GuruFocus had the pleasure of hosting a presentation with Charles Lemonides, the founder of ValueWorks.
Lemonides founded ValueWorks with the goal to broaden availability of his conceptual value investing discipline in the retail and institutional investor communities. He serves as chief investment officer and leads investment research and portfolio management.
His philosophy of value investing was cultivated at Gruntal & Co. During his tenure in Gruntal's research department beginning in 1986, Lemonides honed skills covering risk arbitrage, the banking industry and special situations. In 1994, he joined Sterling Advisors, an investment advisory unit of Gruntal where he became chief investment officer the following year. In 1999, he merged Sterling into the independent advisory firm M&R Capital. As chief investment officer of M&R, Lemonides began branding the composites he brought over from Sterling under a ValueWorks banner, laying the ground for establishing it as a fully independent firm in October of 2001.
Lemonides received his bachelor's degree in history from Vassar College and pursued graduate studies in economics at New York University. He received his CFA designation in 1989 and is a member of the New York Society of Security Analysts. Lemonides has been featured in prominent print and broadcast financial media throughout his career.
Watch the full presentation here:
Key takeaways
Lemonides kicked off his presentation with a brief description of ValueWorks. He explained that the company spends their time in the U.S. equity space and dabbles in fixed income when distressed debt offers an opportunity.
Investments are looked at largely through the view of the assets offered from any given business. From there, Lemonides will take a look at how much he believes those assets are worth if they were to be sold and he compares that number with the amount he would actually be paying to control those assets by buying the stock. Employing both a long-biased and a long-short strategy, ValueWorks has generated returns that well exceed the S&P 500.
From there, Lemonides jumped into his thoughts on the market overall and where he believes things are heading. He explained that he believes the market is in the early stages of recovery after the blow it saw last year. While many believe the market has reached a peak as far as valuation goes, Lemonides takes things a little differently.
He hit on two different aspects he considers to be skewing the overall market valuation. The first comes from the lack of earnings that has been seen by the energy market. Lemonides believes these companies will continue to bring in profits and be worth money in the future even though they have not contributed much over the last year.
The second aspect Lemonides hit on is the global nature of the largest players operating on different indexes. He explained the market cap of the S&P 500 compared to U.S. gross domestic product is pushing peak levels. However, the GDP is not a relative metric when looking at companies like Amazon.com Inc. (AMZN, Financial) or Alphabet Inc. (GOOGL, Financial) because they are global businesses.
Lemonides then jumped into his thoughts on cycles in the market and how he believes we are in the middle of a cycle rather than at the end. He drew on his decades of experience watching the market go up and down to highlight how long the transitions truly take. He then took a brief moment to highlight some generalized investing principles before taking a look at a few specific companies that ValueWorks is invested in.
Stocks
Lemonides jumped into several different stocks to show that ValueWorks likes to build a portfolio with very diverse companies while also taking some short positions. One of the holdings he highlighted was Invesco Ltd. (IVZ, Financial). He explained the company has struggled with organic growth as well as fee compression over the last decade, but if it is able to grow earnings as expected, the investment should do well over time and the stock could easily return to favor amongst investors.
One of Lemonides' favorite investments that he took a look at was United Natural Foods Inc. (UNFI, Financial). The company operates as a wholesale distributor of natural and organic foods. Lemonides explained the company's relationship with Whole Foods might seem like it is at risk under Amazon ownership. However, he believes the scale they operate on as well as increasing consumer interest in digital purchases has positioned them well moving into the future.
Questions
Lemonides took several questions from the audience, including one asking for the thought process behind the investment made into Whiting Petroleum Corp. (WLL, Financial). He broke down the series of events that led to the company choosing to restructure its debt and how it was able to come in and purchase at pretty much the bottom.
By getting in at the bottom, Lemonides believes Whiting Petroleum offers up a great opportunity to make money. Based upon the valuation he has calculated for the assets of the business, the holding should at least make them at least double their money. At this point in time, they have already seen strong returns on the investment.
Another question asked Lemonides about his investment in United Natural Foods and how he was able to keep buying shares. He bought into the company around $24.50 per share initially and then watched as the price dropped to around $5 per share before buying more.
Lemonides explained that he has seen share prices go crazy in many different companies and that this was just one of those cases. The share price dropping did not mean that he was wrong to invest in the first place. He continued that he simply looks back to his previous logic on the investment to confirm what he saw from the beginning. By continuing to buy, he has turned these types of situations into his top-performing investments.
Disclosure: Author owns no stocks mentioned.
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