Like other investing related terms, deep value investing is a much used, but perhaps less well understood term. So, first and foremost we were interested to learn more about what deep value investing really is.one of the many keen observations from Chris is that deep value investing requires strict price discipline on the part of the investor.
But, of course, it doesn’t stop there. Like other investing styles, deep value investing is as much art as it is science. Just because an equity screens low on market value to tangible book or other deep value criteria, that does not in itself mean it will prove to be a good investment.
While deep value investing may not yield automatic investment success, practitioners of deep value investing are arguably less likely to ignore the share price than most other investors. This focus on price also became evident.
“I suppose it’s a way for differentiating yourself from a lot of the other managers because of the way value is so banded about and perhaps people don’t really adhere to the discipline. So perhaps people who think they adhere to the value discipline more than others call themselves deep value…we’re very strict in discipline about what we’re willing to pay. And if that’s two and a half to three times cash flow on a lot of the portfolio, well then that’s what we’re willing to pay. What you’ve got to be concerned about is does that company have the ability [to survive], is it a one-time event, or why is the company mispriced?”
Some more practical criteria that characterize deep value investing :-
Primary Focus on Current Free Cash Flow or Tangible Assets
- Look for existing assets or profits; no interest in “future” or “potential” opportunities
- Strict Valuation Criteria
- Very low multiples of existing cash flow (i.e. 2-5x or less
- Trying to pay only $0.40 for something that is worth $1.00
- Also consider securities paying high current income (yield), if safe
- Look for very low multiples of tangible assets (i.e. 1x or less)
- Quite often a rich opportunity set if one knows where to look
- Buy what others are selling; search for out-of-favor stocks, industries, sectors, etc.
- Long-Term, Catalyst-Driven
- Willing to wait until intrinsic value is achieved
In the case of distressed assets, Chris enlightened us with several case studies including Tronox (debt and equity), Chemtura (equity), EPL (equity) and Hayes Lemmerz (debt and new equity). In that context, Chris reminded the advantage that investors have who are skilled across the capital structure. Similar to value superinvestors Howard Marks or Seth Klarman, Chris is focused on exploiting mispricings with the most favorable risk-reward, no matter where in the capital structure of a company.