GuruFocus had the pleasure of hosting another presentation with Gary Mishuris, the managing partner and chief investment officer of Silver Ring Value Partners. Silver Ring is an investment firm with a concentrated long-term intrinsic value strategy.
Mishuris also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business. Prior to founding the firm in 2016, he was a managing director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the U.S. Focused Value strategy. From 2004 through 2010, Mishuris was a vice president at Evergreen Investments (later part of Wells Capital Management) where he started as an equity analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010.
He began his career in 2001 at Fidelity as an equity research associate. Mishuris received a S.B. in computer science and a S.B. in economics from the Massachusetts Institute of Technology.
Watch the full presentation here:
Key takeaways
Mishuris kicked off his presentation with a brief overview of what he planned to cover during his presentation alongside a short description of Silver Ring. He highlighted the partnership’s temperament as a key competitive advantage. A limited but nimble asset base allows them to invest in the most inefficiently priced securities.
From there, he turned his presentation to take a look at what he believes are the four key investing patterns that investors can follow and use to guide their strategies. He made note at the beginning of his explanation that stocks being cheap, a good business or growing rapidly do not qualify as an investing pattern in his eyes and do not necessarily justify an investment. In most cases, an investor should do their research on a deeper level to find their own justifications.
The first pattern that Mishuris dove into was cyclical companies. He explained that cyclicals are generally affected by market turns or from industry-wide issues that makes them easy to understand. The main pitfall of investors is that they try to play the market cycles. Mishuris thinks investors instead should try to establish a price to value justification for their investment, which will lead to low-risk returns.
Next, he turned to turnarounds, which he explained are related to a company-specific problem that is affecting their earnings. Investors need to focus on what the most likely outcome is for a company going through some form of turnaround rather than trying to find a best-case scenario. Investors should wait for clear evidence of a turnaround, but not so long an income statement shows it, to determine if they should invest in the company.
Mishuris’ third pattern was long-duration, above-average growers, which he highlighted with his stock example later on in the presentation. In short, Mishuris has found the market focuses on the magnitude of growth rather than the length of growth. Investors can find great opportunities in companies that grow at somewhere around 10% a year if they are willing to hold that company for a long time.
His last pattern looked at behavioral errors, which he explained are when investors are making changes that are not market-related. The example that he gave was of a company that may have had a small spinoff. An investor with a small position could go from a 0.5% position in the parent company to a miniscule 0.05% position in the new company. Due to the size of the position, they decide to just sell it because it no longer fits within their strategy. These types of situations compete with the value of a business and can leave savvy investors with a unique opportunity.
Stocks
Mishuris highlighted his long-duration, above-average growers pattern with the example of Sprouts Farmers Markets Inc. (SFM, Financial). He explained the market has generally underappreciated the profit growth the company has seen because it has been slower than other companies. Through his five-step research process, Mishuris broke down how he came to the conclusion that Sprouts offers a unique opportunity.
In short, Sprouts offers several sustainable competitive advantages, including habits among its loyal customers and optimal regional scale to work with local suppliers. Alongside its competitive advantages, Mishuris explained why he likes the company’s management, admitting to his own biases. He finished off the analysis by showing off his valuation strategy that uses worst, base and best-case scenarios for how an investment in the company could turn out.
Questions
One question from the audience asked Mishuris about sourcing investment ideas. He explained that he utilizes some custom-made screeners to dig through different stock ideas. Generally speaking, he uses free cash flow yields to help wade through frauds and it also generally helps to avoid companies that employ accounting gimmicks.
He continued on to explain that he also relies upon a close circle of like-minded investors that he likes to bounce ideas back and forth between. While it would be great to be able to ask Warren Buffett (Trades, Portfolio) what he would buy, the majority of investors do not have access to him. Instead, Mishuris likes to look to lesser-known colleagues and peers to generate ideas at the top of his investment funnel.
The question spawned another asking if it could be the case that the network of peers might create confusion for an investor if there were too many new ideas. Mishuris explained he did not believe there could be too many ideas as long as they maintained a certain level of quality. If those ideas or peers were diluting the quality of information being passed around, then he did think that could cause problems.
Another interesting question that prompted a great response from Mishuris asked of his thoughts on inflation and where the market might be going. He explained that he thinks it is impossible to predict where the market might be going, but investors do have the ability to understand the current state of the market.
He broke down the market into what he believes are three tiers, which are bubble companies, great companies that are expensive and the third tier is made up of companies that are out of favor and, therefore, are cheap. Many cheap companies have problems that should be avoided and at the same time expensive companies are trading at optimistically high valuations.
To hit on the inflation aspect of the market, Mishuris explained that he believes the Federal Reserve always thinks they can control the market, but in most cases they cannot. He is not generally concerned of inflation fluctuating upwards of 5% and if the Fed truly messes up, he has insurance in place to protect himself. Overall, he does not feel the need to worry about inflation rising small amounts.
