An Update on Our Investments in Building Products Companies

February 14, 2019 in Ideas, Letters

This article is authored by MOI Global instructor Phil Ordway, Managing Principal at Anabatic Investment Partners, based in Chicago, Illinois.

Armstrong (AWI) shares fell 3.6% in 2018 but the company is performing in line with our expectations and its prospects have improved in a few important ways since we first invested three years ago.

After spinning off its low-margin, underperforming flooring segment in April 2016, Armstrong completed its restructuring in 2018 by closing the sale of its international operations to Knauf for $250 million in net cash. I think it was a good decision for the company. The price was attractive, and it removed a complicated, low-margin segment while allowing management to focus on the better markets in the company’s portfolio. It also reinforced the balance sheet, which is now as strong as it has been in many cycles. The company’s competitive position and market share remain dominant, and its lead has widened in several key categories.

Capital allocation remains crucial and it is at the top of my list of concerns. By the end of next year Armstrong will have allocated between a half billion and $1 billion of capital over the preceding 24-36 months.[1] The board recently approved the initiation of a small dividend to go with its previous (and small) accelerated share repurchase program and its ongoing open-market share repurchases. Now more than ever the company’s capital allocation decisions will determine our fate as investors.

Builders FirstSource (BLDR) share price tanked as the market turmoil spread in the fourth quarter of 2018. The year presented numerous challenges for the company. Commodity prices whipsawed the homebuilding industry, and the volatility in the price of lumber – a key product for BLDR – was exceptional. After hitting $639 per 1,000 board-feet on May 17, 2018 – an all-time record that was far higher than previous cyclical highs – lumber collapsed by almost 50% and finished the year down 26%. A weaker housing market, tariffs, wildfires, and delivery bottlenecks all hindered the company.

Despite everything that went wrong in 2018 there is a better story to tell looking forward. BLDR continues to entrench its business as the low-cost distributor and supplier of choice in its markets. Regardless of the exact number of housing starts in any given year, the country needs more housing over time and BLDR will be a prime beneficiary.

Even a “bad” year like 2018 wasn’t so tough – the company was very profitable, generating copious free cash flow that further deleveraged the balance sheet. The shares could remain volatile, but it is worth remembering the business outlook and the odds implied by the current market price.

[1] Including the cash received from Knauf.

Disclaimer: Gross Long and Gross Short performance attribution for the month and year-to-date periods is based on internal calculations of gross trading profits and losses (net of trading costs), excluding management fees/incentive allocation, borrowing costs or other fund expenses. Net Return for the month is based on the determination of the fund’s third-party administrator of month-end net asset value for the referenced time period, and is net of all such management fees/incentive allocation, borrowing costs and other fund expenses. Net Return presented above for periods longer than one month represents the geometric average of the monthly net returns during the applicable period, including the Net Return for the month referenced herein. An investor’s individual Net Return for the referenced time period(s) may differ based upon, among other things, date of investment. In the event of any discrepancy between the Net Return contained herein and the information on an investor’s monthly account statement, the information contained in such monthly account statement shall govern. All such calculations are unaudited and subject to further review and change. For purposes of the foregoing, the calculation of Exposure Value includes: (i) for equities, market value, and (ii) for equity options, delta-adjusted notional value.

THE INFORMATION PROVIDED HEREIN IS CONFIDENTIAL AND PROPRIETARY AND IS, AND WILL REMAIN AT ALL TIMES, THE PROPERTY OF ANABATIC INVESTMENT PARTNERS LLC, AS INVESTMENT MANAGER, AND/OR ITS AFFILIATES. THE INFORMATION IS BEING PROVIDED SOLELY TO THE RECIPIENT IN ITS CAPACITY AS AN INVESTOR IN THE FUNDS OR PRODUCTS REFERENCED HEREIN AND FOR INFORMATIONAL PURPOSES ONLY.

THE INFORMATION HEREIN IS NOT INTENDED TO BE A COMPLETE PERFORMANCE PRESENTATION OR ANALYSIS AND IS SUBJECT TO CHANGE. NONE OF ANABATIC INVESTMENT PARTNERS LLC, AS INVESTMENT MANAGER, THE FUNDS OR PRODUCTS REFERRED TO HEREIN OR ANY AFFILIATE, MANAGER, MEMBER, OFFICER, EMPLOYEE OR AGENT OR REPRESENTATIVE THEREOF MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION PROVIDED HEREIN. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY SUCH FUND OR PRODUCT WILL BE ACHIEVED. MOREOVER, PAST PERFORMANCE SHOULD NOT BE CONSTRUED AS A GUARANTEE OR AN INDICATOR OF THE FUTURE PERFORMANCE OF ANY FUND OR PRODUCT. AN INVESTMENT IN ANY FUND OR PRODUCT REFERRED TO HEREIN CAN LOSE VALUE. INVESTORS SHOULD CONSULT THEIR OWN PROFESSIONAL ADVISORS AS TO LEGAL, TAX AND OTHER MATTERS RELATING TO AN INVESTMENT IN ANY FUND OR PRODUCT.

THIS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY AN INTEREST IN A FUND OR PRODUCT. ANY SUCH OFFER OR SOLICITATION WILL BE MADE ONLY BY MEANS OF DELIVERY OF A FINAL OFFERING MEMORANDUM, PROSPECTUS OR CIRCULAR RELATING TO SUCH FUND AND ONLY TO QUALIFIED INVESTORS IN THOSE JURISDICTIONS WHERE PERMITTED BY LAW.

ALL FUND OR PRODUCT PERFORMANCE, ATTRIBUTION AND EXPOSURE DATA, STATISTICS, METRICS OR RELATED INFORMATION REFERENCED HEREIN IS ESTIMATED AND APPROXIMATED. SUCH INFORMATION IS LIMITED AND UNAUDITED AND, ACCORDINGLY, DOES NOT PURPORT, NOR IS IT INTENDED, TO BE INDICATIVE OR A PREDICTOR OF ANY SUCH MEASURES IN ANY FUTURE PERIOD AND/OR UNDER DIFFERENT MARKET CONDITIONS. AS A RESULT, THE COMPOSITION, SIZE OF, AND RISKS INHERENT IN AN INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN MAY DIFFER SUBSTANTIALLY FROM THE INFORMATION SET FORTH, OR IMPLIED, HEREIN.

PERFORMANCE DATA IS PRESENTED NET OF APPLICABLE MANAGEMENT FEES AND INCENTIVE FEES/ALLOCATION AND EXPENSES, EXCEPT FOR ATTRIBUTION DATA, TO THE EXTENT REFERENCED HEREIN, OR AS MAY BE OTHERWISE NOTED HEREIN. NET RETURNS, WHERE PRESENTED HEREIN, ASSUME AN INVESTMENT IN THE APPLICABLE FUND OR PRODUCT FOR THE ENTIRE PERIOD REFERENCED. AN INVESTOR’S INDIVIDUAL PERFORMANCE WILL DIFFER BASED UPON, AMONG OTHER THINGS, THE FUND OR PRODUCT IN WHICH SUCH INVESTMENT IS MADE, THE INVESTOR’S “NEW ISSUE” ELIGIBILITY (IF APPLICABLE), AND DATE OF INVESTMENT. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE INFORMATION CONTAINED HEREIN AND THE INFORMATION IN AN INVESTOR’S MONTHLY ACCOUNT STATEMENT IN RESPECT OF THE INVESTOR’S INVESTMENT IN A FUND OR PRODUCT REFERRED TO HEREIN, THE INFORMATION CONTAINED IN THE INVESTOR’S MONTHLY ACCOUNT STATEMENT SHALL GOVERN.

NOTE ON INDEX PERFORMANCE

INDEX PERFORMANCE DATA AND RELATED METRICS, TO THE EXTENT REFERENCED HEREIN, ARE PROVIDED FOR COMPARISON PURPOSES ONLY AND ARE BASED ON (OR DERIVED FROM) DATA PUBLISHED OR PROVIDED BY EXTERNAL SOURCES. THE INDICES, THEIR COMPOSITION AND RELATED DATA GENERALLY ARE OWNED BY AND ARE PROPRIETARY TO THE COMPILER OR PUBLISHER THEREOF. THE SOURCE OF AND AVAILABLE ADDITIONAL INFORMATION REGARDING ANY SUCH INDEX DATA IS AVAILABLE UPON REQUEST.

My Investment Thesis on TripAdvisor

February 13, 2019 in Ideas, Letters

This article is authored by MOI Global instructor Mark Walker, Managing Partner at Tollymore Investment Partners, based in London.

One- and two-sided network effects and a globally trusted, top-of-funnel, brand strongly position TripAdvisor to take an outsized share of the growing global online travel market. I have discussed my views on the TripAdvisor investment case in prior letters, so I won’t repeat them here.

TRIP continues to strike me as a good example of investors’ inappropriate application of linear projections to platform business models. TRIP’s potential for potentially explosive low-cost growth emanates from its ability to tap into existing demand (travel and leisure visitors) and connecting it to acquired or developed supply (Viator, La Fourchette). Therefore, TRIP is strongly positioned to be the winner in two winner-take-all markets: restaurants and attractions.

For both restaurants and attractions, the number of reviewed items is multiples higher than the number of bookable items. These low penetration rates of bookable inventory (1% for restaurants, 8% for attractions) will provide a long volume growth runway.

Adjusting the company’s trailing FCF for stock-based compensation, TV advertising and non-hotel investments (assuming OpenTable margins achievable on a normalised basis), I estimate the business is generating c. $400mn of owner earnings, a 6% yield to the current cash-adjusted market cap, and c. 60% of invested capital. It’s clear that the opportunity and capital allocation priority for the business will remain reinvestment for a long time.

If (1) for every $100 we invest in TRIP it generates $6 of owner earnings, and (2) that $6 is all reinvested into projects which generate a recurring $3.60 pa, then TRIP has generated $36 of value, capitalised at our opportunity cost of 10%. Assuming average incremental returns on capital of 25% over the next decade and that three quarters of earnings are reinvested yields an IRR of c. 20%, and TRIP would be worth c. $40bn over the next decade.

I have written in the past about the importance of being able to execute a long-term investment strategy. The portfolio management decisions that I have taken, and documented, relating to our ownership of TRIP shares since September 2016 are an example of the freedom that a sound investment process, appropriate working environment and philosophy aligned to manager temperament can afford in making decisions that are consistent with our stated investment philosophy.

TRIP’s quoted share price at the end of 2018 was $54, c.11% lower than our initial acquisition price in September 2016. Yet TRIP’s positive contribution is responsible for c. 8% of the cumulative performance of the portfolio since inception, thanks to an environment and investor base that allow us to make investment decisions which are consistent with a long-term business owner investment philosophy; that is to average down in the face of short-term market pessimism and reduce exposure in response to excessive exuberance.

Disclaimer: The contents of this document are communicated by, and the property of, Tollymore Investment Partners LLP. Tollymore Investment Partners LLP is an appointed representative of Eschler Asset Management LLP which is authorised and regulated by the Financial Conduct Authority (“FCA”). The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Tollymore Investment Partners LLP or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document. The information contained in this document is strictly confidential. The value of investments and any income generated may go down as well as up and is not guaranteed. Past performance is not necessarily a guide to future performance.

“Siempre he dicho que el verdadero riesgo es cuando tienes una perdida irreversible en la cartera”

February 13, 2019 in Entrevistas exclusivas, MOI Global en Español

Tuvimos el honor de entrevistar a Flavio Muñoz, presidente de Andromeda Value Capital y miembro de MOI GLOBAL. Flavio es un apasionado del mundo de la empresa desde niño; además, comparte sus conocimientos sobre inversiones y cómo esto lo ha llevado a enfocarse fuertemente en empresas tecnológicas y de media.

 

MOI Global en Español: Cuéntanos acerca de tu formación y tu trayectoria.

Flavio Muñoz: A diferencia de otra gente que ya estaba comprando acciones a edades muy tempranas y tenía muy claras sus ideas, mi llegada al mundo del Value Investing fue, tal vez, por mera aleatoriedad.

Desde que era muy joven siempre me atrajo bastante el mundo de la empresa, el crear algo, bien fuese un producto o servicio y hacerlo crecer. Sobre todo, la parte de hacerlo crecer con éxito. Así que era bastante común que leyese libros de empresarios o empresas. Me resultaban más amenos que las novelas y supongo que en cierto modo despertaban mucho más mi imaginación.

De forma que, durante mi carrera de derecho y empresariales, solía acudir a la misma sección de una librería en el centro de Madrid para ir leyendo los libros que había al respecto. De mantener la misma costumbre era simplemente una cuestión de tiempo el que diese con El Inversor Inteligente de Benjamin Graham, ya que se encontraba justo allí a la venta. Cosa que acabó ocurriendo en mi segundo año de carrera.

Antes de él ya había leído bastante sobre cracks bursátiles, sobre todo porque era la época de la crisis subprime y parecía ser un tema recurrente. Lo encontraba interesante como añadido a los libros de empresa, y la verdad, tampoco me quedaban ya muchos libros de los primeros que leer en la sección.

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Twenty Years of Opportunistic, Deep Value Investing

February 12, 2019 in Deep Value, Equities, Letters

This post is excerpted from a letter by MOI Global instructor Jim Roumell, partner and portfolio manager of Roumell Asset Management, based in Chevy Chase, Maryland.

The end of 2018 marked a milestone for RAM—our 20th anniversary. From the beginning, there have been myriad market conditions and always lots of things to worry about: economic slowdowns, the dot-com bubble, 9/11, wars, rising corporate and government debt levels, overleveraged consumers, the financial crisis and possibility of a depression, worldwide quantitative easing combined with potential runaway inflation and currency depreciation, and more recently, Brexit. As Gilda Radnor said, “It’s always something.”

Since our inception, we have remained consistent in the investment principles that animate us, regardless of macro-economic factors. To wit, in a 1998 quarterly letter that was written just prior to the official formation of RAM, we used the phrase “specific securities at specific prices,” and highlighted a key temperamental element of our process — averaging down. In our recent 3rd Quarter 2018 letter, we used the phrase “company-specific investment narratives, while eschewing overall stock market exposure.”

There has been little style drift. While most investors pursue “great companies,” we look for deeply mispriced securities. We speak and think in only one language—opportunistic, deep value. We find value in out of favor, overlooked, or misunderstood securities. Our philosophy typically leads us to focus on small companies with super-strong balance sheets, where we carry out dogged detective work. That’s been our song since day one.

The following are excerpts from twenty years of letter writing. We hope you enjoy our trip down memory lane.

3rd Q 1998 — Business risk is about winning or losing customers and creating overall shareholder wealth. Market risk is about what a shareholder is willing to do when he wakes up in the morning in a panic. Market risk is impossible to control. It appears to be managed most efficiently by 1) the security selection process itself and 2) averaging down.

2nd Q 2002 — In this year’s first quarter letter we noted that we looked to see what the market was making cheap…Pursuing this thesis, we purchased a basket of well-capitalized, fallen technology companies we considered to have good futures notwithstanding their current struggles…the market’s current “judgement” will not detract us from our own analysis of a company’s intrinsic value.

4th Q 2002 — Our current holdings possess meaningful discounts to tangible book values, under re- ported real estate values, strong balance sheets, competent and honest management teams (best we can tell) and business models that are straightforward. As we’ve stated many times, our job is not to predict the direction of the overall market or to discern how the market will value our holdings in the short term. Our job is to discover value through a conservative analysis of a company’s business and its assets, justify the analysis on a quantitative basis, and demand a meaningful discount to our estimate of the business’s worth.

2nd Q 2003 — Our sell discipline has shortcomings. For instance, because we are often seeking to simply arbitrage the difference between a security’s current public price and its current intrinsic value, we will often not participate in the growth of the company’s intrinsic value itself. We are always looking to up- date (hopefully increase) our corporate value estimate with new information, but our targets are based primarily on taking advantage of current discrepancies rather than making long-term judgments about the growth of a particular business.

2nd Q 2004 — I liken our opportunistic deep value investing strategy to a tiger patiently waiting in the weeds; off to the side, quiet and calm, waiting for a mistake to happen. Why risk coming out of the weeds when the odds are not (wholly) in your favor? And like the tiger, we demand differing levels of safety to come out of hiding depending on the type of prey…Nevertheless, regardless of the type of opportunity, we need to have the odds strongly in our favor.

1st Q 2005 — Roumell Asset Management strives to align itself with quality people in all of its activities. In selecting investments, we ask ourselves: Do we want to partner with this management team? Are they honest? Are they smart operators? If you can imagine making a private equity investment, you would probably do a tremendous amount of due diligence on the management team. However, for some reason, once a company trades on the public markets, investors often feel management isn’t worth trying to assess. Some investment managers (even some we respect), choose to “let the numbers speak for themselves” and avoid any real management inquiry. We are not looking for perfection, but we seek to go into business with people we believe we can trust. Often, we have to wrestle with what appears to be cheap assets controlled by less than stellar operators.

3rd Q 2006 — Our aversion to an over reliance on debt financing directly affects how we invest your money. In fact, if a novice were to ask us for one simple rule to adhere to as he/she embarked on a strategy to invest in individual companies, we would say stay away from companies who rely heavily on debt financing and pursue those with strong balance sheets. In other words, focus first and foremost on a business’s staying power and ability to survive regardless of the general economic or industry specific climate by referencing its balance sheet (including off-balance sheet items, such as unrealized real estate appreciation).

4th Q 2008 — We are mindful of the current environment characterized as it is by a dramatically slowing economy, real asset price declines, and the difficulty in assigning value to companies and their assets. However, in this environment, security prices appear in many instances to be priced at ridiculously low levels. If historically the investment criterion was “cheap,” it is now “ridiculously cheap” because (1) such prices are available and (2) it is necessary given current economic conditions. Demanding a greater mar- gin of safety seems quite appropriate. Perhaps our view is best described as being tempered, judicious, and flexible, but clearly one of opportunism as well. The economic outlook is truly muddled.

We do not hold securities on margin, have ample cash reserves, and are confident in our abilities as we enter a period that should allow a flexible, research-intensive firm such as ours opportunities to make money for our clients.

4th Q 2009 — We finished 2009 on a solid note. Our sizable investments in high yield corporate debt and select well-capitalized small companies paid off. We were cautious (and continue to be), holding roughly one-third of our assets in cash throughout the period.

4th Q 2011 — Our emphasis is on taking advantage of investment situations where we can reasonably expect to gain an informational and analytic edge through dogged, disciplined detective work to uncover well-capitalized promising securities underfollowed by Wall Street.

For us, while remaining conscious of both stresses and opportunities in the greater economy, investing is about price versus value, plus patience, as it pertains to very specific securities purchased at very specific prices.

4th Q 2012 — As much as information has become easier to access, we still believe firmly that this information is uneven in quality and does not replace old-fashioned shoe leather work. In our minds, the investment culture has been taken in by the notion that everything can be learned while sitting at one’s desk searching the internet. Deeper understanding often demands direct experience. Our research process is relentless and includes regular travel to see management teams, assets, customers, and competitors firsthand in order to obtain more and better information.

The “higher things” in life (thinking, feeling, temperament, and patience) will never become commodities. The investment operation flows from a clear, well-defined philosophy with the discipline to forge ahead independent of the market’s current vote of confidence — and that’s finally about a firm’s character. Proverbs perhaps says it best, “Where there is no vision, the people will perish.” In turn, if there is no investment vision, the strategy will, at some point, fail. The investor must internalize his or her process and beliefs such that they become part of his or her being. The mind’s eye ultimately becomes the tool to distinguish between risk and reward.

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Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.

CIMA Capital sobre Safestyle y DeA Capital

February 11, 2019 in Ideas de inversión, MOI Global en Español

 NOTA DEL EDITOR: Estas ideas de inversión son extraídas de una carta trimestral de CIMA Capital.

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Otra posición significativa es Safestyle [LON: SFE], compañía inglesa dedicada a la fabricación e instalación de ventanas para el mercado de reparación y mantenimiento. La compañía sufrió una tormenta perfecta en 2018 cuando a un entorno de mercado ya complicado se sumó la entrada de un nuevo competidor proveniente de la empresa (un antiguo fundador) que utilizando información interna de la compañía comenzó a contratar empleados y a atacar comercialmente a la compañía. La compañía llegó a caer un 80%, en lo que prácticamente implicaba que el mercado esperaba su quiebra o recapitalización.

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Ray Dalio on His Principles for Investing and Life

February 9, 2019 in Curated, Full Video, Interviews, Timeless Selections, Transcripts, YouTube

Ray Dalio, founder of Bridgewater Associates, participated in the “Talks at Google” series in 2018, sharing his principles for investing and life. The Q&A session following Ray’s talk was moderated by Jordan Thibodeau.

Ray founded Bridgewater in 1975 in his two-bedroom apartment in New York. Forty years later, Bridgewater has made more money for its clients than any other hedge fund in history.

In his book, Principles, Ray shares what he has learned over his remarkable career, arguing that life, management, economics, and investing can be systemized into rules. The book’s practical lessons, built around his cornerstones of “radical truth” and “radical transparency,” offers a clear approach to decision-making.

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