Cheap Compounders with Catalysts
Evermore Global Value Fund
Author: Ticker Magazine
Last Update: Nov 20, 12:09 PM EST
|More often than not stocks that are out of favor remain so over a long period of time until eventually the businesses restructure, merge or new management takes over. However, many of these companies continue to be under the radar, even with value investors, who may be too slow and cautious to reconsider their potential. David Marcus, portfolio manager of the Evermore Global Value Fund, and his team of global analysts apply their operating experience to maintain a portfolio of such cheap stocks with catalyst characteristics.
“It’s all about compounders: cheap plus catalyst equals real opportunity for value creation.”
Q: What is the history of the fund?
The fund came about as a result of my time spent working at Mutual Series for Michael Price, a well-known value investor. I interned with him and worked my way up. When Price sold his fund and later left, I began overseeing half the firm’s assets.
In 2000, I partnered with a Swedish billionaire to create a hedge fund investing in European value situations. When he died, I shut down the fund, returned the capital, and helped his family build their family business by successfully restructuring some public and private companies, which proved invaluable in terms of learning how businesses are managed.
In 2004 I returned to stock-picking, taking large stakes in small companies in Europe, good businesses that were struggling, and helping them fix themselves.
After the global financial crisis, when investors were panicking, I re-evaluated. Michael Price had shown me how to take advantage of market opportunities with an eye toward creating value, a business where the client, employees, and the owners all make money. With that in mind, Eric LeGoff and I co-founded Evermore Global Advisors, LLC in 2009, and launched the Evermore Global Value Fund the following January. We have a single philosophy—one approach, one style of investing.
Today, the firm manages about $1.1 billion, of which approximately $600 million is in this fund and another $500 million is in separate accounts. While we don’t mimic it, the MSCI All-Country World Index is our benchmark.
Q: What core beliefs drive your investment philosophy?
There are many types of value investors, but they essentially fall into two camps. One is looking for cheap for cheap’s sake, to buy a stock for half of what it’s worth, and over time those stocks revert to the mean. That’s not us.
The other camp, our camp, is catalyst-focused. Catalysts can be breakups, restructuring, selling of assets, buying back stock, focusing on core businesses and getting rid of those businesses that don’t play a significant role in the company’s success, improving management quality, etc. It is companies going through strategic change as well as being cheaply priced.
It’s all about compounders: cheap plus catalyst equals real opportunity for value creation. That, particularly family-controlled companies, is where we focus. Our compounders are family-controlled conglomerates, or holding companies, that have had significant total return over many years and are trading at a discount.
Another thing that differentiates us is that we are not just stock pickers. We have operating experience from sitting on boards and helping to restructure businesses, coupled with an extensive network of individuals and families that control businesses globally, especially in Europe, whom we source for ideas.
We want stocks that have these characteristics: cheap, plus catalysts, that along with our operating experience, and our network, we believe results in a sustainable investment edge.
Q: What is your investable universe?
Our fund is global, meaning we can go anywhere in the world, including the U.S. We are pure, opportunistic, unbiased investors. About four years ago we had 40% of the fund in the U.S. and another 40% in Europe. Today, it’s about 16% U.S. and 72% Europe.
We generally invest in developed markets. While we don’t dislike emerging markets, we prefer to sneak into them. For instance, we own Bolloré SA, a nearly 200-year-old conglomerate of transportation and logistics, energy storage, and communication companies. Although French, they own more ports in Africa than any other public company, which generate half their earnings. So, I get high-growth Africa at a low-value European price.
We do look here in the U.S. but, again, we have no interest in mimicking the index; instead, we want to beat it over time. We step out of the mainstream and look at Germany, France, Norway, Italy, etc. It boils down to understanding who the players are, how they create value, and whether we can align ourselves with them as investors.
Q: How would you describe your investment process?
We don’t screen numbers. We screen key words like “post-reorg equity,” “breakups,” “spinoffs,” and “restructuring,” and use different combinations of words to find change going on early in situations.
If a company has underperformed for 10 years, it just shows as a cheap stock. That’s great, but it’s been on that list forever. We want to see if it’s changing. We want change plus value.
A company might announce at its annual meeting that they are reviewing their operations when they spin off non-core assets. But we perform keyword searches or talk to the participants and/or the bankers helping such companies sell non-core assets. If there are family problems in public companies, a breakup might be coming. We track these kinds of things to help us source ideas.
Once we find the idea, the first question we ask is whether the name is cheap, so we assess the valuation to see if it is cheap on cash flow or sum of the parts if we break it up. But we only do a breakup analysis if it is actually breaking up.
Next, we want to understand why something is cheap. And once we are comfortable with that, we look to see what might make it less cheap—what are the catalysts that might increase its value and how long might that take.
If it’s only a good compounder in two years, but not in three, it’s probably not for us. Also, when we buy something for a reason and that reason doesn’t pan out, we don’t make the mistake of trying to come up with a new reason to justify holding onto it. If company management is not doing what they said they were going to do, we move on. There are plenty of other ideas out there.
We strive for longer-term gains. And while we stay alert to the tax situation for investors in order to net them the highest after-tax returns we can, we don’t manage with taxes in mind.
Q: Can you provide examples of your catalyst or valuation analysis?