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Picks and Pans from a Top Value Expert
12/16/2015 10:00 am EST
Peter Mantas focuses on high quality businesses offering long-term fundamental value; here, the manager of Logos LP walks us through some favorite buys—from high end office furniture to banking—as well as a favorite short sale idea from the packaging sector.
Steven Halpern: Joining us today is Peter Mantas, money manager with Logos LP. How are you doing today, Peter?
Peter Mantas: I’m good, Steven. How are you?
Steven Halpern: Very good. Thanks for taking the time. Now your expertise is as a long-term value investor, focused on high quality businesses. Could you walk us through how you view intrinsic value and price when choosing your stocks?
Peter Mantas: Sure. We look for businesses of high quality—as you mentioned—and that’s really companies with high return on investment capital and that are trading below what we believe is the future cash flow, so really looking at the financial metrics is really important for us.
Specifically, looking at a company that can have very high gross margin, very high operating margins, while at the same time growing their revenue base, are some of the mean key factors that we look for when evaluating a business.
Steven Halpern: Now, intriguingly, you also focus on psychology, looking at what you call the interconnection of reason and emotion. Could you explain what you mean by that?
Peter Mantas: Sure. Well, a perfect example is today we see the Dow futures down roughly 200 points. Any time we saw abnormal levels of volatility, or excess fear, or a spike in the VIX is a time for us to really evaluate some of the positions on our watch list and go in.
We generally like to see fear on the market before we buy a quality name, because those are the times that usually present us with the best opportunities.
Steven Halpern: In a way, is this similar or in-line with something like a Ben Graham strategy?
Peter Mantas: It is, it is. I would say it’s a bit more, higher quality than Ben Graham, in the sense that fertile minds…we know that certain names will have a certain premium attached to them, because we don’t want to get in a value trap.
Looking at names that are, for example, at a very high premium—or larger premium rather—that are trading at a very low technical level or another statistical model that the stock has breached, is certainly something that we look for.
Steven Halpern: Now, turning to individual stocks, you’re bullish on Herman Miller (MLHR), which is well known for its high end office furnishings. What’s the attraction here?
Peter Mantas: Sure. Well it’s had excellent revenue growth and it has an excellent last quarter. The real story for this name is its valuation. It’s quite cheap. It’s only trading at less than 1 price-to-sales ratio. Free cash flow to sales is again positive in the double digits.
The company has been growing revenue in double digits. I expect the market—it’s an addressable market—to increase and expand over the next three years, and we see it continually increasing its market share within office space, within fixtures and furniture in North America.
The real growth story towards revenue base will be Europe as that starts to really ramp up for the company. It’s, for us, a very undervalued name. We see it certainly going past $40 a share over the next two years. That’s something that we continue to look at.
Steven Halpern: Now, you’ve also recently called Owens-Illinois (OI) a top short pick. Could you walk us through your negative assessment here?
Peter Mantas: Sure. It’s always dangerous fitting into a short pick because you could be wrong and the loss is unlimited, but Owens-Illinois is really just a story of…it’s really a couple of things.
The first thing is I think the Vitra acquisition will be harder to digest than what the market thinks it will be.
I also think that the transition to its new strategy is really driving down cost—and doing what it can to ensure consistent earnings per share will take some time—and I also believe that the fact that they were not focusing on growth over the last few years with previous management, has really stumped this company and I don’t see any growth catalyst for this company in the basic material space.
If we think that these materials would be depressed over the next six months to a year, in addition to these other factors of the acquisition and its management strategy, there’s no reason for this company to be trading above what we believe is fair value which is12.50.
Steven Halpern: For those not familiar with the company. What does Owens-Illinois do?
Peter Mantas: Sure, Owens-Illinois is a manufacturer of glass bottles for beer companies and packaging, so anytime you buy a Coca-Cola (KO), the chances are the bottle glass is made by Owens-Illinois. It has very small growth margins as well, that have been decreasing and revenue has actually decreased over the last ten years by 14%.
There are a lot of negative catalysts including negative ROE and return on investment capital, but I think you couple that with the depressed basic materials segment that we’re seeing right now, in addition to poor management strategy, I believe the company should go further over the next six months-should go down further over the next six months.
Steven Halpern: Now, turning back to the bullish side, you like two financial stocks, Commerce Bancshares (CBSH) which is a regional bank and Synchrony Financial (SYF), which you call the best name in consumer financial services. Could you walk us through the positives in these two situations?
Peter Mantas: Sure. Commerce Bancshares is an excellent quality regional bank. It’s actually owned by the Kemper family at a majority level or they’re a significant shareholder, so it’s a very closely held family run bank.
They operate out of Kansas City, Missouri, and the reason why we’re bullish on it is that a large portion of its portfolio relies on commercial and residential in the Midwestern states and it survived; it barely got any TARP money from the US government and it has a very, very healthy balance sheet and a very solid management team.
It has increases in revenue year on year. There is no reason that leads us to believe—especially with the inevitable rise in the rates—that this company shouldn’t be able to grow its top line at a much higher—at least by more than 10%—of its current rate. We believe that the company should be able to cross $50 over the next year or two.
We’re actually quite bullish on regional banks for 2016, but we believe that the quality of this one, because of its low debt nature, because of the management that’s in place, because of the market that it operates in, is really poised for what we believe is the best run for 2016.
With regards to Synchrony Financial, as you know, it is a spin-off from General Electric (GE). They’ve been burdened by tremendous regulatory compliance issues over the past year and so the stock has been somewhat flat because there has been uncertainty as to how that will play out.
But if you look since 2012, the company’s revenue has doubled. They have very high margins—operating margins north of 40%—very high return on investment capital north of 20%.
Obviously these type of numbers will come down as there is competition from Capital One (COF) and Discover Financial (DFS), but there’s no reason for this company to not continue at its current net interest margin, and so just based on that alone, we project that the company will be significantly higher than what it is trading today over the next two years.
Steven Halpern: Again, our guest is Peter Mantas with Logos LP. Thank you so much for your time today.
Peter Mantas: Perfect. Thank you so much.
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