Hunting For Overlooked And Misunderstood Companies by Jay Kaplan, The Royce Funds
In addition to searching for companies that aren’t currently getting a lot of attention from investors, Portfolio Manager Jay Kaplan generally looks for asset-light companies with misunderstood business models, a high degree of insider ownership, and managements with a long tenure and shareholder-friendly capital allocation strategies.
See the video here.
Overlooked and misunderstood companies – Reinsurance Group of America
“Reinsurance Group of America is a stock that I have owned on and off for a very long time. In fact, I met the management team when the company went public in the early 1990s. The CEO and CFO are the same today—they are still in charge. They are an insurer of life insurance companies. It’s a very concentrated business. They have big market shares. It had been in domestic business; now it’s a global business. It sells for 10x earnings. It sells below book value. It has over 1% yield today.
“Return on equity (ROE), most of the time, is in the double digits. It’s a little bit lower than that today, but they have a lot of excess capital and excess equity that helps to depress the ROE a little bit, and you find—like any insurance company—sometimes there are hiccups along the way, and sometimes people get excited along the way, so our position hasn’t stayed steady over time. Sometimes when there is a hiccup, we have added. Sometimes when there is overexcitement, we have taken money off the table.
“But I think, if you look at the performance of this company since it has gone public, since the early ‘90s, it is a very steady eddy, up and to the right kind of business, the kind of business you want to own for the long term. There are no public companies like it, so the market really doesn’t focus and the market doesn’t care, and that has given us a good long-term opportunity to own a great business.”
Overlooked and misunderstood companies – GameStop
“A business that we have liked for a long time is GameStop. It is very controversial, but here’s why I like it and here’s why I think it is a great business to own going forward. They are in the business of selling games basically to young adults and kids. There are GameStop stores all over America. GameStop has done well recently because of a new console cycle. There’s new hardware for gamers. Those sales have gone very well. That has generated new sales of software. That is starting to pick up, also going very well.
“They have a very big used game business. Now that the console cycle is underway, the used game business is starting to pick up steam, and people are worried that, over time, selling a game on a disk in a box is going to go away, and this will look like Blockbuster and won’t be around anymore. It is true that over time that disk in a box probably goes away. The company understands that, so they are diversifying.
“They sell more content digitally without a box, without a disk, number one, and they have started some new growth businesses. They are in the business of operating AT&T cell phone stores. They are now the partner of choice for AT&T Wireless, and that business is growing very quickly. They are opening Cricket Wireless stores, another AT&T Wireless brand, growing very quickly. They are opening Simply Mac stores. Those are Apple stores in towns that are too small to have an Apple store. So they have different legs of the business that they are growing. The stock pays you 3.5% while you wait, sells for 10x earnings.”
Overlooked and misunderstood companies – Saga Communications
“Another stock that is very under the radar that presents tremendous opportunity is Saga Communications. They are in the radio broadcasting business. They own radio stations in 23 markets. Advertising, it has been a little bit slow as the economy has been a little bit slow, but there is going to be a big political season I think. As you have seen what’s going on in the presidential campaign, I suspect we are going to see a lot of advertising around the 2016 election cycle, and that is very good for radio. Stock sells at 14x earnings, conservatively financed, nice dividend, significant insider ownership, and it is a stock that I think can do well going forward.”
