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Looking For a Few Good Businesses
Posted by: David Chulak (IP Logged)
Date: June 20, 2013 10:51AM
“We are looking for good businesses where the fortunes of those businesses don’t turn on slight changes in GNP statistics, where there is substantial free cash generated and put into the hands of extremely capable managements which will not go out and spend that money foolishly by over-expanding plant capacity, or paying too much for an acquisition to get into somebody else’s difficult business. We look for people who have a vision of building something, building their business into a great company.”
- Glenn Greenberg
When you think of the greatest of value investors, you cannot but help think of Benjamin Graham, Warren Buffett, Seth Klarman and a few others. The name of Glenn Greenberg comes to mind less often, though if you have not discovered this value investing guru, you are missing out on a lot. The above advice should be posted at the desk of each investor that is researching stocks.
Greenberg is known for his concentrated portfolio (typically around 10 securities), his self-described “defense against ignorance,” limiting himself to those that meet his definition of value. His practice is purchasing individual assets comprising approximately 5% (or greater) of his portfolio.
The majority of his current portfolio that meet the criteria consists of:
Halliburton Companies (HAL)
U.S. Bancorp (USB)
Primerica Inc. (PRI)
Charles Schwab Co. (SCHW)
VistaPrint N.V. (VPRT)
Express Scripts (ESRX)
Oracle Corporation (ORCL)
Valeant Pharmaceuticals (VRX)
Fiserv Inc. (FISV)
Google Inc. (GOOG)
It obviously works well for Greenberg, who wrote in early 2010 that Google seemed very cheap to him, generating approximately $30 per share of free cash flow and as long as management didn’t make any foolish acquisitions, would remain a great company with a moat to protect it. At the time, Greenberg owned a little in excess of 134,000 shares, now reduced to a little greater than 127,000. The price at that time was around $500 per share; it is currently trading at $900.
Glenn Greenburg was asked by McGraw-Hill to write an introduction to Part V of Benjamin Graham’s tome "Security Analysis," which he did in the latest version. Greenberg confessed to reading the book not until later on during his investment career. He enumerates in the introduction and other sources, several investing tools that he uses in making his decisions. Below is just some of the wisdom picked from reading about this investment guru:
- Evaluate each investment prospect or equity by the predictability or reliability of the business.
- Provide a detached and unbiased calculation of the projected rate of return.
- Read each SEC filing, along with their competitors'. He emphasizes that there should not be many. He studies the industry in which they belong to get an accurate picture of the prospects for the type of business model.
- They take the time to talk to management and check to see that the goals align with shareholders, creating value and building the business rather than creating a legacy as a CEO.
- They continually ask questions such as, can margins continue to grow or is the company becoming too capital intensive? Are sales slowing or growing and why?
Study cash flow closely and calculate a rate of return that might be reasonable and verify the ability of the company to continue to grow and sustain the rate of return.
Growth at an unjustifiable low price is what he is seeking. He goes on to explain that if the business can generate at least 10% free cash flow and grow approximately 3% to 5%, you will end up with a company that can produce the 13% to 15% returns that will mostly exceed market returns. He endeavors to never buy a stock unless it priced to give at least a 15% return.
Because finding stocks that meet all of their criteria are tough to find, they seek our purchases of equities that consist of at least 5% of the portfolio and as much as 25% at any one time. This promises a very small portfolio to manage.
Financial analysis, in the end, is what’s important. The CEO’s glossy cover letter is meaningless.
Bruce Greenwald’s book, "Value Investing: From Graham to Buffett and Beyond," has one chapter devoted to Greenberg. It should be noted that while most value investors use discounted cash flow, many steer away from it because of its weaknesses. Greenberg, however, makes no apologies for using the process and appears to be his valuation method of choice. He mitigates some of the issues by choosing companies with stable or strong earnings, along with predictable cash flows… all of which makes the calculations more reliable. Admittedly, they use other methods to verify potential returns.
Greenberg’s scrutiny of discounted cash flow extends up to 12 years and adds a terminal value into his calculations.
“I would say our edge is the willingness to take a longer view of the business.”
Disclosure: No positions in any stocks mentioned
Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: HAL, USB, FISV, PRI, SCHW, ORCL, ESRXVRX, VPRT, GOOG,
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