Kevin Douglas – The Greatest Super Investor No One Knows

With everyone reading the 13fs filed last night, we see the quarterly drool-fest over what the super investors are doing.  While it’s interesting to see what others are buying, I find it most interesting to learn why it is they are doing that buying.  Sadly, one of my favorite super investors is a man named Kevin Douglas, and he, as usual, will not be filing any planned 13fs this quarter.  Who is Kevin Douglas?  Odds are you probably don’t know, yet over the past decade he has built one of the most impressive investment track records.  Recently he has received some headlines for his thus far poor investment in American Superconconductor Corp., but even those articles reference the fact that he is little known above any other point (see the Wall Street Journal on the topic).  If you do a Google Search for Kevin Douglas, it’s almost astonishing how little meaty information comes up for a guy who invests tens of millions at a time right now, in the age where Big Brother (aka the Internet) is always watching.

From what I can gather, Mr. Douglas made his initial money as the founder and Chairman of Douglas Telecommunications, a VoiP company.  Beyond that, little is even know about Douglas Telecom (as it is/was known) for even the company’s website no longer exists.   I found one old press release from the company that included a root directory phone number, but that line now leads to a perpetual busy signal.  This only adds to the mystery and intrigue.

Swinging for the Fences, and Connecting

One may ask why I care, and that’s a fair question.  I first encountered Mr. Douglas when he made a substantial investment in IMAX as the company seemed to be in a great deal of distress amidst the financial crisis, crumbling under its debt load accrued a decade earlier during the Dot.com.  IMAX caught my eye at that time, as Dark Knight emerged as a hit on the platform and the catalyst to look deeper was Mr. Douglas, already the majority holder, ponying up for more shares in an equity raise that helped pay down a substantial chunk of the company’s debt load.  Following that move, Mr. Douglas owned nearly 20% of the company and as a result, I dug further into Mr. Douglas’ portfolio holdings and investment track-record to determine whether that was a good or bad thing. 

I was pretty amazed with what I found on two fronts: first, he had an outstanding success rate, as he made money on nearly all of his investments; and second, that nearly all of his successes were home runs.  In baseball terms, this was not your all-or-nothing home run machine like a Jim Thome, nor was it your dinky little singles hitter like Ichiro.  This was something like Barry Bonds in 2001 where each at bat was either a walk (a pass in investment terms) or a home run (greater than 25% CAGR over a substantial stretch of time).

For the most part, the only known investments by Mr. Douglas are in situations where he has taken in excess of the 5% ownership interest reporting threshold by the SEC, and as such, any picture is inevitably incomplete.  That being said, by all appearances, when Mr. Douglas invests, he buys big and keeps on buying, plus he operates a fairly concentrated portfolio in companies with market capitalizations under $1 billion.  He owns enough of companies to safely say that he doesn’t trade at all around the holdings, and sits tight as his money works for him.  It’s this last element that is particularly impressive.  He sits tight amidst volatility, he sits tight holding losses, and he sits tight holding massive gains.  Patience is the man’s best friend. 

Known investment successes include Hansen Natural, now Monster Beverages, Westport Innovations, Jos. A. Bank, Stamps.com, IMAX, and SilverBirch Energy, with one seemingly large failure in American Superconductor and a remains to be seen, although losing position in Cree Inc. right now.

Monster Beverages and Westport happen to be two of the market’s top performers over the last two years, and they just so happen to be two of Mr. Douglas’ most noteworthy investments.  In Monster Beverages, formerly Hansen Natural Corporation, Mr. Douglas bought 329,719 shares at an average price of $0.58 between 2003 and 2004.  At today’s share price of $109.68 that represents a 92% CAGR, having turned around $190 thousand into a sum greater than $36 million (Hat Tip to Stockpup for the cost basis info).

With Westport Innovations, Mr. Douglas accumulated 18.5% of the company’s shares, at prices between $12.95 and $20/share.  Let’s assume an average price of roughly $18/share (which is high if anything considering he had plenty of purchases, most of which happened below that price), that represents a 144% return over the last year and a half.  Whereas Monster/Hansen generated a stellar return on a relatively small sum, Mr. Douglas put over $150 million to work in WPRT and thus far has seen an equally lucrative outcome in terms of percent return, and a far more impressive outcome in terms of gross return.  Don’t underestimate for a second how hard it is to double $150 million in contrast to any number in the thousands.

How Does he Do It?

Considering how little is known about Mr. Douglas, it’s hard to know exactly how or what he looks for in an investment.  However, I have spent a decent amount of time digging into each and all of his known investments during since 2003 and drawn several conclusions.  First, it’s most clear what Mr. Douglas doesn’t look for.  He doesn’t look much at all at economic forecasts, or anything of that kind, and further, Mr. Douglas is neither a traditional “value” nor “growth” investor.  In many respects, he operates far more like a venture capitalist operating in public markets, than a traditional equity strategist.  Incidentally, the only clear-cut theme one can glean from his present holdings is that Mr. Douglas has a “thing” for Canada, as many of his investments are companies domiciled in Canada.  Yet, that appears more of a coincidence than anything else, and is most likely reflective of the fact that many American investors turn to “sexier” countries like the BRICs when looking abroad, while ignoring our neighbor to the north. 

My intuition after reviewing as many investments as I can is that Mr. Douglas first assesses a company’s addressable market and then assigns probabilities based on the likelihood of the company capturing different portions of the addressable market.   For example, let’s say we’re talking about a company with a $20 billion addressable market.  He would then assign probabilities for the company to capture that market opportunity.  For example, let’s say there is a 20% chance that the company captures 50% of the market, a 50% chance of the company capturing 30% of the market, and a 30% chance that the company captures 10% of the market, he then calculates the weighted average of the future revenue base (.2*$10) + (.5*$6) + (.3*$2) = $5.6 billion.  So long as the company is worth less than the present market capitalization grown at his target rate of return (let’s say 25%), he will invest.  For a $5.6 billion market opportunity five years down the road, that means Mr. Douglas will be buying so long as the company is worth less than $1.8 billion today, Mr. Douglas will be buying. 

Each of these investments are positioned for some kind of secular super-trend, some of which people knowingly acknowledge and talk about, others of which Mr. Douglas is clearly early in recognizing the opportunity.  All in all, there are two key elements to his analysis: first is the subjective analysis of the companies’ business and market opportunity, and next is the objective mathematics, based on probabilistic outcomes and his CAGR objectives.   It is in these subjective metrics that his skill is clearly superior.  His ability to identify and quantify market opportunities for his portfolio companies is simply uncanny.   Whether it is energy drinks, fine men’s apparel, digital postage or a movie display platform, Mr. Douglas has tremendous skill at identifying the largest market opportunities, targeting the company best positioned to prosper, and quantifying the investment upside in order to make a concentrated wager.  Call me impressed.

Mr. Douglas, if you’re out there and reading this, I would love to get in touch with you in order to learn a little bit more about your investment background and process.

Update: I have added a follow-up post to give some more color and background on the AMSC loss and the HANS/MNST gain.  Plus I added a brief little bit about Mr. Douglas very successful investment in Rural Cellular Corp.  Be sure to check it out.

Author Disclosure: Long IMAX, CREE

Comments

[Balaji Sridharan]

Will you be kind enough to share some of the posts / details of Kevin Douglas that you have found? I am intrigued now!!

[Elliot Turner]

Balaji:

Stockpup put together a nice little Google Spreadsheet of Kevin Douglas' buys and sells over the past few years, although it has not been revised in quite a while:

https://docs.google.com/spreadsheet/ccc?key=0AvghFDV0YoOadEFpRFZINHhuVXhGVFBkSjhGOGMtcFE

I also have a Google Alert setup with Kevin Douglas' name in order to receive timely information on changes. He has some very interesting obscure investments that were not included in this write-up. I really don't know all that much about him, and would love to learn more. I just spent some time running through all his past investments, trying to find common threads amongst all of them and drew some of the conclusions mentioned above. Unfortunately I don't have any tangible resources I can share, as there is a total void of any info on the guy.

[Billionaire]

At a glance he seems to have lost about $220,000,000 on the AMSC investment thus far.

For all we know, that could be 50% or more of his net worth.

[Elliot Turner]

Billionaire:

He has unquestionably taken a beating on AMSC, and it was one of his largest investments (I believe CREE is his single largest deployment of capital). There is absolutely no way it's more than 50% of his net worth, for his known public stakes as of today are valued at greater than $440 million. Plus, his unrealized gains in those stakes exceed his losses in AMSC.

[Ralph]

He has almost certainly lost about as much on AMSC as he made on WPRT & IMAX combined. The fact that you want bother to do a complete accounting is very telling. You don't dare. A complete accounting would show a lousy 10 yr track record. Think of it this way, if you make 3 big investments and the losses on 1 of them wipe out the gains on the other 2, you're left with no gains other than on your smaller positions. The overall return for your portfolio becomes poor.

btw, a complete accounting will include his losses on AMSC calls

[Elliot Turner]

Ralph:
Sorry you seen to be so offended by this. It's VERY hard to do a complete accounting of his P&L because not every holding he has is public. I was planning on doing an update today, because I greatly understated his earnings in HANS/MNST, as the share total I used was his personal total, not the total that includes his family trust and the others he invests for (and for consistency purposes, the AMSC losses include his family trust and the others he invests for). What I do know is that his outstanding capital gains as of today are well in excess of the losses he suffered in AMSC. He made more than 3 successful investments, those were just the 3 I chose to highlight. At the end of the day, even with the AMSC losses, his 10 year track record is outstanding. Plus, and I hope this wasn't lost in the writeup, one of my main concerns in the writeup was trying to figure out and highlight his methodology.

Hope this helps.

Elliot

[RTN]

AMSC - low cost competitor SCON gearing up for full production Q1 2013..
technology finally validated with 1 meter samples and more.
New facility Q1 2012 (!)

SCON febr presentation http://www.suptech.com/pdf_presentations/2012invpresentation.pdf Page 15 -> projected price 100$/kA-m thats much cheaper than some resident players like AMSC

[Elliot Turner]

Good point RTN. I have looked through AMSC quite a bit, and one thing that is interesting is the company surged on its wind-power technology, despite that being its secondary source of intellectual property. AMSC, as its name suggests, possesses next generation super conductor technology, and that tech has yet to really hit the market. Time could greatly improve Mr. Douglas' investment in AMSC, but still, for now I will count that as a clear-cut loss to more fairly assess his 10 yr. performance.

[Ralph]

It helps a lot. It confirms:
1. you cannot be bothered to prove your rhetoric,
2. having a blog is NO indicator of having knowledge, and
3. you are not really very good at numbers.

When you say nonsense like this "VERY hard to do a complete accounting of his P&L ... his 10 year track record is outstanding", you lose all credibility. A track record is a NUMBER. If you want to discuss it, get it or CALCULATE it. If you cannot be bothered to do either, you are nothing but a tout on a soap box.

As for NUMBERS, it is simple. If, over a 10 year period, 4 of your investments greatly outweigh all the others, and 1 of those (AMSC) totally offsets 2 others (WPRT & IMAX), then you are left with 1 big winner over 10 years. And, the denominator in "track record" is the amount of capital used. That BIG winner was big on a small % of the total capital. If you make 10x your money on an investment that began as only 3% of capital, the total contribution is only 30% and that is over 10 years, or 3%/year. Meanwhile, if you lose half your money on a different 30% of your capital you have given back half of that 3%/yr #.

The conclusion is simple. You like to make noise without having facts to back it up. I suppose that is common among bloggers. When you learn to back up your comments, you will be taken more seriously.

[Ralph]

btw, your "objectivity" is on display in this comment:
"Time could greatly improve Mr. Douglas' investment in AMSC, but still, for now I will count that as a clear-cut loss to more fairly assess his 10 yr. performance."

How big of you. You'll count his real loss as if it is a real loss. Somehow, for you, positive #s are real & negative #s come with an asterisk.

[Elliot Turner]

Ralph:

I urge you to read the update (link is at the bottom). First, his gains in MNST are far greater than I originally estimated. Second, I purposely excluded an analysis of several other substantial gains (not just the AMSC loss), one of which is a much larger gain than his loss in AMSC (Rural Cellular). Third, his losses in AMSC are not nearly as great as you have estimated. He had bought in in the single digits, sold 20% of his stake for a greater than 100% gain and then bought back in for more. The gains he had locked in are not included in saying he lost "over $200 million" in AMSC. Fourth, his outstanding capital gains in KNOWN positions are double his known losses. And of course an investment that he has not closed out could improve, but as I said in the comment you quoted, I count it as a FULL LOSS despite not being closed in order to be objective about it. Lastly, and most importantly, as I have said several times, my intent was not to do a complete accounting of Mr. Douglas' gains and losses, rather it was to analyze his investment process, to glean some insight into how someone who has been very successful actually does it.

Hope this helps clear things up a bit for you.

Elliot

[David]

Ralph, best way to prove your point is to bash the author. Really intelligent stategy. I for one would love to know more about Kevin Douglas and his investment methodology. I think author has just begun the discourse on figuring this investor out.

[AMSCINVESTOR]

I appreciate your hard work that you put into this website.

I guess as far as Kevin Douglas is concerned with AMSC is why he isn't adding more at these low prices. If your willing to pay $30 a share when it is at $4 why isnt he buying more. I guess further more why he isnt doing anything? Not buying or selling? AMSC lost there biggest customer. So the market is basically pricing it like the game is over. If they win the lawsuit against sinovel. That is a huge game changer and a much needed life line if they win a HUGE settlement. Just my opinion...interested to hear your comments. Also... when did he start buying cree and do you know how much he owns and at what prices? and how did you find that information that he owned cree?

[Bill]

AMSC got shafted by the Chinese, and there were no repercussions by the US. If this situation continues to exists, I would suggest US corporations not trust in legal solutions and demand cash before entering business deals. In God we trust, all others pay cash. Sound familiar??

[erik g.]

yes...indeed...hopefully AMSC will win the Sinovel lawsuit...so it will give them more $$ to burn through in the ensuing years.
1. re douglas...the best investors ALWAYS have losers....so..."past results don't dictate/guarantee future returns".
2. you can analyze this til tuesday...but...if red comes up 4X in a row at the roulette table...there is obviously no correlation to what happens the 5th time.
3. mavericks make mistakes...now there's your story!

[shammy]

Hi there, thanks for a very interesting article. Regarding Kevin Douglas' investing style...apologies but i struggled to understand your assumptions.... I mean how much were you assuming that hypothetical stock trades at now? Presumbaly you assumed it trades at X....and then you work back to see if the return you will get in 5 years assuming 25% growth is worth it. Can you share your calculations?

For example, let’s say there is a 20% chance that the company captures 50% of the market, a 50% chance of the company capturing 30% of the market, and a 30% chance that the company captures 10% of the market, he then calculates the weighted average of the future revenue base (.2*$10) + (.5*$6) + (.3*$2) = $5.6 billion. So long as the company is worth less than the present market capitalization grown at his target rate of return (let’s say 25%), he will invest. For a $5.6 billion market opportunity five years down the road, that means Mr. Douglas will be buying so long as the company is worth less than $1.8 billion today,