Value Investment Principals Ltd. is a Hong Kong-based [with an office in India] investment advisory firm focusing on unique “deep value” stocks globally. Their clients include many savvy value investors globally. Sandy Mehta, CFA, has 30 years of investment experience, and has previously been a Portfolio Manager for a $15 billion “flagship” Global Equity Fund, been PM of two [international and domestic] 5-Star rated funds, and also founded a $200 million international Hedge Fund. He was the first analyst ever hired by legendary value manager John Rogers at Ariel, and also worked with Arnie Schneider and John Neff at Wellington Management Company. He is a Wharton MBA and a CFA.
The 6 stocks which Sandy mentioned in his last ValueWalk interview in July 2015 all did very well, being up anywhere from +20% to +90%. None were down.
Interview With Sandy Mehta, CFA
Q: Give us some details on your firm and investment style? How do you define value?
Sandy Mehta: Value Investment Principals [VIP] specializes in finding unique “deep value” stocks on a global basis. Our clients include some of the most prominent value investors in the world, and in fact many of them are often profiled regularly in your newsletter. Our valuation metrics are typically quite extraordinary, and this is our specialty. For example, we have had about a dozen stocks where net cash on the balance sheet is greater than the market cap, so investors are getting a quality underlying operating business essentially for “free”. We have done really well with these net cash [and Net-net] type of ideas. Over the past 6 years, all of our stocks have had average dividend yields in the 5%- 8% range. Today, our stocks have an average dividend yield of over 5%, and including 20% of our current portfolio which have 5% plus buybacks this year, total return of capital to shareholders is around 7.5%. Single digit P/E’s, price/books well below 1.0, EV/EBITDA below 4 or even below 0, are the sort of extreme deep value metrics we seek.
But it’s not just about “throw away” valuation metrics. Two-thirds of our investments are “growth” companies, or at a minimum in growth sectors, and 50% are clear industry leaders. So this unique combination of deep value, growth, industry leadership and FCF/dividend yield is an intuitively appealing mix for most investors. Our investments are diversified by geography and market-cap; so we are typically 1/3 USA/Canada, 1/3 Europe/Japan, and 1/3 Asia/EM. And by market cap: 1/3 large-cap, 1/3 mid-cap, 1/3 small-cap. We like quality businesses, clean balance sheets, and strong FCF. We shy away from excessive debt, and only a fraction of our investments have been leveraged companies.
Q: How has performance been?
Sandy Mehta: Performance has been strong in general, and specifically last year. In addition to solid relative-to-benchmark performance, approximately half our stocks have been up 25% or more absolute, and one-fourth up 50% or more. In fact, just last week, one of our investments, UK-listed Kennedy Wilson Europe Real Estate [KWE_LN], whose stock we picked up opportunistically following Brexit market dislocation in Q3 last year, received a takeover offer. Deep value stocks with strong FCF and underlevered balance sheets are fertile ground for takeovers and shareholder activism. Fully 1/3rd of our stocks over the past nine years have either received a takeover offer, or have been the subject of concerted shareholder activism efforts. Given the deep value metrics and extreme undervaluation of all of our ideas, we would not be surprised to see more of these companies being the targets of activists as well as outright buyouts going forward. [Please do see our full disclaimer on our website]
BTW, all six stocks I mentioned to ValueWalk when we last had an interview published, which was nearly two years ago on July 8, 2015, have all really done well, and provided returns of 20% to 90%, handily outperforming indices. I will mention those individual return numbers when we discuss specific stocks.
Q: What else makes your style unique within the value investing space?
Sandy Mehta: We are very risk-reward focused, and therefore, price sensitive. We like to catch stocks at multi-year lows in terms of our initial purchase price. The sell-side will always come to you with recommendation upgrades after stocks have already moved up 50%. For example, among the more well-known large-caps, we invested in Toyota below 2,800, Microsoft at 25.00, H&R Block at 16.11, Suncor below 30.00, Corning at 12.63, Sony 1,890, InterActive IACI at 20.30, Hugo Boss at 54, etc. Looking back over the past nine years, many of our entry points were close to multi-year lows. Extreme deep value, emergence of catalysts, receiving rich dividends while we wait – this enables us to pull the trigger. A low entry point increases risk-reward and sets up multi-bagger opportunities. And we have been able to consistently find one new deep value idea each and every month on average.
Q: What are some of your more recent “new money” buys today in the USA? Are you still able to find deep value with indices at highs?
Sandy Mehta: Yes, we still find at least one new idea every month globally, including the USA. The last time I spoke with you, back in July 2015, I had mentioned USA ideas Kulicke & Soffa [KLIC] and Suncor [SU_CN] – those stocks are up 90% and 30% respectively since then, much better than the overall market. I have two new names both of which are down more than 50% from recent highs, which is in sharp contrast to the overall USA in record territory. First is the clear leader in jewelry retailing in the USA, Signet [SIG; US$4.5 billion market cap]. As per IBISWorld, SIG controls 17% of US market share against Tiffany’s 5.1%, which is the next largest player. Signet owns 3 of the top 5 retail jewelry brands in the US: Kay, Zales, and Jared. The stock is down over -50% from its highs during the past couple years. Globally luxury goods stocks [we have done really well buying Hugo Boss at the trough one year ago] are correctly viewed as being in a secular growth space and command huge premium multiples. Signet similarly was a growth investor darling trading at over 25x times earnings not too long ago. In fact, despite a sluggish environment the past one year, SIG’s actual EPS has grown at 18.8% CAGR, and revenues at 11% CAGR, over the past six years. And despite weak comps this year, expectations are for both revenue and EPS to grow going forward. We expect minimal competition from online players such as Amazon and jewelry industry pure-play Blue Nile [NILE] which was acquired at a nice premium just six months ago despite producing very stagnant revenue/earnings the past several years. Signet trades at clear deep value levels at a P/E of 9x [a huge discount to closest peer Tiffany’s current 23x multiple and to SIG’s own 5-year average P/E of 17x and median of 16x], 9.5% buyback in the last four years and 3% buyback in FY01/2018e, 16% ROE [last 5-year average], and 9% FCF yield on FY01/2018e. Retail experts Leonard Green also announced a strategic investment in Signet last year,