GuruFocus had the pleasure of hosting a presentation with Ben Claremon, the co-portfolio manager for the Classic Value | Small Cap Plus strategy at Cove Street Capital.
Claremon joined Cove Street in 2011 as a research analyst. Previously, he worked as an equity analyst on both the long and the short side for hedge funds Blue Ram Capital and Right Wall Capital in New York, and interned at West Coast Asset Management in Santa Barbara. Prior to that, he spent four years with a family commercial real estate finance and management business. Claremon was also the proprietor of the value investing blog, The Inoculated Investor. His background includes an MBA from the UCLA Anderson School of Management and a bachelor of science in economics from the University of Pennsylvania's Wharton School.
He was also joined by his partner Eugene Robin, CFA. Robin is a principal at Cove Street and works on both the Small Cap Value strategy as well as the Micro Cap Value strategy for the firm. Prior to Cove Street, he worked for the family office of a preeminent Kuwaiti family as an investment analyst and was responsible for diligence on a large investment portfolio, which included hedge funds, bonds, equities and real estate. Robin worked for Viasat Inc. (VSAT, Financial) as a software engineer before earning his MBA in finance from the UCLA Anderson School of Management. He also holds a bachelor of arts in computer science from UC San Diego.
Watch the full presentation here:
Key takeaways
Claremon kicked off the presentation with a brief explanation on Cove Street's background. The investment adviser is SEC-registered and is 100% employee owned. Since 2011, they have acquired approximately $700 million in assets under management.
The company takes a concentrated value focus on U.S. stocks that are small to small-mid cap companies. In their Classic Value Small Cap strategy, they have a portfolio of 30 to 39 stocks and their Small Capo PLUS (SMID) strategy is slightly smaller with 20 to 29 stocks.
Their investment philosophy revolves around three key pillars of business, value and people. They operate on a long-term horizon that ideally sees holding last forever. It is their belief that less is more relating to finding high-quality companies that provide strong returns rather than searching for "hero companies."
Claremon explained that their process of due diligence includes a lot of what they call non-Wall Street tactics, which he clarified did not refer to insider information. For the company, this means finding as many sources of information that are not coming directly from publicized information. They seek out company blogs and network with as many people as possible while also attending trade shows to find new information.
The next part of the presentation took a look at Cove Street's process that can be broken down into four stages. The first stage is where the team generates ideas through their collective experience, screening for anomalies within companies and finding good businesses and cheap stocks. The second stage is where they qualify a company as an investment that can be a good business at a reasonable price or a cheap security with a large margin of safety.
In the third stage, the team takes an alternative approach to other investors. They work as a single unit to triangulate the intrinsic value of a company. During this stage, the long analysts put up all the aspects that could lead to good value for a company. At the same time, a short analyst plays devil's advocate and challenges the value of the stock.
Finally, the fourth stage is where a decision is made on the investment. Generally, investments are made within the portfolio as either what is called a full or a half position. For the small-cap stocks, this means a 2.5% to 5% weighting in the portfolio. In SMID stocks this can be 2.5% to 5% and also includes the potential to bump up to a 7.5% weighting.
Before handing things off to Robin for a deep dive into Viasat (VSAT, Financial), Claremon ended with a brief commentary on the current state of the market. He hit on some of the volatile prices that have been driven by the internet, like the recent GameStop Corp. (GME, Financial) short squeeze, as well as the low interest rates that have led to nearly free credit. Overall, he emphasized that there are still value stocks out there and investors have the opportunity to be contrarian, but they must be highly selective when doing so.
Stocks
Robin took over the presentation and gave a full-blown explanation of the firm's largest position in their small-cap strategy. He explained many of the characteristics of Viasat's business and how they are positioned to succeed moving into the future. He also explained their competitive advantage over many of their competitors and, along with Claremon, dispelled many things they believe to be myths about the company.
In short, Viasat has a few key competitive advantages that they believe will make it very successful in the future. First, the company is set to roll out services that far exceed competitor speeds and are going to do so at a much lower price than their competitors. The second advantage is the company's focus on developing solutions for government entities in real time rather than implementing them as an afterthought. Finally, the company is positioned well to tackle potential future markets for their satellite services.
Questions
Once the presentation concluded, Claremon and Robin took several questions targeted specifically at Viasat. One question addressed why the company has seen low free cash flow and return on invested capital over the last several years.
Robin took point on this question and explained the company has heavily invested back into their own technology over the last several years to bring their third generation of satellites to market. Due to this capital expenditures, investors are left without seeing any money flowing into the company until the new satellites are launched. Robin believes that within the next year or so, once the next generation of satellites are in orbit, returns will start flowing in.
Another question addressed why Viasat's stock price has been so low since 2014. Robin explained that many people are unable to see around the corner for the investments that the company has been making into itself and have, therefore, shorted the stock. This is then compounded by the fact that the company is seen as a business only engaged in one market. He believes that the company is going to succeed in the long term due to the fact that they are diversified across multiple markets and that this is the key part that most people are missing.
Disclosure: Author owns no stocks mentioned.
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