3 Paths to Finding Value in Stocks by John Huber

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3 Paths to Finding Value in Stocks

John Huber Brief Bio
• Founder, Portfolio Manager at Saber Capital Management, LLC
• Author of the Blog BaseHitInvesting.com, where I discuss my investing ideas
• Saber is a Registered Investment Advisor (RIA) that manages separate accounts for clients using a value investing approach
• Saber emphasizes aligned incentives (John Huber invests alongside clients)

Saber’s strategy is to make investments in high-quality, well-managed businesses at attractive prices.
Qualities I Look For:
• Businesses I Understand
• Growing Intrinsic Value (High ROIC)
• Durability (Predictable Cash Flow)
• Shareholder-friendly Management
• Margin of Safety (Value)

Three ways to locate value in stocks:
1. Information Advantage
2. Analytical Advantage (Thinking Differently)
3. Time Arbitrage

More details in http://sabercapitalmgt.com/wp-content/up...a-2016.pdf

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John Huber has shaped and corrected many of my heuristics over the years. There are still a lot (of heuristics) left that I hope to correct in the future, as capital gets more while the time to grow it gets less. As Lao Tzu said that it astutely two thousand years ago - When the student is ready, the teacher will appear.

Investment Evolution or Flexible Tactics?

I think people overstate Buffett’s “evolution” and assume he once bought cheap stocks and now only buys quality stocks.

Not all of these investments were big winners. My point in highlighting these is just to show that Buffett doesn’t box himself into any style box. He simply wants to find investments that will grow his capital in a safe manner.

When I started Saber a dozen years ago, great quality companies (today what are commonly called compounders) were all reasonably priced; some were downright cheap. Apple and Microsoft traded at 10 P/E at times.

Next Decade’s Opportunities: In short, I think they’ll come from special situations, bargains, and high quality (even if lower growth) companies that spit off cash and are buying back shares.

Today the opportunities are more in the camp of the 15% FCF yield example I outlined above. Cheap stocks that are using their cash to buy back shares. If we get even a small amount of growth, that’s an added bonus. And we don’t need the market to increase the valuation if we buy at such a low starting multiple.

The next great investments may come from high quality, but will not all come from the stocks that are today defined this way. I think a flexible mindset is required.

https://basehitinvesting.substack.com/p/...r-flexible

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Last month, some of the more "fully priced stocks" in my portfolio suffered at least ~20% declines. In the heart of hearts, these "fully priced stocks" were probably overvalued but it was hard for me to trim them because they were still "good quality". At the back of my mind, I am also aware to never underestimate the enthusiasm of crowds (great banks like JP Morgan and DBS trading at 3.X P/B is the great example).

But on another thought, I was probably also over-influenced by Munger as well (which is what John Huber has mentioned as well). Of course, unless one is a trader, else there isn't no clear cut workflow wrt to selling an overvalued yet quality stock.

Quick Thoughts: Tampa Bay Rays, Moneyball’s Goal, Herd Behavior and Compounders

Many high quality compounders have taken it one the chin recently: some of these world class businesses traded at 40-50 P/E: stocks like CSU, LVMH, CPRT, ZTS, POOL, VRSK, ROL, AMT, INTU, and NKE are all down 50-80%. FICO might take the cake, reaching more than 100 P/E (now down 75% from its high). Many of these stocks still trade at 20-30 P/E. There’s a massive air pocket in these stocks when the narrative breaks: growth investors no longer want them and they’re still too expensive for value investors.

Some well-known fund managers have said that quality investing is no longer working. One even suggested that adding a momentum component to his strategy might be necessary, because buying dips no longer works. But there is nothing wrong with the strategy of investing in growing companies. The problem is simply that growth stocks became overvalued.

There are issues with many of these stocks, but all great businesses have hiccups. The main problem for these stocks is that there is no margin of safety at 40-50 P/E.

One thing I disagree with the late, great Charlie Munger on: with very rare exceptions, I think stocks at these levels should be sold. When the business hits that inevitable hiccup, you’re looking at sizable losses, which violates a different Charlie Munger idea that I very much agree with: never interrupt compounding unnecessarily.

I’ve made plenty of my own mistakes holding great businesses too long (CPRT one such example among others in years past). This experience has led me to conclude that the risks to owning stocks at 40-50 P/E are not worth the reward. I don’t feel comfortable trying to guess which one might end up becoming the next 10-bagger. That’s not a strategy that I believe has positive expected value, at least not for my skillset.

I never buy into the idea that “markets are broken” or that value investing (or any other style) doesn’t work anymore. Groups of stocks sometimes tend to get overvalued and stop performing well, but they may one day become the best opportunities in the market once again. These things have life cycles.

https://basehitinvesting.substack.com/p/...moneyballs
How great stocks drop 50% | John Huber (MicroCapClub's interview) https://www.youtube.com/watch?v=cEK8Ak-q0tg