Tyndall’s Brad Potter shares lessons from 20 years of investing
Brad Potter, Head of Equities at Tyndall, learned some of his biggest investing lessons in the Great Sandy Desert and The Pilbara.
Before embarking on a career in funds management, he followed his father’s footsteps in the mining industry and worked as a geologist for the likes of BHP and Newcrest, and later covered the sector as an analyst.
In crisscrossing between dusty towns and corporate offices filled with eager executives seeking positive ratings and access to capital, Potter quickly realised why it’s vital to be skeptical when listening to management teams talk up their books: broken promises destroy value.
“When it comes to management, you have to be cynical. You have to always wonder ‘are they telling me the truth, and what are they not telling me?’.”
He applied this wisdom when he joined Tyndall in 2002 and it has shielded the company’s funds from duds time after time, helping cement Potter’s reputation as one of Australia’s most reputable and reliable equity managers.
With his 20-year anniversary at Tyndall around the corner, Potter reflects on his investing philosophy and how it’s produced steady returns. He also calls out CBA’s stock for being too expensive relative to other banks, discusses why mergers and acquisitions remain a key theme, and the importance of backing your process.
Note: This interview took place on the 8th of September. Watch the video or read a summarised version of the interview below.
The early days
When casting his mind back to his time as a resources analyst, Potter didn’t need to think hard about what defined one of the key pillars of his investing philosophy.
Part of his job as an analyst covering junior miners and explorers with Ord Minnett was to meet management teams. And often after seeing their dazzling presentations, Potter found executives were more talk than walk – leading investors on while in reality projects and profitability were far behind schedule.
“It led me to be very cynical about what management told you. That cynicism is very important when you’re looking at companies and talking to management and that’s stayed with me since that period,” he says.
The stakes are particularly high for small caps, whose risk of ending up in the ASX’s graveyard is much higher if investors are disappointed by setbacks.
“Good management teams will try to under promise and over deliver.”
Value always matters
Potter has witnessed his fair share of market calamities over the last several decades including the 1987 crash, dot-com bust, Global Financial Crisis and last year’s pandemic-induced freefall.
While there are no doubt new trends have taken root in markets such as the rise of environmental, social, and corporate governance screening and the technology boom, he insists the concept of value investing hasn’t changed.
“At the end of the day value is all that matters.”
Potter takes inspiration from the father of value investing and author of The Intelligent Investor, Benjamin Graham, who mentored billionaire investor Warren Buffett.
“Graham once said ‘in the short term the market is a voting machine, but in the long-term it is a weighing machine.’ It means markets move up and down but in the long run what truly matters is the underlying value of the companies you hold.”
But he says that value investing should not be construed as a strategy which entails buying a cheap stock while ignoring its growth prospects.
“A value investor ignoring growth is just as silly as a growth investor ignoring value.”
For Tyndall, value investing boils down to finding companies that are:
- Growing earnings sustainably
- Generating robust cash flow
- Paying dividends and franking
In addition to the above-mentioned data, Potter’s team gleans insights from a company’s management team and suppliers, and analyses its competitive landscape, to produce a valuation. That valuation is used to determine if a stock is currently expensive or trading at a discount.
The importance of having a process and sticking with it
While the Tyndall team has an established process, Potter is humble enough to admit that, sometimes, intense market volatility can make even the best investors second guess their own strategy. He recalls the depths of the GFC when banks were trading at eye-watering valuations.
“That was a big regret. The banks were extraordinarily cheap, but we didn’t go hard enough because it was during the middle of the GFC and we didn’t know what the outcome would be,” he says.
It was a big lesson for Potter, and since then he’s learned the importance of backing his process no matter how tough markets get and removing emotion from the equation.
“When stocks get cheap at the bottom, and you’re emotionally holding back from buying them, and your valuation process says you should be buying it, you need to be stepping into the abyss and you buy it because that’s what your valuation approach says.”
Ranking the banks – why CBA is last
On the topic of banks, Potter is overweight the sector. Bank yields have bounced back to around 5%, a level which he says is “definitely sustainable” given the amount of excess capital on lenders’ books.
He’s particularly excited about Westpac – Tyndall’s top bank holding - jumping on the capital return bandwagon with a “very large” off-market buyback as part of its full year results announcement on 1 November.
“We think these buybacks and dividends will continue for a number of years given the huge amount of capital that the banks have got,” Potter says.
While the prospect of juicy yields should delight investors, Potter suggests bank shares may struggle to maintain their momentum given low interest rates are pressuring net interest margins, which in turn hurt earnings growth.
Potter is also negative on CBA, which is trading nearly five P/E points above its rivals. While the nation’s largest lender justifiably trades at a premium given factors such as its relatively high return on equity, the valuation extreme between CBA versus ANZ, NAB and Westpac has blown out of proportion in the current environment.
“We assume a 15% premium for CBA versus the other banks in our process, but it’s actually trading at a premium of more than 30% to the other banks. We think this is excessive as we don’t see top-line growth being any better for CBA than the other banks.”
Mergers and acquisitions remain a big theme
Potter expects mergers and acquisitions (M&A) to remain an ongoing theme given interest rates aren’t expected to rise for three to four years. It’s an obvious solution for companies struggling to grow earnings given how cheap money is.
Australia has witnessed several blockbuster deals in recent times including BHP’s petroleum merger with Woodside, Santos and Oil Search combining, Square snapping up Afterpay, super funds vying for Sydney Airport, and Canada’s Brookfield recently making an offer for AusNet.
Potter says the energy sector will likely experience heightened consolidation activity given decarbonisation goals by governments.
“There's a lot of pressure on funding projects for oil and gas. Arguably you need to be larger to fund those projects so that makes a lot of sense from an oil and gas perspective.”
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