Logos LP’s strategy is built around value, but unlike other value funds, managers Matthew Castel and Peter Mantas are not afraid to use leverage to boost returns, which has helped the team produce an annualized return for investors of 25.1% by hunting for potential baggers. The fund is one of two featured in the third quarter issue of ValueWalk’s exclusive magazine (whose price will be increasing soon!), Hidden Value Stocks
In the magazine, Matthew and Peter discuss their strategy and several ideas that currently feature in their portfolio. The duo also discusses two of their under-the-radar stocks in-depth, outlining their investment thesis and valuation process.
If you’re interested in discovering more, head over to Hidden Value Stocks where you can subscribe ahead of the magazine’s publication.
Exclusive Fund Interview: Looking For Potential Baggers
When you’re looking for a “peripheral” position, what are the qualities you’re on the lookout for?
“Peripherals” are either: 1) potential baggers (expected high growth businesses with long potential runways) 2) potential baggers at a depressed valuation (long potential runway stocks that have declined significantly for a specific reason) or 3) stocks with a specific catalyst leading to a depressed valuation. Our peripheral positions tend to have small market capitalizations, and the golden egg are peripherals in the second category as these are very difficult to find. One example of a peripheral position in our portfolio in the third group is XXXX, which is a small cap agricultural dealer listed on the TSE. The company was depressed given the decline in soft commodities over 2014-2016, a recession in the Alberta economy and declining revenue and margins. We picked the stock up at $6.19 with a 9% dividend yield and calculated fair value north of $14.50. Current stock price is $10.09.
You mention "potential baggers" as part of your peripheral strategy. What is a bagger and what name do you have in your portfolio you believe may become one?
Our peripheral strategy was influenced by Thomas Phelps’ 1971 book that explored stocks that have made outsized returns (100x, 200x, 300x, 1000x or more) in the equity markets. In other words, these are names that over the long-term have very long and explosive growth cycles leading from small market capitalizations to very large ones. An example of a bagger is a name like Amazon, which started as a moderately quality operator in the early 2000s, went nowhere for 8 or 9 years, then exploded leading to a 5000x+ return in 20 years. These are companies that typically operate in markets with high levels of disruption, create brand new processes or products and have very long runways given their market dynamics. A potential bagger that we like and have in our portfolio is a company called XXXX.
On the topic of core positions: You’ve described several times in your letters that Church & Dwight is a core. What do you like about this company?
Church & Dwight is a visionary company, plain and simple. We were lucky to enter into this mid-cap core position very early on and will continue to hold the position for the long-term. They compete in the land of elephants but continue to squeeze significant cash flow from their strong portfolio of brands, continue to innovate into new product categories, make high-return/asset-light acquisitions and generate consistently high returns on invested capital.
Can you name another core position and what you like about the business?
XXXX is another core we own. They have a monopoly on the Cancun airport and a 50% ownership stake in the Puerto Rico airport. We initially got into the position in early February 2016 (it’s now up over 66%) and this was during a time when global markets were in a panic over China as the Shanghai market had dropped over 30% in three weeks leading up to early February. Despite solid fundamentals, the stock dropped nearly 20% from August to February on global emerging market fears. The company has a strong moat....
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