GuruFocus had the pleasure of hosting a presentation with Tom Russo (Trades, Portfolio), partner at Gardner Russo & Gardner LLC.
Tom Russo (Trades, Portfolio) joined Gardner Russo & Gardner as a partner in 1989. He is a graduate of Dartmouth College and Stanford Business and Law Schools and oversees $3 billion as general partner of the Semper Vic Partners and Semper Vic Partners limited partnerships along with overseeing funds in discretionary, individually managed accounts for individuals, trusts and endowments.
His investment philosophy emphasizes return on invested capital, principally through equity investments. His approach to stock selection stresses two main points: value and price. He looks for companies with strong cash flow characteristics, where large amounts of free cash flow are generated.
The end of the second quarter saw top holdings in Mastercard Inc. (MA, Financial), Nestle SA (NSRGY, Financial), Berkshire Hathaway Inc. (BRK.A, Financial), Pernod Ricard SA (PDRF, Financial) and Heineken Holding NV (HKHHF, Financial).
Watch the full video here:
Key takeaways
Russo's presentation started off with a statement of fact that the value of a company is entirely dependent on growth. From there he took a look at two key points that he focuses on what other investors might overlook or use to justify moving past an opportunity. The first of these Russo coined as a company's "capacity to reinvest."
The guru dove into this topic first by explaining that he likes to focus on companies that operate on a global scale and are largely family-owned businesses. By operating on a global scale, a company drastically increases the potential to see population growth among their consumers by spreading into new markets. Then combine a global scale with family management and a company is created that is focused on making the best changes over the long term. In this case, a company that is happy to reinvest capital to expand the business rather than show high returns for shareholders.
Russo's second point emerged as a company's "capacity to suffer." Many of the companies he has invested in have taken serious punishment to their bottom lines or expansion due to reinvesting in themselves for long-term success. His examples covered companies that found themselves investing large sums of money in places that other investors would have seen as destroying value. By suffering the short-term consequences, these companies came out on top and saw massive benefits.
Stocks
Russo used several different companies to highlight his key points and show where he sees value opportunities moving into the future. Covering several companies at a time, he looked at different consumer goods industries, including global whiskey brands.
One of the companies that he highlighted during the presentation was Brown-Forman Corp. (BF.B, Financial). The company is home to several brands, including Jack Daniel's, which Russo used as his example.
He explained that whiskey has been booming around the world, but the market in Asia has been increasing exponentially over the last several years. In Asia as a whole, the population reaching legal drinking age is seeing massive growth each year, which is drastically increasing profits for brands with global distribution. India, for example, is expecting 25% growth in the legal drinking age population each year for the next decade.
Another example Russo looked at was Nestle. Nestle served to represent a company that showed a "capacity to suffer" over the years. The company invested heavily into the Nespresso launch even though it had failed to come to market several times. They suffered in the short term as large amounts of capital seemed to vanish before bringing the product to market and massively capitalizing on the Nescafe brand as a whole.
Questions
Throughout the presentation and pausing between sections, Russo took questions from the audience. One question that was raised early on during a section on luxury goods allowed Russo to delve into Ferrari NV (RACE, Financial).
Russo explained that Ferrari, while not necessarily fitting in with his criteria for a good investment, holds a special place in the market that will likely never go away. This comes down to the brand as a whole outside of the cars it sells. He explained that the company could stop selling cars entirely and just the trademark on the name Ferrari would bring them billions in revenue each year on merchandise. He views the company as a powerhouse in the market regardless of it being an investment opportunity.
Another question that sparked interest was one regarding consumer goods industries that worry Russo or that he has been scared to get involved with. He spun the question to look at the gaming industry, which he described as having deep franchise value and that he believes he had undervalued previously.
He gave the example of Tencent Holdings Ltd. (HKSE:00700, Financial), which he met with at one point recently. He explained how the company has created an environment where consumers are drawn regularly to buying new products and that they have all the characteristics that he looks for in an investment. His reasoning behind not getting involved was that the company operates in an industry that he and the company has no frame of reference. Due to his lack of experience, he cannot comfortably invest money in the industry, but he remains interested looking toward the future.
Disclosure: Author owns no stocks mentioned.
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