Chris Mittleman, managing partner and CIO of Mittleman Investment Management explained his criteria for investment and process in evaluating the business durability during a recent interview with Value Investor Insight.
Chris Mittleman focuses on businesses’ economic performance
Chris Mittleman said his firm was looking for businesses with a long history of economic performance. He explains that the business should have a strong moat, generate lots of free cash flow, and be managed by highly-capable executives with great track records.
Finding extreme under valuation
He emphasized that the most important criteria considered by Mittleman Investment Management is valuation aberration. According to Chris Mittleman, his firm expects its businesses to grow over time and benefit from valuation aberration, but it is not the driving force. He said, “It’s all about trying to find something at an extreme undervaluation.”
Companies should survive harsh situations
When it comes to evaluating the durability of the business, Chris Mittleman said his firm focuses on the past performance of companies—those that survived harsh environments.
In 2008, Mr. Mittleman said the performance of his firm was “terrible,” but the he pointed out that the cash flows of the businesses they owned were not affected.
He mentioned Carmike Cinemas, Inc. (NASDAQ:CKEC) as an example of a durable business. According to Mr. Mittleman, the stock price of the company declined from $10 to $1 per share, but its “movie-theater business did not flinch.”
Chris Mittleman Investment Management still owns a stake in Carmike Cinemas, Inc. (NASDAQ:CKEC). The stock is trading at $29.71, down by nearly 3% at the time of this writing, around 1:01 in the afternoon in New York. Over the past five years, the stock gained more than 197%.
“We think our portfolio rebounded so quickly after 2008 in large part due to the resilience of the companies we owned,” according to Chris Mittleman.
Mittleman is bullish on LeapFrog Enterprises (NYSE:LF) and in response to a question from VII, he states:
Industry-wide toy sales haven’t been great and we overestimated the company’s ability to withstand a number of new market entrants that offer similar products at lower prices.
The good news is that the brand remains well regarded, the toys rank high in popularity and the company is releasing for the holiday season a number of new products, including a new iteration of its LeapPad tablet. We also knew going in that the company had a balance sheet that would provide a cushion if things went wrong.
Net cash is about $200 million, on a stock with a $420 million market cap. The shares now trade at an enterprise value of only 5.8x our $40 million EBITDA expectation for next year. If we’re right on that, this type of business would typically trade at a 9x multiple. That makes it worth our while to be patient.
Chris Mittleman avoids certain businesses
During the interview, Chris Mittleman said his firm avoids certain types of businesses including those competing on fast-shifting technologies and fashion-sensitive businesses. Mittleman Investment Management also avoid companies with heavy capital spending demands that limit free cash flow and cyclical businesses that burn cash during unfavorable situations.
Chris Mittleman said, “You can make a lot of money in industries like airlines or auto manufacturers if you time the cycle right, but I’d rather not bet on our ability to do that.”
He added that Mittleman Investment Management firm finds plenty of great values in businesses that do not burn cash during a recession.
Other stocks Mittleman likes include; Gazprom, First Pacific, Jardine Strategic, GTECH, and Revlon
The Q&A ends with a question on guarding against over-confidence – Mittleman responds with a great quote which captures an important aspect about value investing. Mittleman states:
Success in investing comes down to how much discipline you can muster in changing circumstances, including when times are good. You make a certain amount of money and you start believing that money is somehow a validation of your intelligence. That can lead you to act on instinct and cut corners, contrary to the way you generated success in the first place.
The market serves up more than enough adversity to keep us humble. If you allow yourself to start thinking you’ve got it all figured out, that’s probably the beginning of the end.
