Finding X-factor stocks that trade cheaply
In a recent investor presentation, Michael Goldberg quoted Howard Marks saying that the main risks one has to balance in investing are losing money and missing opportunity. This is at the front of mind for the Collins St Value Fund, where they operate a concentrated, high conviction portfolio.
"Our first and foremost concern is preservation of capital ... ( then) our focus is always to go out there and find these good quality companies that are trading cheaply. If we're able to identify a business or an asset worth a dollar trading at 50 cents, then we're not so concerned about what the share price might do in the interim."
Accompanying this concentration is an immense discipline - especially when selling. The team fixate on their thesis, and as soon as it turns to speculation, it is a matter of when they will exit, not if.
Our job is to invest in ideas where we've got an advantage that we can press and point out that the market is missing ... Then we have to recognise if (an idea has become) speculation. And again, there's nothing wrong with speculating...(but) that's just not our job, and it's not what we spend our time or focus on.
In this Expert Insights video, executive director Michael Goldberg discusses the fund's portfolio management approach, their process-driven decision methods, and finally how they are finding opportunities in a 'money for nothing' environment.
The Collins St Value Fund has delivered a 19% p.a. net return since inception in 2016 – around 8% p.a. higher than the broader market – and is the #1 fund in its Morningstar universe over the 3 and 5 year period to 30/09/2021.
To find out more about the high conviction, unconstrained and deep value approach that underpins this performance, backed by a truly investor aligned zero fixed-fee model, click here.
How do you balance the risks of losing money and missed opportunity within a concentrated, high conviction portfolio?
It's certainly a truism, I think, but for us, it's not really a big consideration. Our first and foremost concern is the preservation of capital.
I think Warren Buffet is often being quoted as saying that the first rule of investing is don't lose money, and the second rule of investing is don't forget rule number one. So, our focus is always to go out there and find these good quality companies that are trading cheaply, so if we're able to identify a business or an asset worth a dollar trading at 50 cents, then we're not so concerned about what the share price might do in the interim.
We're not so concerned about that opportunity cost, because even if share prices go up or down, to us, risk is not really about a share price going up and down. It's about the risk of loss of capital. And so, when you can identify these good quality companies and you can buy them cheaply, and that, of course, is key, you don't have to worry so much about what the broader market is doing.
And to answer the question really about opportunity cost, we often get asked, "Do you wish you were invested in company ABC? One that came up a lot with Afterpay?" And while I wish the best of luck to people who have invested in it, and I hope that they do exceptionally well in these sorts of companies, our view is if we can't find some special piece of information, if we can't find some advantage that the broader market isn't paying attention to, then for us, it's just not a risk we'd like to take.
So, these share prices might do exceptionally well, but we are comfortable letting these ideas go and recognising the limitations of our time and our area of expertise, and really just focusing on those ideas that are most attractive to us, that we can get really really comfortable in owning.
Could you describe the fund’s process when deciding whether to sell down a position?
Look, it's a question that comes up regularly in the office. We'll take a position, it'll do really well, and then, we have to sit down and have the conversation. What do we think this thing is actually worth? Because at some point as a stock goes up, you need to decide, are we now speculating on some macro event coming in to make its intrinsic value worth more? Are we relying on the markets to get exuberant, overly exuberant about the idea, and so push the share price up higher? And so, at the point that we identify that we're now speculating an idea rather than having the information and recognising that it is fundamentally cheap, that's the point at which we'll say, "Okay, time to sell down position," and often it works wonderfully after we sell stock, it goes down.
Normally, our selling does nothing to the markets, and most recently when we sold down a big uranium position, which we've held since I think 2017. In fact, I think one of the first conversations I had about uranium was with you people at Livewire, and we finally decided about a month ago that the share prices got to what we thought, we were using a contracting price of about $70 per pound, and that price using Paladin as a proxy, we thought it was worth about 55 cents per share, so it got to about 55 cents per share. We sat down, we said, "Look, are we prepared to speculate on spot prices going even higher? Or are we going to take our money to the table given that we've got what we wanted?"
So we decided to take our money off the table, sold that between 52 and 55 cents. And of course, literally within the next week, maybe 10 days, it got to a dollar. So, sometimes you sell things, go down, sometimes you sell things, nothing happens. Sometimes you sell and prices go up, but you can't worry about what the broad market is doing.
Our job, at least, is to invest in ideas where we've got that information advantage and we can press, we can point to the point that the market is missing and explain, that's why there is value in this investment. At the point that we can no longer point to why it is that this thing is of value and why this thing makes sense it's an investment. Then we have to recognise that it's speculation. And again, there's nothing wrong with speculating. Plenty of people have made tremendous fortunes out of speculating. That's just not our job, and it's not what we spend our time or focus on.
Is it becoming harder to find ‘x-factor’ stocks in this environment of astonishingly low rates?
I think we've seen, we've seen markets go from a historic average price to earnings multiple of 14, 15 times to not that long ago, I think was it 22 times? I think we've come back a little bit as earnings have caught up, but I think certainly money for nothing as you put, it tends to push up asset prices. And so instead of finding ideas in all different regions within the market, I think what we're finding now is, most of our ideas are coming outside of the most heavily covered ideas because those heavily covered ideas are going to be where money tends to flow more easily and so push up share prices or in sectors that are out of favour, even immensely out of favour.
So, we've found a lot of ideas in mid-caps and small-caps that have enough volume for us to get in and out of. And we've found some wonderful ideas recently in what we're calling sectors that are ESG pariahs. So we're happy to look wherever we can find these opportunities. And I think our view in the office, at least as it relates to ESG is that the government is of... the governance, I'm sorry, is of utmost importance. But just looking at uranium as an example, the ethical perception of things can change on a whim.
There are certain things that we wouldn't invest in because they're bad for the world and that's ultimately going to come back and impact the share prices, but if we can find something that is unloved for an emotive reason, and it's not based fundamentally in the earnings ability of that company going forwards, then we'd happily invest in. And uranium was a great example in 2017, more recently, we invested in Beach Energy, which has done exceptionally well since we bought it. But that's where we tend to find the ideas in expensive markets, in areas that everyone is ignoring or in companies that are sort of flying under the radar.
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