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Holly LaFon
Holly LaFon
Articles (8057) 

How Charlie Dreifus Uncovers Absolute Value

December 16, 2013 | About:

As long-term investors, our goal is to find quality companies that are inexpensive on an absolute basis. Portfolio Manager and Principal Charlie Dreifus talks about how he believes investment returns are primarily a function of entry price and details how accounting cynicism helps his efforts to identify good businesses.

Watch the video here.

“I have very much an absolute return mentality. I really hate losing money. So I want to buy a stock at a level that will not only be inexpensive to the market and inexpensive to peers, but inexpensive in an absolute sense. Much like a private equity or strategic buyer would look at that, because of my risk-averse nature.

I also believe, although I can’t prove it, that absolute value ultimately translates into absolute return. Now, you can find companies that are inexpensive in an absolute sense, but they’re not necessarily good businesses. So I want to own companies—as Buffett would describe them—with moats around them, that are niches; that are franchises.”

“Then the other primary metric that I use is a measure of cash conversion. By that I mean how much cash the company generates in relation to what they report as net income.

So, over a business cycle I’d like for the company to have close to parity, if not parity, of funds from operation that’s cash from operations, minus capital expenditures as it relates to reported net income. By doing that you come up with two conclusions: First of all, you’re avoiding the Enrons of the world because the company actually has produced the cash, and secondly you have companies that have the capacity of doing value accretive things, particularly companies that can and do increase their cash dividends annually.”

“Those are the quantitative measures of my process. There’s a very important qualitative measure, which is the deep dive into the financial statements that I do, which has been described by some others as my ‘secret sauce.’ And I always tell people the credit should go to the chef, Abe Briloff, who was my accounting professor in graduate school. He’s been known over four, five decades as being this super critic of companies but, more importantly, of their accountants that allow them to portray their numbers in an aggressive fashion, which doesn’t square with the reality.

Abe’s contention, basically, is that the auditor should be ombudsmen and they should insist that companies present the numbers in accordance with the economic reality, rather than some fiction.”

Important Disclosure Information

The thoughts and opinions in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money.

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