The 3 Cs of Value Investing
Mackenzie Cundill Team is finding opportunities in the 3Cs of value investing: Cyclicals, Compounders and Cigar Butts.
The 3 Cs of Value Investing
Mary: The Cundill brand is really synonymous with value investing, ever since 1975 when Peter Cundill started the funds. On March 24th, 2016, portfolio managers Richard Wong and Jonathan Norwood took over leadership of these funds and under their stewardship, they continue the value philosophy of looking for unloved, misunderstood and mispriced stocks that have catalysts that can take those share prices to what we believe is what they’re truly worth over a three- to five-year time horizon.
So what we’re finding these days are what we call the three C’s of value investing. That is, we’re looking for cyclicals, compounders and cigar butts.
Cyclicals tend to be companies that go up and down with the economy. You can find them in areas such as energy, industrials or financial services. And the Cundill team tends to buy those stocks when they trade at trough valuations and then sell them higher when they trade at mid-cycle earnings.
For example, we own a large U.K. retail bank that we got the opportunity to buy during the Brexit negotiations, when the British pound was hit and a lot of stocks got hurt, and we were able to pick up this high-quality franchise at a steep discount.
Compounders are the second C of value investing and these are companies that could be undergoing business transformation. Meanwhile, their underlying value is actually increasing or compounding over time. So you actually have two ways of realizing value with these companies.
So one company that we own is a leading European pharmaceutical that is undergoing business transformation with its eye care business, and that will generate value for the stock. And then we were able to pick up the stock at a significant discount because investors were not building in the value of the future revenue stream coming from potential drugs coming to market, and so we saw what investors were missing.
Cigar butts are the third C of value investing. Now, this is a term coined by the late, great father of value investing: Benjamin Graham. And just like a cigar butt that’s been discarded on the street, it may have a few puffs of value left in it. So here the Cundill team looks at asset value and we hypothetically liquidate the company, and we have found a retailer that has real estate assets that we think could be worth significantly more than the value of the whole public company.
This is really important because investors are searching for areas of the market where they are finding perceived over-valuation and maybe a handful of stocks driving market returns. So, we think investors should take another look at value investing.