Searching for deep value investing insights and ideas, we recently had the pleasure of sitting down with Chris White of Greenstone Capital Management Partners in Dallas, Texas.
Like other investing related terms, deep value investing is a much used, but perhaps less well understood term. So, first and foremost we were interested to learn more about what deep value investing really is. And while definitive descriptions may prove elusive (see a related article here), one of the many keen observations from Chris is that deep value investing requires strict price discipline on the part of the investor.
But, of course, it doesn’t stop there. Like other investing styles, deep value investing is as much art as it is science. Just because an equity screens low on market value to tangible book or other deep value criteria, that does not in itself mean it will prove to be a good investment. During the conversation, Chris emphasized some of the other important factors to consider for successful deep value investing: motives of management, history of capital allocation, and the ability of the business to survive, among others. Chris was generous not only with sharing insights from his vast experience in deep value investing, but also in giving specific case studies and current investment ideas. The full interview with Chris White is available in The Manual of Ideas Members Area.
What is Deep Value Investing?
In a recent BeyondProxy article, John Mihaljevic asked the question: How do you determine if you are a value investor or a pretender? John suggested that the number one reason you may NOT be a value investor is if your investment theses do not reference the stock price. While deep value investing may not yield automatic investment success, practitioners of deep value investing are arguably less likely to ignore the share price than most other investors. This focus on price also became evident in our conversation with Chris White. On the question of what is deep value investing, Chris stated the following:
“I suppose it’s a way for differentiating yourself from a lot of the other managers because of the way value is so banded about and perhaps people don’t really adhere to the discipline. So perhaps people who think they adhere to the value discipline more than others call themselves deep value…we’re very strict in discipline about what we’re willing to pay. And if that’s two and a half to three times cash flow on a lot of the portfolio, well then that’s what we’re willing to pay. What you’ve got to be concerned about is does that company have the ability [to survive], is it a one-time event, or why is the company mispriced?”
In addition to the above take on the question, Chris also offered some more practical criteria that characterize deep value investing. And while a definitive answer may yet prove elusive, the below criteria should be helpful guidance in thinking about what situations may be fruitful hunting grounds for practitioners of deep value investing:
- Primary Focus on Current Free Cash Flow or Tangible Assets
- Look for existing assets or profits; no interest in “future” or “potential” opportunities
- Strict Valuation Criteria
- Very low multiples of existing cash flow (i.e. 2-5x or less
- Trying to pay only $0.40 for something that is worth $1.00
- Also consider securities paying high current income (yield), if safe
- Distressed Assets
- Look for very low multiples of tangible assets (i.e. 1x or less)
- Quite often a rich opportunity set if one knows where to look
- Buy what others are selling; search for out-of-favor stocks, industries, sectors, etc.
- Long-Term, Catalyst-Driven
- Willing to wait until intrinsic value is achieved
In the case of distressed assets, Chris enlightened us with several case studies including Tronox (debt and equity), Chemtura (equity), EPL (equity) and Hayes Lemmerz (debt and new equity). In that context, Chris reminded us of the advantage that investors have who are skilled across the capital structure. Similar to value superinvestors Howard Marks or Seth Klarman, Chris is focused on exploiting mispricings with the most favorable risk-reward, no matter where in the capital structure of a company.
A Deep Value Investing Idea: Discovery Offshore (Oslo: DISC)
One of Chris’ favorite current deep value investing ideas is the Norwegian-listed jack-up drilling company Discovery Offshore. In the video excerpt below, Chris provides a brief thesis on Discovery Offshore. The video of the full interview with Chris White is available in The Manual of Ideas Members Area.
Deep Value Investing: A Word on Idea Generation
How does one generate deep value investing ideas? Ben Graham net net disciples will of course point to net net screens. Others will gravitate toward 52-week low lists and other shortcuts for deeply out of favor stocks. And while there are many ways to look for deep value investing opportunities, we found one aspect of Chris White’s research process particularly illuminating. How did he find Discovery Offshore? He found it mentioned when he was reading through the 10-K of Hercules Offshore (HERO), a company he was initially interested in!
This reminds us of Warren Buffett’s answer when he was asked how he became so successful: “We read hundreds and hundreds of annual reports every year.” Chris’ research intensive investment process is certainly a hallmark of all successful deep value investing. At Best Ideas 2013, a recent ValueConferences event, Chris delivered a tour de force in bottom-up research in his presentation of the investment case for Discovery Offshore. Below is an excerpt in which Chris talks about how he found Discovery Offshore. The video of Chris’ full hour-long presentation at Best Ideas 2013 is available in The Manual of Ideas Members Area.
Chris White on How He Found Discovery Offshore
Chris White is also one of the instructors at Deep Value Summit 2013 on May 7-8. At the event, Chris will present another one of his favorite deep value investment ideas, an unlevered U.S.-listed micro-cap with a management and board who understand capital allocation (they’re returning approximately 20% of their market cap back to shareholders via buybacks and have a healthy 5% cash dividend program). The equity currently trades for less than 4x free cash flow. Catalyst: the company, which provides exposure to the Macau gambling industry, is working towards a mid-2013 dual-listing on the Hong Kong exchange.
About Chris White: Christopher B. White has over twelve years of experience in the US capital markets. Chris founded Greenstone Capital Management Partners, LP in 2008. The fund is a long/short investment fund that is primarily focused on low multiple investing in ‘out of favor’ US listed equity and distressed situations, across capitalizations and asset classes. Prior to founding Greenstone, Chris spent six years at the investment banking firm of Stonegate Securities, Inc. in Dallas, Texas. His diverse roles included sell-side analyst, and investment banking, where he was integrally involved in raising over $400 million in capital for small cap public companies. In New Zealand, he worked for the world’s largest sheep processor, Alliance Group, Ltd, and fisheries company, Moana Pacific Fisheries, Ltd. Chris graduated from the University of Otago in New Zealand with a Bachelor of Commerce double major in Economics and Finance in 1996. Mr. White is the current holder of NASD Series 7, 63, and 65 designations. Chris is presently on the board of the University of Otago in America. He also currently sits on the advisory board to the New Zealand Global Network (KEA) North America Education Initiative, and on the board of the American New Zealand Association Inc. (ANZA) which is focused on supporting the educational and research opportunities between both countries. Chris and his family live in Dallas, Texas.