Greenberg was one of the first fund managers whose strategy I felt like I truly understood. When I initially came across the investor, his strategy was based on the simple principle that investors should always seek to buy stocks trading at a deep discount to their intrinsic value. To find this value, he would calculate the value of an equity using a discounted cash flow analysis and use a relatively high discount rate in the mid to high teens.
Not only would this establish an appropriate value based on cash flows, but it would also incorporate a margin of safety into his analysis. Greenberg's approach worked incredibly well. Based on the information that is publicly available for his time managing Brave Warrior, he returned 25%+ per annum between 1984 and 2008.
Based on this track record, I like to keep an eye on the positions that appear in this value investor's portfolio to see if any obviously undervalued securities appear, which may be worth further analysis.
According to the hedge fund's latest 13F, which details the equity positions in the portfolio at the end of June, the most prominent holdings were mostly unchanged from the previous period. The two most significant holdings in the portfolio, accounting for 15% and 10% of assets, respectively, were Anthem (ANTM, Financial) and AON (AON, Financial).
One new position made it into the top 10 - Fidelity National Financial (FNF, Financial). Greenberg acquired 6.3 million shares in this enterprise during the second quarter of the year, giving it a 9.4% portfolio weight. At the end of the quarter, the position was worth $273 million.
Fidelity is a financial holding company providing title insurance, escrow and other title-related services. At the time of writing, the stock is trading at a price-earnings ratio of 8.5 and offers a dividend yield of 3.2%. Over the past six years, earnings per share have grown at a compound annual rate of 32%. Revenue has increased from $6.6 billion in 2015 to around $10.7 billion in 2020 (revenue is projected to be $13 billion for 2021).
According to the GuruFocus discounted cash flow calculator, the stock could be worth as much as $350 per share, up from the current $48.60 per share, if its free cash flow grows at a compound annual rate of 20% for the next 10 years before falling into a terminal growth rate of 4%. This is based on the company's free cash flow growth rate over the past 10 years, which averaged 22.6%. The discount rate used in the equation is 8%.
Even cutting the growth rate down to 3% per annum for the foreseeable future throws out a terminal fair value of around $105 per share. I think this incorporates a substantial margin of safety considering the high discount rate and below-average free cash flow growth figure.
These numbers seem to suggest that this stock is deeply undervalued based on its cash flow potential. This may be why Greenberg decided to initiate a position in the equity during the second quarter.
Two other new positions appeared in his portfolio during the three months to the end of June. The first was MasterCard (MA, Financial). The hedge fund added 558 shares in this company during the period. That position was worth $204,000 at the end of June, giving it a 0.01% portfolio weight in the $2.9 billion equity portfolio. The other new position was Squarespace (SQSP, Financial). Greenberg and his team acquired 6,000 shares in the website provider, investing a total of $356,000.