This is part four of a five-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.
Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.
From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.
The Zeke Ashton interview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!
Interview with Zeke Ashton of Centaur [Pt. 4]
Continued from part three…
Apart from the bank warrants, can you tell us a bit about your other highest conviction position in NASCAR stocks?
The two stocks we own are International Speedway and Speedway Motorsports. Between the two of them they own almost all of the tracks that host NASCAR racing events. I just think that they are unique assets that nobody is excited about and that are priced as if the popularity and profitability of NASCAR racing as a sport is guaranteed to be in perpetual decline.
Popularity for car racing in the U.S. seems to have peaked in the late 1990’s, and based on all the data we can see the sport remains very relevant but has struggled to grow attendance and corporate sponsorship since coming out of the recession. Both businesses remain very profitable, however. One of the largest income streams for the track owners actually comes from media broadcast rights to the races. This is a high margin revenue source and the current media contract runs out to 2024, so there is quite a bit of visibility for the next eight years or so. The valuations for the stocks are reasonable, with both stocks trading at low multiples to the current cash flow generated by the businesses, and substantially below the replacement value for the tracks and the adjacent real estate. If NASCAR is successful in maintaining the popularity of the sport and the management at each company does a decent job in terms of allocating the cash currently produced, investors should do pretty well. If the sport were to actually recover a bit in terms of popularity these stocks could be big winners, and we don’t think that is a crazy notion at all. Major sports tend to wax and wane in terms of fan interest, and it could be that car racing is just going through one of those lulls. In the meantime, we can be pretty well assured that there are not legions of new entrepreneurs lining up to enter the car racing business, so it’s not like a bunch of new competitors are going to spring up out of nowhere. In terms of our conviction level, we consider the NASCAR investments to represent one underlying investment idea, so our combined position in the two stocks is not much bigger than a typical top 10 position would be for us.
According to a recent interview you gave to Value Investor Insight, Centaur’s current cash allocation is more than 35%. Does this mean you’re preparing for a market crash?
We are always preparing for a market crash, whether we are 10% in cash or 50% in cash, at least mentally. Nobody can predict the timing of market corrections or crashes with perfect accuracy, but a professional investor always has to be prepared to wake up in the morning to a vastly different market than the one prevailing when he or she went to bed. Also, being mentally prepared for a crash and being positioned for a crash are two completely different things. There have been times in the past where we’d been prepared for a crash (or at least further declines) but positioned for a recovery. If a crash happened tomorrow, we’d be both mentally prepared and reasonably well (but not ideally) positioned.
I’ve been responsible for managing other people’s money in one vehicle or another since late 1998, and I have learned that the scoreboard changes very quickly in the stock market. Very few people in March of 2000 would have believed that the NASDAQ index would fall 80% from its peak to the trough in early 2003, but it did. That is a major index, by the way, not some small corner of the stock market. I can assure you that in mid-2007 very few people saw a 50% decline in the S&P500 coming, or at least very few were positioned for it.
All that said we don’t use some kind of crash probability generator to determine how much cash we hold. The amount of cash we hold in our funds is almost 100% correlated to our ability to find really compelling long ideas that meet our criteria for value, safety, and liquidity. Right now, the pickings amongst the ideas we feel that we can evaluate are pretty slim.
The U.S. stock market today is probably more uniformly overvalued than it was prior to either of the two prior bear markets. Total debt outstanding in the world is far higher now than it was prior to the credit crisis of 2008. So yes, we are prepared for a correction, though I am not predicting a crash. I am also prepared for a multi-year period where the market bounces around a lot and doesn’t go anywhere, or a period where the market doesn’t crash or correct, but just loses ground for an extended period of time. But mostly we are just trying to exercise patience until we see the next compelling bargain security that we can buy.