Buying Great Companies at a Discount
Oppenheimer Global Value Fund
Author: Ticker Magazine
Last Update: Nov 16, 10:18 AM EST
|Investors have a daunting task when it comes to selecting from several thousand companies to invest, and the problem is only compounded when they are searching for opportunities around the world. Randall Dishmon firmly believes that great companies stand out regardless of where they operate, but the portfolio manager of the Oppenheimer Global Value Fund always sticks to a strict price discipline when exploring the globe for ideas.
ďThe bottom line is it is all about buying at a discount. I want to see a large gap between where a company is trading and the value of the overall business. Thatís how to engineer great returnsóbuy something for less than itís worth.Ē
Q: What is the history and mission of the fund?
I launched the Oppenheimer Global Value Fund on October 1, 2007, and have managed it since. Currently, the assets under management total about $570 million.
We officially refer to the MSCI All Country World Index as a benchmark, but I am completely benchmark agnostic. I never pay attention to the index or to what other funds are doing.
People come to professional money managers because they need more money to feel financially secure. My mission is to make money with money, to help people achieve their goals.
Q: How do you define your investment philosophy?
Every great investment starts by buying something for less than itís worth. The idea of investing in growth, or core, or value, or a certain market cap is about achieving returns. When people choose a way to invest, it is because they think their choice represents a better return.
I look at the world as one stock market, and set out to find the best 40 to 60 ideas I can. How the allocation ends up is predicated on the ideas I find, not on where I think I ought to be. I own my best ideas wherever I find them.
Good companies generally start the same way, irrespective of geography: people getting together over a great idea, putting money and sweat equity behind it, and bringing it to fruition. I have found great companies in countries all over the world.
That said, I would value Amazon in Argentina differently than Amazon in California, because the legal, political, and regulatory environments are different. That affects what something is worth.
The bottom line is it is all about buying at a discount. I want to see a large gap between where a company is trading and the value of the overall business. Thatís how to engineer great returnsóbuy something for less than itís worth.
We never own something just because it is growing, with no regard for price. We believe that managing volatility leads to suboptimal returns long term. I accept higher volatility because, in the hands of a good investor, it leads to higher returns.
Q: What is your investment process?
I see great investing as opportunistic, so mine is a fundamental, bottom-up stock-picking approach. Over my 17 years at Oppenheimer, I have identified three questions we have to answer correctly in order to secure a great investment.
One: Is this business worth owning, ever? Certain businesses just arenít worth our time, ever, at any price, where thereís either no advantage to be gained or the economics or return structures and the competitive landscape are poor.
Two, and this, to me, is most important: At what price is this business worth owning?
Three: Is the management team working for the shareholders? If theyíve made acquisitions that make no sense, or a long series of failed acquisitions, or if incentives are based on things that can be too easily manipulated by accounting tricks, the management team is not working primarily for shareholders.
Within a universe of about 67,000 companies, I have done detailed work on and visited thousands, generating a list of 700 to 800 companies that I am willing to own at a certain price. Within that, I need to find 50-plus good ideas that might matter. I donít have to distill the entire ocean to find them.
I determine how we would value it. My key valuation metrics are private market value and LBO (leveraged buyout) types of valuations, and I start from a place that is devoid of sentiment and emotion.
Q: Can you illustrate this process with a few examples?
Alphabet Inc, the parent of popular search engine Google, I bought a few years ago. Google had just identified a key opportunity in the market, data centers, and invested $10 billion in building a web services business for commercial entities.
That dampened their margin by about 10% for one quarter, and the sell-side community went nuts. The stock halved over the next two or three months and was trading on a price-to-earnings ratio (P/E) of 6 when I looked at it.
Back then, based on its metrics, it was classified as a value stock. I wrote a piece about two companies, Company A and Company B. I modeled Company A after Google, trading at a P/E of 6, with an all-cash balance sheet and significant equity, and no debt other than working capital. It had significant asset value, including numerous physical assets as well as intangibles that had had market offers before, so they were easy to price, and was trading at about eight or nine times EBITDA.
Company B, on the other hand, I wrote, had 55% operating margins, was growing the top line compounded over the previous decade at 39%, generated double-digit net margins and operating cash flow of several billion dollars a year, year in and year out, which was growing at about 50% a year. That, I stated, would classify it as a growth stock.
Notably, both Company A and Company B were Google when I bought itóboth descriptions fit. This is why I donít care if something is considered to be value or growth.
What people missed was that Googleís decision was purely discretionary. They could have decided not to, and their margins would have remained 50%-plus, boosting earnings and accumulated reserves.