Having started his own fund at just 27 shortly after the financial crisis, you can understand why Rational Investment Group founder Guy Gottfried has mostly kept his head down and focused on managing his portfolio with great success- the fund is up 10.6% through Q2 and has returned 21% annual since inception, according to sources with direct knowledge of the matter. But with recent talks at this year’s Value Investing Congress and Capitalize for Kids, along with an interview in the most recent issue of Graham & Doddsville, he seems to be opening up his approach to value investing.
Guy Gottfried: Moving past stock screens
One of the most difficult questions facing a value investor is where to look for opportunity when the rest of the market is confident. There are enough people with an eye out for obvious net-nets that you’re unlikely to find any low hanging fruit in the usual places.
“You can’t do the same thing as everybody else and expect different results,” said Guy Gottfried in the Graham & Doddsville interview. “Many investors might start by screening for stocks with low multiples to their earnings or free cash flow. But the most attractive opportunities often involve businesses that are under-earning or even losing money and that therefore won’t be found in a screen.”
He gives the example of Canadian income trusts, a structure similar to REITs and MLPs that gave companies significant tax benefits with fewer restrictions on who could become an income trust. Guy Gottfried noticed that whenever an income trust would reduce or temporarily eliminate its dividend the price would plummet, and that there weren’t many analysts systematically watching the space for oversold stocks.
Similarly, debt recapitalizations, where a company settles debt by issuing new shares, can leave current shareholders with a bad taste in their mouth and warn other investors that the company is facing serious problems. But Guy Gottfried has found that debt recapitalizations often leave stronger balance sheets, new management, and discounted stock prices in their wake, a value investor’s dream when it all comes together.
Guy Gottfried: Putting old ideas to new use
“By the way, there’s no shame in using the same method multiple times. It’s so difficult to find truly compelling ideas that you have to take them any way you can get them,” says Guy Gottfried. “When I find some way of simplifying the process of locating bargains, I’m unapologetic about reusing it for as long as it works.”
Case in point is Canadian hotel company Holloway Lodging Corp (TSE:HLC) (OTCMKTS:HLLOF), which falls into both categories that Guy Gottfried mentioned in the G&D interview. A former REIT, Holloway paid off maturing debentures with new shares in 2011, diluting its stock by 90%, falling from a split-adjusted pre-crisis level of $150 down to less than $4. In 2012 activist investors took over management of the firm, which is when Guy Gottfried first invested. Even though Holloway stock hasn’t appreciated much since then, Gottfried sees the recent acquisition of the underperforming hotel company Royal Host as yet another chance for Holloway management to turn a mismanaged hotel company into a winner, which the market didn’t really registered. “The market was giving you Holloway at an attractive price and throwing in Royal Host for free,” says Guy Gottfried.