Aaron Edelheit Shares Ideas and Lessons

We had the pleasure of interviewing Aaron Edelheit of Sabre Value Asset Management, a value-oriented investment firm founded in 1998. The firm manages the Sabre Value Fund and two distressed real estate funds. Edelheit graduated with a B.B.A. in finance from the University of Georgia in 1996. He is a philanthropist and serves on the board of directors of the Moishe House Foundation. Since June 1998, Edelheit has reported a compounded annual net return in excess of 12%.

MOI Global: Value investors come in many different stripes. How does your approach differ from some other value-oriented strategies?

Aaron Edelheit: I focus on small to medium sized companies that most investors have never heard of. My goal is to find companies that are very attractive, but aren’t being followed closely due to their size, lack of analyst coverage or neglect. I look for change inside of those companies that investors are not seeing and that will make the company much more valuable. Specifically, I’m looking for spin-offs, companies restructuring, turnarounds and special situations – such as a company with two divisions, in which the poor division is masking the other division that is very attractive. And I take very concentrated positions, am patient and do not use leverage.

MOI: You have at times put in writing your thesis on your favorite ideas, both long and short. Let’s take a look at some of what you’ve written and extract lessons that may help us become better investors. In April 2009, when Sprott Resource (Toronto: SCP), an investment firm controlled by respected Canadian investor Eric Sprott, traded at C$2.65 per share, you wrote:

“What if I told you there was a company out there that was predominantly sitting in cash, gold and silver bullion with no debt, whose tangible book value is approximately C$3.50 per share, with little expenses, that was selling for C$2.65 per share? Better yet, what if I told you that it is run by one of the best resource investors around, who has a proven record for making investors money and has increased book value from $1.50 to over $3.50 in two years?”

Many investors reading your argument might have said, “Yes, I see that SCP is undervalued on a sum-of-the-parts basis, but what is the catalyst to unlocking value? Can’t the discount persist indefinitely?” Eight months later, SCP traded at more than C$4 per share, with additional upside looking likely due to value creation in the interim. When dealing with investment vehicles such as SCP, how do you decide what discount to net asset value is sufficiently compelling, and how do you avoid the entities that do trade at wide discounts to NAV for a long time?

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