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Sydnee Gatewood
Sydnee Gatewood
Articles (2781) 

AzValor Asset Management's September 2020 Note

Discussion of markets

September 23, 2020 | About:

Dear co-investor:

We certainly live in strange times. In the world of investment, there are always latent risk factors that can have an impact on the results of companies, but the situation we have experienced in recent months, with an unprecedented global activity slowdown, escaped any projection by market agents.

However, it is during these times that it is more important than ever to keep perspective . When we are really investing in the long term , what happens in the companies invested in the next seven years is much more relevant than in the next seven months. That said, this is a fund with a daily NAV, and those investors who invest from day one, we see a NAV that is close to 25% below initial. The question to be asked is whether we consider this a permanent capital loss or not, and for this we must consider the situation of each of the companies in the portfolio. Although each of the Managers does this exercise in a deep and constant way, there is no space here to transmit it in a detailed and complete way. What we can convey to you is that the four Managers that make up the fund are tremendously confident about the evolution of the portfolio companies' businesses (except for a few exceptions, which weighed very little1, and have left the same) andThey identify this moment as an extraordinary investment opportunity, given the valuations at which these companies are listed, taking into account their balance sheet financial situation and their generation of long-term cash flows . In the words of Amit Wadhwaney (Moerus Capital), one of the fund's Managers:

"Although it has been terrible, we firmly believe that the COVID-19 crisis will be like the rest of the previous crises, in the sense that this, like the others, will also pass; and that, a posteriori, it will be verified that it is offering long-term opportunities that are only seen generationally, as happened with previous major crises. "

We believe that it is important to distinguish between the variability of companies 'listed prices , which responds to the changing opinions of market operators, and the variability of companies' business results , measured by the cash flow they generate, and which are usually much more stable than the former. Although a global confinement of the population may have temporarily affected the results of companies to a greater or lesser extent, for long-term investors the evolution of these flows over the next five or ten years is more relevant. The implicit return of the fund according to the annual cash flows of the companies in which we invest is more than 18% [2]. This implies that, if the stock markets closed tomorrow, at current prices, in approximately five and a half years we would have recovered the initial investment, and we would continue to own the companies and their future profits. We are convinced that the strength of the portfolio will make the listed price reflect the reality of the companies, sooner or later, and while this happens we benefit from a high generation of cash.

We invest in companies from many different sectors and regions (more details in the annex), as well as companies of very different sizes. In this sense, we have an important part of the portfolio in small or very small companies, companies that are generally unknown and little followed by the market. Being off the radar of investors leads to more inefficiencies in listing prices, offering very interesting investment opportunities. Logically, these "forgotten" companies do not usually change their valuation multiple overnight, and hence patience is a fundamental ingredient when investing in them.

On the other hand, the most popular and expensive companies on the market trade at extreme prices, which we think carries a high risk. In this sense, over the last decade investing in companies with lower market valuations has yielded worse results than investing in companies with higher valuations , which, although it contradicts investment logic, tends to occur in the markets from time to time (see graph 1 below). It is true that this time has been more extreme and lasting than ever, which has tested the temperament and long-term perspective of investors and fund managers we follow around the world, many of whom have capitulated, "forgetting "The importance of investing at low prices.Historically, changing investment strategy in the middle of the game has proven to be a major mistake , and in that sense we see positively that the four Azvalor Managers remain faithful to their investment processes, which on the other hand is not surprising. , given that they have been doing it for decades, having demonstrated their temperament during previous very severe crises. Likewise, extremes never last forever ; We believe that this time it will be no different, and that the payoff for patient investors who maintain a long-term mindset in the right companies will be significant.

Figure 1:

As always, we reiterate our utmost commitment to Azvalor Managers, and rest assured that we treat the fund as if it were our own capital because, in fact, it is [3] .

Thanks for your attention,

Javier Saenz de Cenzano, CFA

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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