Deep Sail Capital's strategy puts more emphasis on business models and growth potential than solely on valuations. We seek to understand in depth the industry dynamics of the companies we are invested in.
The fund has three core investment focuses: quality, microcaps, and special situations. We combine these three core investment focuses because we have vast experience identifying investment opportunities in each category, and we believe they complement each other due to different risk and reward profiles. By combining these three investment focuses, we have more optimization opportunities within our overall investment universe than if we had a singular focus.
We focus on Industries that are historically highly profitable, have barriers to entry, that we can understand, and that have stable growth trajectories. These industries include:
● Tobacco and Spirits
● Tower Companies
● Medical Instruments
● Medical Diagnostics
● Serial Acquirers
● Financial Services
● Internet & eCommerce
LONG PORTFOLIO: QUALITY
"Quality" is both a qualitative and quantitative trait to assess in any business.
Qualitatively, we look at the overall business model, how they compare to peers, the level of customer and employee satisfaction, historical capital allocation, and what their competitive moat is within their industry.
Quantitively, we look deeply at margin trends over time, returns on capital, scale relative to TAM, growth metrics, and business model efficiency.
We invest in quality businesses because they tend to remain quality businesses year after year. We believe the quality of the business and its longevity are highly correlated.
LONG PORTFOLIO: MICROCAPS
"Microcaps" is a group that we characterize as companies with an enterprise value below $1B.
The microcaps that we focus on are companies with traits like those discussed in Chris Mayer’s book "100 Baggers". The traits we specifically look for are:
● Company is Small Enough (initially below $1B)
● Ability to reinvest capital at high rates
● Have a large addressable market
● Have a strong and honest management team
LONG PORTFOLIO: SPECIAL SITUATIONS
"Special Situations" are short term situations in which market dynamics, short-term selling, future M&A, or other corporate actions have created a material upside in a security.
Special situations that we focus on include public market discounts, spin-offs, SPACs and SPAC warrants, the January small cap effect, and M&A targets (pre-annoucement).
Special situations are meant to be held for less than a year, although some have been held for longer.
The short portfolio provides both a source of alpha and a way to increase leverage on our long portfolio while keeping our beta largely hedged. All of our short positions' valuation is a key consideration, but not the only one. We don't base our decisions purely on valuation. We look for company specific catalysts along with valuations prior to initiating short positions. We focus on Short targets that have the following characteristics:
● Potential Frauds / Frauds
● Pump & Dumps
● Broken or Declining Business Models
● Industry Fads
● IPOs with upcoming Lockups
● Overvalued Moonshots