It was Friday afternoon at the Time Warner Center in Manhattan. After Mohnish Pabrai, Joel Greenblatt and Curtis Jensen had spoken their peace, a man named Kian Ghazi took the stage to talk about how he uses this underappreciated (and often scoffed-at) strategy to extract big profits from Mr. Market.

Kian Ghazi co-founded Hawkshaw Capital Management in 2002. Officially, Ghazi’s portfolio is focused on proprietary investigative research. In layman’s terms, this is the scuttlebutt. You know — the gossip, observation and otherwise first and second-hand analysis of a business.

Many investors use it as a backup tool. If you like a business on paper and it happens to have a store close by, you’ll visit and mentally rate your experience. And you’ll remember plenty of useful details after you leave. Were there a lot of shoppers? What were they buying? Did they seem happy? Was the sales staff knowledgeable and friendly?

Ghazi takes this information seriously, which is why he has dedicated so much time to it. He doesn’t try to trade on inside information or numbers polling. Instead, he acknowledges that there are other people out there that probably know a particular business better than himself and his analysts. This is why he relies on scuttlebutt as a margin of safety.

But his scuttlebutt research is much more than just a casual shopping trip. His people will call customers, competitors, suppliers and industry veterans to get a better idea about how a particular company will perform. “We built our culture around this process,” he said.

The scuttlebutt is difficult and time-intensive when it’s done properly, Ghazi said, but it helps him build conviction. Hawkshaw’s portfolio proves this; it only contains 15 long positions. It’s Ghazi’s scuttlebutt research that equips his team with the knowledge and courage to act decisively.

By the way he describes his process, he acts like an investigative reporter. He tracks down the right people and keeps calling when they don’t call back. Ghazi also works hard to ask the right questions and hone his interview skills to get the best possible information from the people he interviews.

Armed with his investigative research, Ghazi has made some bold investments recently. And he was kind enough to share information about some of his small-cap holdings on Friday. Here’s one I found to be especially interesting:

Lesco Inc. (LSCO: NASDAQ) sells turf care products to professionals that care for athletic fields, cemeteries and golf courses. In fact, about 20% of its sales are to golf course turf managers.

Lesco is a turnaround value play, and Ghazi has made a couple of gutsy moves with his position in the company. All told, he has more than tripled his investment in the company since it dropped from highs of more than $17 earlier this year. As of Friday, shares traded for less than $8.

Ghazi said he is confident with Lesco’s expansion plans, which include adding 200 stores over the next five years. And Lesco is opening these stores in its existing markets where it already has loyal customers.

Ghazi’s scuttlebutt has also told him that better times lay ahead for Lesco. This tiny, $72 million company is actually considered a leader in its space. And even though the company sells a lot of name-brand turf-building products, the Lesco brand stuff is also widely respected in the industry.

And the scuttlebutt on new CEO Jeffrey Rutherford is that he’s been good for the company, Ghazi said. On top of all this, Lesco is re-establishing its sales force. All of this adds up to a company that’s poised itself for a turnaround.

Best,
Gunner
November 13, 2006

Alternative Investment Strategies was originally featured in the Penny Sleuth.