Prospector Portfolio Managers John Gillespie, Kevin O’Brien (CFA), Jason Kish (CPA, CFA) and Steve Labbe (CFA) recently conducted a video conference call with Stacy Havener, Founder & CEO of Havener Capital Partners, in which they discussed the sustainability of 2021’s rotation toward value stocks as well as aspects of today’s market that remind them of the dot-com bubble, among other relevant topics.
One question that came up during the call was: how does Prospector help clients?
Kevin offered his take on areas within the market where the team is finding strong investment opportunities, below:
Kevin O’Brien: I would say the slice that we fit in most peoples’ portfolios is an area of the market that we believe is the least followed, where there's the most opportunity, and that's often mid-cap stocks. That is primarily the fishing hole where we're casting into. We think there are a lot less eyeballs on those names and I think it's been proven that over long periods of time, whether it's growth or value, that's where managers are able to add value. I would say the other thing is that we're financial services experts, and while we carry a heavy weight in that area, we do it because we're really good at it, and over a long period of time, we've shown that we can add value in that area. All four of us grew up in financial services.
I would say the other thing is that it might seem counterintuitive, but we're a sleep-well-at-night manager. We take a lot less risk than the average person in this mid-cap value space, and we do that by looking for stocks that can help mitigate downside risk in some way, shape or form.
Stacy pointed out that a significant amount of the portfolio managers’ personal capital is invested alongside their clients, so the sleep-well-at-night approach makes a lot of sense. Stacy then asked John Gillespie what “flavor” of value investing he would consider Prospector to be. Here is John’s response:
John Gillespie: Well, we do a few things different. If you walk into an ice cream parlor where there's all different flavors, they could represent different elements and different investment strategies. On the value side, there's contrarian investing, there's pure low valuation, low P/E investing, there's free cash flow investing, there's private market value investing.
I would say that we work with two primary techniques on valuation; one is free cash flow where we're trying to buy companies that are reasonably priced with good future prospects to grow a sustainable stream of free cash flow.
The other technique that we use is private market value, and that means different things for different kinds of companies. It could mean just following M&A multiples, and what prices whole businesses trade at and comparing public security prices to the private market prices.
It might mean for a financial company, actually marking the balance sheet to market. Half of a typical bank or insurance company balance sheet is a blind pool based on management estimates, and we've developed a lot of techniques over the years to let us draw a pretty firm conclusion about whether managements are consistently conservative or consistently optimistic in setting their marks.
We use that insight to help us build portfolios where we think the balance sheet mark to market might actually be higher than it's stated according to GAAP accounting. I would say we have a quality bias, so for us, value investing usually means buying a fair company at a good price. And occasionally, once or twice a cycle, we'll get a chance to buy a really good company at a fair price, and we're happy to do that when that opportunity presents itself to us. So, we're quality value, a lot of free cash flow that tends to make our portfolios relatively recession-proof, because they tend not to rely on capital market activity in order to resupply and fund their businesses.
Interested in hearing more on topics related to the new economic cycle, inflation and value investing? Check out the full video call with the portfolio managers titled Value Investing: Is Your Portfolio Ready for the Rotation? Click on the graphic below to get started.