Aaen combines his accounting background and his focus on the human side of running a business to find attractive investments. Since he launched Symmetry Invest in 2013, the IRR has been 17%. In the same period, the average annual market return has been 7%. Independent and thorough research in the small-cap value space, a long-term investment horizon, and a focus on very specific company characteristics has been a successful formula.
We talked to Aaen about how he works and invests and what kind of companies he owns.
A concentrated portfolio of founder-led small caps trading at big discounts
Symmetry has a concentrated portfolio. The typical position size is 7–9% of assets under management, with the largest holdings around 12–15%.
Aaen mostly buys founder-led small and midsized companies with dedicated and passionate management teams, often market leaders in small attractive niches with long runways. He buys companies with little or no debt, most have net cash positions. And he prefers capital-light business models with good returns and cash flows.
Two companies that tick these boxes are the Italian treasury software company Piteco and the American food certification company Where Food Comes From. We’ll get back to these two investment cases later.
Aaen is a value investor and he needs a big upside to be interested in a stock. “In our models, we look at the valuation in intervals due to the many moving parts. The low end of the interval needs to have 50% upside and in smaller cases we prefer to see 100% upside in three years. This gives us a margin of safety. We have room to make some mistakes and still be able to generate attractive returns.”
He believes many people wrongly see value investing as only buying stocks with low earnings or book multiples. “If a stock looks very cheap in screens and is widely shared in equity forums it’s often cheap for a reason. You make the best investments in stocks that are extremely cheap but look expensive at first glance. It’s not until you do the work and think three steps ahead that you see how cheap it actually is. Few investors are willing to do it, and that gives opportunities to those of us who do.”
“At Symmetry, we look at the value of a company based on the discounted future cash flows. When you do that, the company’s moat, pricing power, management and so on weights much more than whether the stock trades at nine or twelve times last year’s earnings. We don’t mind paying a high multiple if a software company is investing heavily in customer acquisitions up-front and the customers have a high lifetime value or if a company makes other long-term value-creating investments that temporary weigh on earnings.”
Short selling as an additional alpha source
Symmetry has created positive alpha on their short positions every year. Aaen’s accounting background is useful when he looks for overvalued companies. They have 30–40 short positions, usually with a weight of 1–3% of AUM in each. “We don’t see the shorts as a hedge, it’s mainly to create alpha and to gear our longs a bit without increasing the market risk.”
“We look for unsustainable business models with warning signs. It can be companies with large negative cash flows while the reported earnings look good. We look for CEOs that are unreliable and their actions and results do not mirror what they promise. We also have a number of ways to find outright fraud cases.”
Aaen mentions household names like the Danish jewelry company Pandora and the Swedish technology company Fingerprint Cards as successful shorts in Scandinavia. Shorting EROS International has also been a success, it is an example of a company he sees as an accounting fraud case.
A dedicated one-man investment team with a big network to lean on
His one-man investment setup is inspired by successful investors like Mohnish Pabrai, Charlie Munger and Warren Buffett, who all worked by themselves without a team of analysts. He believes it’s an advantage to do all the work and make all decisions by himself. This way he can maintain his independent thinking and do what he is good at and loves to do.
“I really like the research part, digging around, talking to management and so on… I think about Symmetry and investments pretty much around the clock. When my wife and kids go to bed, I prefer to sit by the computer to research stocks rather than watching Netflix or Champions League like a lot of my friends. Running the fund is not a job, it’s a hobby and a passion.”
When Aaen feels the need to spar or discuss an idea, he has a network he can reach out to. “I have a big network of like-minded investors both in Scandinavia and in the rest of the World. It’s a group of highly intelligent people who manage money themselves. I could not afford to hire people of this quality, but this way we get to spar and share ideas with each other.”
By keeping track of industry experts and smart people he meets, Aaen has also built a network he can contact during his due-diligence process. “Whenever I meet interesting people with unique industry knowledge, I put them into my database. If I’m working on a case within agriculture, I know who to call.” An example of his use of experts is his interviews during the Piteco due diligence. He talked to a number of CFOs across company sizes to understand how they use treasury software systems or why they don’t use them.
To learn more about using expert interviews in the investment process, read our article on the subject here.
Idea generation and due diligence process – turn over a lot of stones and keep digging deeper when you find something interesting
“I call my idea generation process ‘pounding the rock’. I keep turning over a lot of stones until I suddenly find something interesting. I read a lot. It can be newsletters, investor letters, industry articles and a lot of other stuff. I talk to my network and share ideas with them. I used to do screens but don’t do it much anymore.”
Another popular source of ideas is busted IPOs. “I almost never invest in IPOs, but I follow them closely if the companies fit my criteria. If a small quality company goes public at a high valuation you often get an opportunity to pick it up at a good price if they disappoint a little or the share price doesn’t perform in the first couple of years.”
“Piteco is a good example. I started to research the company when they IPO’ed in 2015 with a 20-25x P/E multiple. Over the next two years, they grew earnings a lot, did 2 good acquisitions while the stock barely moved. In late 2017 and throughout 2018, we were able to buy shares in a company with a proven business plan that I had known for 2-3 years. The free cash flow multiple had declined to 9-14x.”
When Aaen finds a company that looks interesting, he starts out by reading the last annual report and see if he can find any deal-breakers or red flags that kill the case. If everything still looks good, he digs down another level. He listens to conference calls and reads old annual reports to see if the company has delivered on what they promised five or six years ago. He learns about the company, the industry and the customers. Then he starts to build a model.
“One of the most important things about our models is to identify the KPIs that drive the case and the value creation in the company. It can be things like the customer retention rate, customer acquisition cost or the incremental margin on invested capital. The model helps me to understand the moving parts. It makes it easier to identify leading indicators and spot issues before they show up in the numbers or in the share price.”
“The key to modeling is to understand unit economics, not the fair value estimate that comes out of the model. If you don’t understand the economics, you can get whatever outcome you want from the model by changing the inputs.”
If things still look interesting, he talks to the management team. First on the phone or on Skype and later he usually meets them in person. He learns about the organization and the culture.
“We take it step by step until we feel comfortable with the investment. Then we usually start to build a small 2–3% position. It could be a month after we started the due diligence process. As we keep getting to know the company over the next 3, 6 or 12 months, we might add to the position.”
Finding quality management with purpose and integrity
Assessing the management team and the ownership structure is an important part of Aaen’s investment process. He has a clear preference for what he calls intelligent fanatic CEOs and often invests in founder-led companies. “The founders are still involved in 70–80% of the companies we are invested in. Either in the management team, on the board or in other ways. Owner-operators often have a strong drive, aligned interests and a focus on developing the culture.”
“The capital allocation skills are obviously the most important. But I’ve started to look more at the human side of the equation as well. What motivates them, what’s their background, why did they start the business and why are they still involved? Founders often have a purpose; they try to solve a problem and create value for their customers. We are not interested in managers that are just in it for the money.”
“I try to get to know the management team as human beings and find out if they have high ethical standards. Do they care about their employees and their shareholders? Besides the business-related questions, I also ask into their family relationships, their hobbies and so on. It breaks the ice and we get to know each other. I find out if this is the kind of person I would like to run a company I own a part of.”
When Aaen gradually develops a relationship with the management team and they see that he is invested for the long term, it helps him get better access to the next layers in the organization.
“We like to see if people further down the organization are aligned with management’s strategy and they answer our questions in the same way as management did. In companies of this size, few people ask to interview the supply chain manager or one of the salespeople. But when they get to know me, it’s easier to get access. Even though there is a selection bias when the boss decides who we can talk to, I still think it adds value.”
Investing in small companies with limited liquidity
Small- and medium-sized companies make up 80–90% of Symmetry’s portfolio. The rest are mainly larger positions that help to create liquidity if they suddenly get redemptions and need to sell. Besides the few large positions that provide liquidity, the largest companies typically have a market cap of around 400–500 million USD. The smallest investment currently has a market cap of around 20 million GBP.
There is not a lot of money in doing sell-side research on a company with a market cap of GBP 20 million or a company that only trades a few thousand dollars a day. That’s one of the reasons Symmetry has an edge in this market segment. “It’s a huge advantage that most of our companies don’t have any analyst coverage. If they do, it’s often very superficial with only a few highlights from the last quarterly report and that kind of stuff. When we do our own thorough long-term focused due diligence, we get an edge. Especially since it’s mainly private investors we compete with in this segment.”
Aaen acknowledges the issues with low liquidity but has learned to deal with it. “The low liquidity in these companies makes it difficult to get in and out of a position. So, we have to think very hard about it before we decide to buy or sell. This brings down the trading activity and helps you maintain a long-term focus. We deal with the low liquidity by being patient and build up our positions slowly. That being said, we are not afraid to pay a 5% premium if we can get a big block. That’s the benefit of being a long-term investor and having a large margin of safety.”
Two Symmetry holdings
Aaen makes comprehensive investment write-ups on his holdings, such as the recent 31-page report on his holding in Piteco. We went through two of his write-ups. Below are some of the highlights.
Piteco – Highlights from Symmetry’s investment case
Mcap: EUR 113 million
Piteco is an Italian software company. They are the clear market leader within treasury management software solutions for medium and large enterprises in Italy. The software can be integrated into the companies’ accounting software from providers like SAP, Oracle, Microsoft and so on. It helps the treasury department with cash management, liquidity management, bank transactions, and other treasury management solutions.
The Piteco software tool has around 20 different modules for different industries, customer types, etc. This gives Piteco an advantage as they can tailor the product directly to the customer needs. Normally a new customer buys 4–6 modules and adds more modules each year. If a customer pays Oracle or SAP 2–3 million EUR a year for the ERP system, the 30–40,000 EUR or so they pay Piteco is rarely a big concern.
International players have been unsuccessful when they tried to enter the Italian market, and Piteco’s management does not recall ever having lost a client to a competitor. Once the customers start to use their software, they don’t change to another supplier. Most revenue is annually recurring and retention rates are 95%+ (by volume). The main reasons for losing customers are if the customer is bought by a company using another provider or if the customer goes bankrupt.
Symmetry estimates Piteco has an 80% market share among the companies that currently use treasury management software. The biggest competitor is actually spreadsheets. The main task for the sales force is to convince companies to move from spreadsheets to start using treasury management software. Piteco estimates that just one in four companies in the addressable market use professional software; the rest still use spreadsheets.
Piteco has 40% EBITDA margins despite no heavy capex needs and no capitalized R&D. They have a highly scalable asset-light business model with strong free cash flows and a long runway. They currently grow the top line by 5–10% per year organically. Including M&A the annual growth rate has been above 20%.
The majority owner (65%) is the Italian software conglomerate Dedagroup, which is controlled by the Podini family. They have shown themselves to be great capital allocators and a good controlling shareholder. Management owns 6% and there has been a lot of insider buying lately.
They made two acquisitions of other software businesses. They bought 60% of LendingTools in the US and 54% of Myrios in Italy. Founders or management in each of the two companies own large stakes and are highly incentivized. They are still in charge of the daily operations as the companies operate as separate businesses.
Both acquisitions were made at attractive prices as Piteco were in unique positions to be the best owner. They paid 7–9x earnings in both cases. The US company’s former owner was looking for a new home for the company and would not sell to a PE fund or a competitor. They had a connection to Piteco and decided to do a management buy-out, with Piteco buying the rest of the company. The Italian company could gain access to a lot of new business through Piteco and Dedagroup. So, by selling part of the business at an attractive price they believed Piteco could help accelerate the business and take it to the next level.
At the end of 2018, Piteco’s share price was depressed due to the overall market correction and concerns in the Italian equity market in general. At the time it traded closer to 9x free cash flow. Symmetry bought aggressively and increased the position. On Symmetry’s estimates, Piteco currently trades at around 13x free cash flow. Peers trade around 18–20x and in the US they trade closer to 25–30x.
Where Food Comes From – Highlights from Symmetry’s investment case
Mcap: USD 40 million
OTC-listed Where Food Comes From, WFCF, is the only listed player within food verification and traceability. They provide audits to farmers in the USA of around 40 standards including Organic, Non-GMO, Gluten-Free, Safe Quality, Protected Harvest, American Humane Certificate, Sustainability.
The core business is auditing the different standards that allow the farmer to sell the product with the respective certificate. The farmer needs an annual inspection to keep using the certificates. WFCF is the clear market leader in this small but growing niche. They are especially strong within meat and dairy. Beef is the largest segment, and they have a 90% market share in this market. They are also active in a number of niches such as nuts, honey, mushrooms, etc.
WFCF has the highest number of different certifications and can bundle their offering. The farmer only needs one inspector for several certifications, which saves both time and money. It makes it very difficult for other players to compete. With more certifications, the farmer has more options to sell his meat and can obtain a better price.
They currently have a sticky relationship with 15,000 customers with recurring revenue. The market-leading position and existing customer base give WFCF a cost advantage. It’s cheaper to do the inspections in year 2, 3 and so on, and WFCF has built a leading infrastructure and IT systems for the inspections. The farmer’s cost per inspection of around 1,000 USD is relatively low and most farmers won’t go through the trouble and risk of changing inspector to save a few hundred dollars, just as companies don’t shop around for a new accountant each year to save a little money.
It takes time to be authorized for the different standards, which is another barrier to entry. It took more than two years for WFCF to be authorized as a Non-GMO auditor. And it is still a very small market: WFCF has revenue of around USD 18 million. So, no large companies are attracted to the niche. But there are many strong and long-term growth drivers for both the industry and the company.
The increased focus on food safety and quality and on animal welfare from end-users is putting pressure on all parts of the supply chain to demand more certified products. In 2013, Whole Foods had 3000 Non-GMO products; in 2016, they had 13,500.
WFCF mainly sells directly to the farmers, but large players like McDonalds, Tyson, and Danone are increasing the requirements towards their suppliers. When McDonalds Canada decided that all their meat needed to be certified Non-GMO and Verified Sustainable Beef, WFCF was chosen as the partner to perform the certifications.
The export market is also an important growth driver, since all meat needs to have a number of certifications. Finally, the regulation is gradually becoming stricter and the US is still behind comparable countries in their requirements.
WFCF has done many small bolt-on acquisitions to complement the business in different geographic areas and to expand the offering with new types of certifications or solutions. They often buy small private companies at attractive prices and with clear synergies.
They also have a number of related business areas with big potential. WFCF is the market leader in ear tags for cattle, with 80% market share. They also offer software solutions to farmers. They can cross-sell these products on their regular visits to the farms.
One example is their acquisition of SureHarvest, which makes software for the almond industry. WFCT has adapted the software and developed an offering to the beef market. Whenever a cow is moved to a new location, it has to be tracked in a report. These reports were done on paper until WFCF started offering a SAAS solution. They receive USD 3 for each report and it saves a lot of time and paperwork for the customers. There is big potential within beef and it’s likely they can expand the platform to areas other than beef and almonds.
Another interesting growth option is in the hemp market. WFCF has recently been named Program Administrator and exclusive certification body for the new US Hemp Authority Certified verification standard for hemp growers and processors.
The founders and managers, married couple John and Leann Sounders, own 30% and are fully dedicated to managing and developing the business. The board of directors owns 10% and is made up of several skilled people from the industry
WFCF is not a cheap stock measured on multiples like PE or PB. However, if you adjust for the amortization of intangible assets from past acquisitions, the adjusted EBITDA looks attractive. Adjusted EBITDA has grown 30% annually on average since 2010, while revenue has grown 24% annually.
A lot of R&D investments and other long-term investments are accounted for through the P&L, although these have not added anything to current earnings. This is one of the reasons for the decline in the EBITDA margin. In 2011–12 they had an EBITDA margin of 16–20%; today it is 11–13%. They have a stronger market position and a better business now, but they have increased investments, especially in software and labeling.
On Symmetry’s estimates, the stock trades at 17–18x next year’s adjusted earnings.
After having shared his research online for some years, Andreas Aaen gradually attracted attention and an online following. His ideas delivered and people saw the quality in his write-ups, so they started to reach out to Aaen to discuss investment opportunities.
He decided to quit his job as an accountant and with money from friends and family and from contacts he made by sharing his research online, he started to manage money professionally.
Since the launch, the IRR has been 17.3% as of Q3 2019. The MSCI ACW index returned 7.1% annually in the same period. Symmetry had an average net exposure in the 45–80% range.
Performance 2013 – Sep 2019
The AUM is DKK 75 million (EUR 10 m). Aaen plans to slowly increase the AUM to DKK 200–300 million and then evaluate if the strategy has room for more or if they are close to the limit.
The majority of investors in Symmetry Invest are either business owners or people who have sold their business and need to invest some of their capital. Most have an interest in equities themselves, but do not have the time or the skills to invest in this segment of the market. Through Symmetry, they get diversification and exposure to a segment they usually do not invest in.
Aaen invests the vast majority of his investable assets alongside the clients.
The management company behind Symmetry Invest, Symmetry Administration, is owned by Andreas Aaen and three investment companies: MH Investments, Strategic Investments, and Jesica Invest.
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