GuruFocus had the pleasure of hosting a presentation with Lauren C. Templeton, the founder and president of Templeton & Phillips Capital Management LLC.
Templeton & Phillips Capital Management is a value investing boutique located in Chattanooga, Tennessee. She currently serves on the board of directors at Fairfax Financial Holdings (TSX:FFH, Financial), the board of directors at Fairfax India Holdings Corp. (TSX:FIH.U, Financial) and the board of directors of Canadian Solar Inc. (CSIQ, Financial).
Templeton is the great niece of Sir John M. Templeton and serves on the board of trustees of the John Templeton Foundation. She is also a current member of the Templeton World Charities Foundation and a Trustee of Templeton Religion Trust. Templeton is the co-author of "Investing the Templeton Way: The Market Beating Strategies of Value Investing's Legendary Bargain Hunter."
Templeton began investing as a child under the heavy influence of her father as well as her late great-uncle, Sir John Templeton. Professionally speaking, she began her career working with managed portfolios and investments in 1998. She started as a junior associate at the financial advisor Homrich and Berg and later the hedge fund management company New Providence Advisors, both based in Atlanta.
In 2001, Templeton launched her own company, which dedicates its efforts to the practice of value investing across the global markets using the same methods learned from her great-uncle. She lives in Tennessee with her husband, Scott Phillips, who is a portfolio manager and director of research at Templeton & Phillips Capital Management.
Watch the full presentation here:
Key takeaways
Templeton kicked off her presentation with several quotes from Sir John Templeton that she used to introduce some of the key guiding principles that made him so successful and that she still employs to this day. To highlight one, Templeton and all those in her office operate under the idea that trouble creates opportunity. When the market becomes pessimistic, it is the prime time to invest money.
From there, she dove into the investment process that Templeton & Phillips uses to make successful investments. The first step the firm employs is a quantitative screening process that utilizes approximately two dozen proprietary screens to rank and narrow down companies. Here, as taught by Sir John Templeton, the numbers lead to bargains.
The second step in the process is to estimate the intrinsic value of potential investment candidates. This is done through a combination of discounted cash flow, a dividend discount model and estimates of five- and 10-year price-earnings ratios. For companies to pass this step in the process, they must show the potential for an upside of 50% or greater. While discount cash flow models can prove difficult to get accurate results, Templeton believes the modeling process is invaluable to finding insights into the nature of businesses.
The third step is to come to a purchase decision. This is done through fundamental analysis used to determine the cause of mispricing as found in the previous step. Here the firm employs several different strategies should cash not be available in the portfolio. By the end of the process, the firm lands on companies that either offer compounding growth moving into the future or can be purchased at a tactical discount allowing for solid returns over time.
Before Templeton offered one of her holdings as an example, she took a brief moment to talk about the human impact that is seen in the stock market. She explained that the average investor falls behind the market on a short-term and long-term basis. Due to these mistakes, the market has seen multiple bubbles and subsequent crashes and value can always be found during times of pessimism.
Stocks
Templeton used her stock example to drive home her point that trouble creates opportunity in the market. She looked towards India, where the ongoing pandemic continues to wreak havoc on the population, to find HDFC Bank Ltd. (HDB, Financial), which she believes offers up a great opportunity. She explained that the company has led the charge to digitalization, allowing it to offer a 24/7 banking experience. The company is set up perfectly for future growth and maintains strong credit quality.
Questions
Templeton answered several of the many questions that came in from the audience after she concluded her presentation. Lumping several together, she looked at the likelihood of a market crash coming in the future on the level of the 2008 housing crash.
She explained that she is absolutely confident that there will be another crash coming in the future. She does not consider herself a market timer and does not believe that it can be done successfully. Instead, she chooses to prepare herself for what she considers to be the inevitable. By preparing for market corrections between 25% and 40%, she establishes a game plan that allows her to take advantage of these situations and make investments.Overall, she believes investors are better off investing when they have the money and they have done their due diligence.
Another question asked Templeton what her process for raising capital during the bull phase of the market was so that she was well prepared for selloffs that can be taken advantage of. She gave the short answer of doing it organically before diving in to explain what organic cash generation looks like at her firm.
Things begin with the firm's sell discipline, which starts when a company approaches their calculation of its intrinsic value. At this time, they begin to consider liquidation of that asset unless there is a reason for them to stay invested. Once they have come to the conclusion that the stock is ready to be sold, it is offloaded and then there is cash available in the portfolio.
Over time as the market continues to fluctuate, there are times when they do not have a good opportunity to reinvest that cash as potential companies are too expensive. This cycle continues and repeats until cash builds or at times they may find themselves working with a new investor and once again do not find the opportunities they are looking for. In short, Templeton believes they have times where cash is accumulated faster than they can send it back out the door.
Disclosure: Author owns no stocks mentioned.
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