The third-quarter letter of Cobas, the asset management company of Francisco Garcàa Paramés (Trades, Portfolio), was clear in interpreting the current market correction as an opportunity:
“Volatility must be our friend and falls on the markets such as that of October should be considered opportunities to reap the profitability of the future.”
Paramés stated the importance of being patient and the confidence that Cobas investment portfolio is defensive in nature because it would not be affected by an eventual drop in private consumption.
He gave five examples of Cobas defensive investments:
“The Teekay Group, by means of Teekay LNG and the parent company, Teekay Corp, is one of our most significant investments. This investment has a low correlation with the behaviour of the market as it depends on specific actions of the Group. The reasons that made it share price dropped (a cut in dividend to finance its ambitious growth plan) will shortly be the reasons for the market to again appreciate its qualities. Teekay LNG is the main source of potential for them both and has perfectly implemented its growth plan, which involves long-term contracts for its LNG transport ships. The execution risk is now very low and it is interesting that the market appears to be in agreement regarding the generation of the expected operating cash flow at Teekay LNG, but this is not yet being reflected in the share price. Now we are waiting for the plan of the company so as to reinitiate the distribution of cash while they reduce their borrowing. In any case the accumulation of value will be evident and we hope that this will be reflected by the market, this time sooner rather than later.”
Babcock International Group PLC (LSE:BAB)
“The Brexit and the inappropriate comparisons made by the market with a company as unique as Babcock, which is no. 1 or no. 2 in practically all the businesses and regions in which it operates, give us an extraordinary opportunity to purchase good businesses with unique well-managed assets at very attractive prices (PER 8x; an expected annual profitability of 11%). Babcock is particularly strong in the maintenance of nuclear submarines and frigates in the United Kingdom, in emergency helicopter services in Western Europe, and in the support and dismantling of nuclear power stations, all of which are good businesses which are difficult to replicate.”
International Seaways (INSW, Financial)
“We have a significant investment (almost 10% of the International Portfolio) in the oil shipping business, in which International Seaways is one of our favourite companies. The current situation, which is the lowest point of the last 30 years, encourages investment in favour of the recovery of the cycle of maritime transport, in particular of crude oil. Several factors contribute to the current weakness, and we can gradually see how each and every one of them is returning to normal (inventories of crude oil, demolition of the fleet, and the drop-in orders for new ships, among others). This means that supply and demand are being adjusted as is shown by the daily freight rates and the price of new ships. With International Seaways we moved into position for this recovery through a company with moderate levels of debt and with revaluation potential, even if the company should be liquidated today before the recovery of the cycle.”
Renault
“This is a clear case of hidden assets, as according to our estimates the value of 43% which Renault holds in Nissan is higher than the market capitalization of Renault itself. In other words, we are investing “free” in the Renault car business (we estimate some 4mn units sold in 2018), its financial business, and the 1.6% it holds in Daimler, all of which are undoubtedly of quality according to our analysis. The market does not quite believe this situation, but we believe the current management team has the intention of freeing the value of the company in the medium term.”
Dixons Carphone PLC (LSE:DC.)
“The Brexit has allowed us to purchase Dixons, a leader in electronic distribution in the United Kingdom, the northern countries, and Greece, at 5 years minimums (PE 7x), while Best Buy, which is operating in exactly the same business but in the United States, is trading at close to its historical maximums (PER 13x). At a time when the shadow of disruption threatens the distribution sector, Dixons has not only shown that it can compete effectively with Amazon but has consistently increased its market share over the last 5 years.”
The potential
Paramés is convinced of the high underlying value of the businesses in which they are invested. Cobas estimates that their international portfolio (Cobas International and Cobas Seleccàon), which invests in companies at a world level excluding those listed in Spain and Portugal, presents a revaluation potential of 91% according to the fair values estimated for each of the investments. The portfolio trades at 8.0x estimated 2008 price-earnings ratios and a 25% ROCE, considering Cobas' estimates of earnings and capital returns.
As the old cliche says, “Good things come to those who wait!”
Read more here:Â
Cobas Management: Fear, a Value Investor's Worst Travelling Companion
Francisco Garcia Parames Will Speak In GuruFocus Value Conference 2019
