he can get in cheaply with a tailwind at his back, the investment should still turn out favorable. "The good businesses — the Warren Buffett business, the business you tell yourself you want to own — I find that the multiples are so crazy that the best case scenario is already priced in, which means that if it doesn't go exactly according to plan you're going to lose a whole lot of money," he said. Beyond Kupperman's bulleted checklist, he also utilizes a highly concentrated approach, investing in only six to 12 names at a time. Below is a stock he has high hopes for that currently occupies one of those spots. A stock with huge potential  "A company I'm long right now is a company called St. Joe; I think it's the cheapest stock in the galaxy right now," he said. Kupperman says St. Joe owns hundreds of miles of coastline in the rapidly growing state of Florida and is building housing expeditiously upon it. On the surface, Kupperman says that St. Joe ( JOE ) looks like a "perpetual value trap." But after digging deeper, he came to a completely different conclusion. For context, Kupperman says that the quote below is attributable to earnings in 2022. "But when you go there and you actually look at what they're doing — look at how they're strategically positioning the company, and you see what's actually happening — you realize this is a company that's probably growing 20% or 30% a year, and you can come into it at a single-digit earnings multiple, while you get like $200 a share of land on the side for free," he said. He continued: "You can look at what's happening and see what the pipeline of developments are and you have almost no downside because they have no debts." Over the course of his lifetime, Kupperman believes St. Joe's share price can increase 50 to 100 times.