Carlo Cannell is one of the best kept secrets in the value investing world. Not only does he have an investment record that professionals such as Seth Klarman, Carl Icahn, or even Charlie Munger could only dream of, he’s also quite a character as evidenced by his dry wit in interviews, entertaining activist letters, and public photos dressed as a Mexican, or the pope.
The few interviews that he’s given should be seen as a treasure for investors managing less than a few hundred million, due to his practical how-to advice and easily understandable investing style.
So, let’s shed some light on this Superinvestor, his strategy, and what you should take away for your own event driven investing.
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Who Is Carlo Cannell?
Carlo Cannell is an exceptional California-based micro cap investor who has flown under the radar of most of the value investing community. Possibly because he manages a comparatively small portfolio, he has not achieved the notoriety of other big names such as Bill Ackman, or Mohnish Pabrai.
The Cannell Family’s Legacy of Outstanding Returns
Interestingly, he’s also the son of another great investor that you’ve likely never heard of, Peter B. Cannell, who ran his own hedge fund from 1973 to 2004. Over that 31 year period, Cannell Sr. compounded money at a very respectable 16%. That puts him in league with Walter Schloss.
While Carlo would have no doubt discussed investing with his father, Cannell Jr. seems to have significantly outperformed his dad, achieving far higher returns. More on those returns later.
Starting Cannell Capital
Cannell is one of those US based investors who really got going in the early 1990s. It was a great time for investing, as stocks were cheap and markets were moving higher.
Cannell launched Tonga Partners LP, his flagship fund, on July 1st, 1992 with just $600,000 USD in capital, $100k of which he contributed himself. This was a tiny fund, so he had incredible flexibility in terms of the stocks that he could buy.
In time, Carlo would launch Cannell Capital, which acted as general partner and financial advisor for his family of funds.
Cannell found early success, and his fund grew to over a billion dollars as investors flocked to the fun - not a bad run from $600k…
At $1 billion, though, it was much tougher to invest in nano cap companies, so Cannell returned ~$300 million in capital to investors from 2003 to 2006. This is almost unheard of in the investment world, as managers aim to manage increasing pools of money to collect larger fees. But, Carlo Cannell had his reasons. First, investing was just not as fun with over a billion in assets under management (AUM), and, second, the strategy was not as viable with a larger fund, so he was doing his limited partners (LPs) a disservice by growing in size. By keeping the fund small, he could better serve his LPs and retain the joy of combing through the pink sheets.
What is Cannell Capital’s AUM Today?
In 2023, Carlo Cannell managed about $600 million US and was still very willing to return cash to LPs in the future if the fund grew in size. This is a fraction of the amount managed by others, such as Bill Ackman, but Cannell’s small portfolio size is what helps maintain his performance. And he is far more interested in maintaining his performance and the joy of investing than becoming one of the ‘masters of the universe.’
How Carlo Cannell Invests: Cannell Capital’s Modus Operandi
Carlo Cannell is a value investor - no surprise there if you read the title of this article. But he’s taken a similar approach to value investing that other great investors have taken: deep value with a major growth element.
Miyamoto Musashi wrote, “If you know the way broadly, you will see it in everything.” I’m not sure if that’s true about everything, but I can definitely say that it’s true of investing. The key elements that seem to be in place for most great investors (Buffett, Munger, Greenblatt, Li Lu, etc) are a cheap price and better times ahead. Everything else just fills in the details around those two factors.
Carlo Cannell’s Investment Style: The Long and the Short of It
First and foremost, Cannell runs a hedged portfolio, meaning he takes both long positions and short positions. This helps him outperform during bear markets but can add risk if he’s wrong on a single short position. We’ll discuss later how he tries to guard against that possibility.
On the long side, Carlo Cannell hunts for mispriced, unloved, neglected stocks among the micro and nano cap universe. He also looks for investments in the ignored, unloved, or beaten down industries, including cyclicals. In this way, he hopes to take advantage of investor fear & panic in individual names.
These sort of companies primarily exist in the OTC market and are often found on the Pink Sheets. He primarily looks for stocks that are cheap and have the potential to produce multibagger returns due to an unrecognized growth factor. In an interview with The Accent Podcast, Cannell explained:
“The core of what we do… Most of the profit and loss has been through what we call private equity in the public market, on the long side. It’s just studying up on massively dislocated companies and taking large positions, concentrated positions, in those companies. It has a tax advantage and it has a compounding advantage because if you find these enterprises and have the courage to really take large positions, they’re not up 20 or 30%, they’re 10xes over time or more.
If you were to go back 31 years, my belief is that the activism and the short selling would be very subordinated to the core of just finding these companies, buying them, and holding them.”
There are some key advantages of the micro or nano cap universe. First, this area of the market is much less efficient than the universe of American medium or large caps. There are far fewer skilled investors looking at these firms. As a consequence, Cannell can find good firms that are just chugging along, doing their thing, without anybody noticing. Any company like this in the large cap space would have dozens of analysts following it - so Cannell ignores that space.
Second, these sort of firms can be somewhat uncorrelated to the market. It’s much easier, then, for Cannell to achieve returns based on his selection and assessment skills than based on the direction of the overall market.
In the first half of his career, he looked first at quantitatively cheap classic Graham stocks: low price to net assets, a PE lower than a company’s ROE, or low price to sales. But, this focus has shifted as he’s gotten older. Now, Cannell leads with quantitative data that he thinks shows that things are getting better for a business, and then dives deeper into the firms that come up on their quant screens.
His quantitative screens tend to be unique to Cannell Capital. Cannell mentioned in a 2006 interview with Value Investor Insight:
“Having an edge as an investor is a bit like having an edge as a radiologist, or a mechanic, or a pilot. The edge comes from being able to see patterns and reliably diagnosing what they will mean. I’d like to think that the combination of inputs we use to correlate and predict is somewhat unique to us.”
For example, Cannell discussed a screen to spot companies that are building up cash. He likes this screen because management will hopefully do something with that cash to benefit shareholders.
He also discussed a screen that Cannell Capital put in place to find companies that are improving working capital cycles: increasing cash generation, increased inventory turns, correlating receivable balances, and tightening prepaid assets. Firms that exhibit this would be improving profitability and maybe signals new management blood which could produce a positive change.
“We’re looking for elements of positive change – fresh management blood, a changing market, a changing regulatory environment, a shift in competition – that suggests a future characterized by reliable and increasing earnings. We have to be predictors of growth to be able to buy at bargain prices.”
After the initial quantitative filtering, Cannell goes heavy on the qualitative analysis. On the qualitative side, Cannell will visit the companies, talk to management, look at product surveys, buy and use the product, etc, to try to gain some insight into the prospects of the business. Despite his habit of talking with management, he’s started to lean away from that practice because he finds that management does not always know what is in their future.
But, Cannell’s team does prefer managers who have big equity stakes and manage the company with a very tight focus on costs. While management may not know what’s in the company’s future, they can still operate intelligently.
To Cannell, growth is very important. “In our experience, it’s revenue and earnings momentum that catapults a stock out of the swamp. Regardless of how neglected a security may initially be, it’s really growth that is the most predictable precursor to an increase in the stock price – and to an increase in attention from the market.”
Ultimately, all of this information leads to an opinion about what the company will look like in the future. Cannell’s team wants to predict what the cash flow from operations will be far out into the future, and then ascribe some market multiple to that. Projections are not science but educated conjecture, which is probably why Cannell thinks that investing is an art, not a science.
All of this work leads up to an investment thesis which they package into a one page memo to themselves. As Cannell explains:
“In that thesis, the first sentence is the most powerful. We own See’s Candy because X. And then the second sentence is the second most important. It delivers the second most important fact. And then the last sentence is more or less to water the intellectual curiosity of the reader.”
If the company proves not worth an investment, they’ll just move on to another opportunity. And, if they find it hard to put together the thesis, they’ll put that company into the too hard bucket and will not invest in it. Investing is hard, so it makes sense to find what Buffett calls “one foot hurdles.” Cannell seems to agree, mentioning, “We prefer to own businesses that we can explain to a 6 year old with one sheet of paper and a crayon.”
With a stock selected, Cannell then has to size the bet in his portfolio. For that, he leans on conviction. The more convinced he is of the thesis, the larger he’ll make the position in his portfolio.
Cannell describes himself as a concentrated investor, but when you look at his portfolio, you’ll see dozens of stocks… so he’s much more diversified than he claims. Part of this comes with size. It’s hard to put $600 million to work into companies that may have a market cap of only $20 or 30 million. The largest position Cannell Capital has at the time of writing is only 7.15% of his portfolio, with most at 5% or less. He’s also very active when it comes to trimming or topping up a position, making his portfolio a little tough to copy if you want to go that route.
When Cannell Aims to Sell
A lot of deep value practitioners get rid of a company after it reaches their conservative assessment of fair value. While Cannell likes to buy cheap, he does not automatically sell based on this initial valuation but tries to hold onto a growing company much longer. As he explained in Value Investor Insight:
“We find in growing companies that there can be considerable opportunity as the perception of value pivots from the balance sheet to the income statement. A lot of value investors drop out as that is happening, while the growth investors are slow to pile on until the growth is more obvious.”
In fact, Cannell prefers pyramiding into positions that have worked out if he feels that the thesis is stronger now or if he sees greater value than his initial assessment. This is in sharp contrast to most deep value practitioners who simply want to harvest their winners and redeploy capital.
Similarly, he’s hesitant to average down, since a stock decline can sometimes go hand-in-hand with an investor’s thesis falling apart. To Cannell, it does not make sense to buy into a company where your initial assessment of where the firm was headed is not panning out. This makes perfect sense.
Cannell’s ideal is to hold a position for decades since he ideally wants his companies to have very long growth runways or, conversely, to have very long declines when he’s short. As he explained to The Accent Podcast:
“There is a tendency for investors to jump to the next shiny object, but sometimes the devil that you know is better than the devil that you don’t know.”
Holding as long as is profitable also has important tax advantages for his investors. As long as a company is growing and expected to grow, it makes sense to hold it to harvest those returns rather than handing money over to Uncle Sam.
The qualifier here is valuation. If the stock is well above what Cannell thinks the fair value of the firm is today, Cannell Capital will sell some but not all of their position. They’ll sell disproportionately larger amounts of a stock as it continues to rise. Selling and investing generally, according to Cannell, is very much an art.
But investing is not all rainbows and butter cups. Sometimes you make an error, or the investment goes against you, and you lose money. If the thesis is being derailed, Cannell just sells, taking a loss, and moves on. While this can be psychologically difficult, it’s better to be intellectually honest and redeploy your capital into a much more promising investment.
Cannell Capital’s Long Side Investment Checklist
Cannell looks for a wide range of factors and has not disclosed many of his quantitative screens, but we can look at the core features of the investments he likes to buy:
- Small cap to nano cap
- Not covered by analysts (almost nobody follows them or just obscure brokers)
- Illiquid in terms of traded shares
- Exhibit some quantitative data showing that things are improving for the business
- A good business
- Reasonable price
- No biotech or mining
- Company existed through past business cycles so he can see the shift in the financials over time
- Simple, understandable, businesses
One recent buy that exemplifies Cannell’s strategy is the automotive data provider TrueCar. Cannell picked up the stock in 2024. At the time, the $200 million dollar company had languished for a number of years at a depressed price relative to former highs, and without many people following the business. To the casual observer, the stock did not seem to hold any special promise.
But, Cannell understood that it was a cyclical business, and saw it as a beaten down company that had a bull market immediately in front of it. The automotive business is cyclical in nature, and dealers generally start to invest in marketing when sales struggle. TrueCar specialized in helping dealers turn up leads and had a strong competitive position in the space. With auto sales declining sharply, Cannell knew that the dealers would flock back to the service and the stock would start its multi-bagger climb back up to a cyclical high.
Cannell Capital’s Short Selling Principles
Cannell is equally picky on the short side. Since short selling can lead to losses that are practically infinite, short sellers have to be very careful. Cannell mentions the following principles to keep in mind if you want to go down this route:
- Shorting is inverse momentum investing, where you are catching a trend
- Never short based on valuation because the stock can always go higher
- Regulators usually get involved in frauds after the company implodes, not before
- Short broken companies that are clearly going out of business. Better to short a company when it is evident that they have no future because you are less likely to get a bounce.
- The best bet is to short the broken businesses that are diminished or diminishing, where the need for the product is going away
The Reluctant Activist
While Cannell is a great value investor, we’re primarily interested in him for his activist activities. We call him a reluctant activist because, while folks such as Carl Icahn love to go to battle with management as their main modus operandi, Cannell denies that he’s an activist investor.
“It is something that I am personally trying to lean away from. It’s only a piece of what we do, and it’s only by default that we take up the hammer. Number one, we prefer to invest with managers, with allocators, that don’t need to be told what to do. Warren Buffett doesn’t tell the managers of See’s Candy, that he bought maybe 40 years ago for nothing, he doesn’t tell them what to do and that’s my preference as well. But, if it’s believed that a board or management is stealing from my limited partners, as a fiduciary I have a responsibility to minimize that or to stop that practice.
I want to make it very clear that I don’t spend my day trying to extract value out of mismanaged enterprises which is what most hard core activists do.”
We strongly disagree with his claim that he is not an activist investor, however. While he may not enjoy battling management and may aim to invest in businesses that do have management teams that need to be kept in line, Cannell frequently writes activist letters to management and boards. Just like you don’t have to swim all day every day to be called a swimmer, you don’t have to scrap with companies on each investment you make to be called an activist. Simply engaging in activism on a somewhat regular basis is enough.
When it comes to activism, Cannell prefers not to send scathing letters to management. Instead, he prefers to pick up the phone and deal with management with a lite touch.
“Sometimes you have a board of directors who have made some well meaning errors and it just has to be tweaked a little bit or maybe you have to keep them honest. You have to make it clear to them that they’re being watched.”
In most cases, the board and management is not acting unethically, but they just don’t understand capital allocation. In those cases, it does not make sense to shame management or ratchet up the pressure, since management would not know what to do. They may be working hard and trying their best. Instead, guiding management on better corporate and capital allocation policy would be a much smarter move.
Cannell Capital’s Investment Record
Cannell is undoubtedly one of the best value investors in existence, but details on his investment record are hard to come by.
An interview with Value Investor Insight shone a light on just how incredible his early returns were: From 1992 to 2006, Tonga Partners returned 25.2% per year, turning $10,000 into just over $230,000 in 14 years. The Russell 2000 returned 10.8% compounded annually over the same period.
Clearly, he’s doing something right.
Carlo Cannell’s Personal Net Worth
While Carlo Cannell is not listed on the Forbes 400, I estimate his net worth to be over a billion dollars US.
First, Cannell funded his hedge fund in 1992 in part with a $100,000 personal investment and earned just over 25% compounded over the first 14 years. That would have grown his investment to $2.3M.
Second, the fund grew from $600,000 to $1 billion over that period. Assuming an average portfolio size of $500 million, a 2 and 20 structure, where 2% goes entirely to running the fund, Cannell’s 25% CAGR over the period would have earned him $25 million per year, or $19 million after tax (25% corporate tax). Over 14 years, that would have net him about $266 million.
Assuming the fund achieved a slightly lower 20% compounded per year from 2006 to 2024, the same earnings would have totaled $270 million, and his initial investment would have grown to $61.2 million.
Adding it up, and ignoring the ability to compound his fees by adding them to his fund’s AUM, we arrive at just under $600 million USD. Investing his fees would have undoubtedly catapulted Cannell into billionaire territory.
Carlo Cannell is an Activist to Follow
If you love activist investors, you could hardly go wrong tracking Cannell Capital. Carlo Cannell is a great value investor, often spotting attractive under the radar stocks. It’s also a joy to read his activist letters, many of which he’s reposted on his website. For those reasons, we follow Carlo Cannell’s dealings here on Event Driven Daily. Join the conversation by becoming a member.
