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Peter Mantas
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Peter Mantas, CIO of Logos LP. Experienced investor seeking value in the global capital markets. I aim to identify quality global businesses trading at a discount.
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Logos LP
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Logos LP Blog
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  • Memorial Day Treat: How History Can Help You Beat The Market

    In 2001, the Oracle of Omaha made a fantastic speech to the MBA students of the University of Georgia and one specific example he gave caught my attention. In 1950, Mr. Buffett bought half an interest in a Sinclair Gas station with a friend who was in the Naval Guard. In the early 1950s the station was not doing well and Mr. Buffett eventually lost his entire investment, which at that time was roughly $2000. However, in his speech Mr. Buffett indicated that the true cost of his investment was not $2000, but rather close to $6 billion (in 2001 dollars).

    The Oracle has not made many blunders when it comes to capital allocation but this small example got me thinking about the powers of compounding and the drastic effects of opportunity costs. The most famous example of compounding is Peter Minuit who was the Director of the Dutch colony of New Netherland from 1626 until 1633. History has it that he purchased the island of Manhattan from the Native Americans on May 24, 1626 for goods valued at 60 Dutch guilders, which in the 19th century was estimated to be the equivalent of US$24. The island of Manhattan today is worth roughly $9 trillion which means that his initial investment has compounded at an estimated average rate of return of over 7% per year for the last 388 years.

    There are many other real life examples of incredible wealth creation by very smart investors who intuitively understood opportunity costs and the effects compounding. One of the most successful investors is Mr. Theodore R. Johnson who was an employee of the United Parcel Service. Mr. Johnson never made more than $14,000 a year, yet managed to plough every penny of his annual savings into only one stock - UPS. When he reached the age of 90, he shocked his relatives and friends by announcing that his net worth was a little over $70 million. Mr. Johnson also re-invested all dividends earned into UPS stock.

    Another brilliant investor is none other than Shelby Cullom Davis. Mr. Davis received his bachelor's in Russian history at Princeton (1930), his master's degree at Columbia (1931), and his doctorate in political science at the University of Geneva (1934). He worked many odd jobs and was also a freelance writer and author. Starting at age 38, he took $50,000, provided by his wife Kathyrn, and amassed it into a $900 million portfolio in 47 years. This amounts to an annual compounded rate of return of over 23% during that time span. Mr. Davis always bought on margin (which undoubtedly helped his returns) but what's incredible about Mr. Davis is that he only invested in one particular industry, which was insurance. Mr. Davis was relentless in his study when searching for insurance stocks. He largely focused on fundamentals before choosing his investments, looking for a solid balance sheet and making sure the insurer did not hold risky assets like junk bonds. He then focused on management quality and made trips to meet with the management team. By the mid-1950's he held up to 32 insurance companies, and by the end of his life had amassed large stakes in AIG, AFLAC, and Chubb. He even bought a piece of GEICO when it was being left for dead and a young Warren Buffett bought a large stake in the business for pennies on the dollar. Mr. Davis also lived very frugally, often never writing anything down in order to save paper. His extreme frugality helped him to save every penny he could to invest in "compounding machines," as he called them.

    However, my favorite real life example is Ms. Anne Scheiber, who is possibly the greatest investor of all time. Ms. Scheiber lived quietly in her rent-stabilized studio apartment on West 56th Street that was bereft of luxuries: paint was peeling, the furniture was old and dust covered the bookcases. She walked everywhere, often wearing the same attire. She worked for the I.R.S. for 23 years as a tax auditor, leaving the bureau in 1944 with a total savings of $5,000. Ms. Schieber never made more than $4,000 a year, and never received a promotion in her entire career.

    Over the next half century, she parlayed that $5,000 into a portfolio of blue-chip stocks that included Coca-Cola, Paramount, Schering-Plough and re-invested all dividends. On January 9th 1995, at the age of 101, that $5,000 portfolio was worth about $22 million and she donated the entire amount to Yeshiva University. One can only imagine how wealthy Ms. Schieber could have been if she had started her investment career much earlier and continued to work while re-investing all of her earnings, but it is safe to assume that the portfolio would be worth more than quadruple the final amount.

    How can these history lessons make you a better investor?

    There are two important lessons that an investor at any age can learn from these stories. First, the overwhelmingly most important factor for any investor is discipline. As seen with these examples, a substantial amount of wealth is created when human beings refrain from doing moronic things, which in the investment world means constantly buying and selling. Taking the "sit on your ass" approach to investing so famously coined by Charlie Munger creates absolutely incredible results over the long-term. Forget making a quick buck trading volatile options, forget that lucrative pharma stock you think will jump 25% in a day, forget "riding" a sector rotation involving basic materials and cyclical stocks and absolutely forget the new tech company that has no revenue whose stock is jumping 35% because another 10,000 users just joined its social media platform. The opportunity costs are far too great and that quick 50% you made trading TWTR in an out-of-the-money call option expiring in June actually just cost you tens of millions of dollars (or more depending on your age and capital) because you didn't have the ability to take a large position with a tiny bit of leverage in a very high quality business with a substantial 'moat'.

    That leads me to the second lesson which is identifying high quality businesses. All of the investors mentioned above have very concentrated portfolios (Mr. Johnson only had one stock) in which they invested all their capital and rode for a very long period of time.

    But what makes a quality business? Let's start by indicating what industry provides the best returns. According to a study by Patrick O'Shaughnessy, the number one sector that has provided the highest average annual returns since 1963 is Consumer Staples with an average compounding rate of 13.33%. Health Care and Energy are second and third with 12.52% and 11.44% respectively. The worst sector? Technology with 9.75%.

    The single best stock over the past fifty years has been Altria (NYSE:MO) which has a total return of more than 1 million percent in that time frame. That's a compounding rate of 20.23% per year, every year. If one were to have $1000 of Altria (then Philip Morris) in 1963 that amount would be worth more than $8 million today (that includes dividends and stock splits). Anheuser-Busch, Pepsico, Coca-Cola and Hormel were also near the top of that list according to the study.

    Why have consumer staples done so well? Part of the reason is that these companies offer scale and recognizable brands leading to wide 'moats'. Other reasons include basic inflation, psychology, rising population growth and increasing consumer incomes which are all factors that have been in place for the last 100 years. These trends have been well documented and it is safe to say that they still will be in place for the next fifty years, perhaps growing at a faster rate given the incredible potential of Asia, Africa and Latin America.

    So the next time you hear an analyst pitching an iron condor options trade, a broker selling the next hot issue, or your neighbor rushing into a 'once-in-a-lifetime' start-up, I would urge you to filter out the noise, stick to your core competency and become a student of history. As Bill Gross once said, "there is no better teacher than history in determining the future… There are answers worth billions of dollars in a $30 history book."

    -Initially published on Logos LP's Blog on September 2014

    May 25 5:04 PM | Link | Comment!
  • Accenture And Why Big Is The Next Big Thing

    With the rise of the "new" tech world (Facebook, Twitter, Apple) and the slow resurgence of "old" tech (Microsoft, HP, Oracle) there is one company that has been able to grow organically at high single digits while creating incredible returns on equity for investors over the last 10 years. This company has generally flown under the radar but has a very impressive moat and client base which makes its services almost indispensable in the world of large corporate and government systems implementation. The company has generated ROIC and ROE north of 54%, ROA north of 16%, an operating margin of near 14% and over the past 10 years has a CAGR of 21.57%, beating the market and its competitors handily.

    What is this mystery company and what is the investment thesis?

    I am talking about none other than Accenture (NYSE:ACN). This $56bn company, which generated over $30bn in revenues in 2014, is at the forefront of innovation, research, implementation and execution of some of global businesses' largest projects and problems. Some might think of this company as just some global consulting firm with the crux of its business based solely on "human capital" but this business has over 2400 patents and very deep infrastructure technology platform relationships with names like Cisco, salesforce.com, Workday, Microsoft, SAP and Oracle.

    Before I get into some of the main catalysts for Accenture, let's first take a look at its valuation conducted earlier in the fall through our good friends at Levered Returns:

    WACC Analysis

    http://leveredreturns.com/models/acn-q4-14/v1/wacc/

    DCF Analysis

    http://leveredreturns.com/models/acn-q4-14/v1/dcf-short-5yr-ebitda/

    The price as of October 13 was $76.29 implying a 29.2% discount from fair value (and the most recent price of $83.73 as of December 10 implies a 22% discount so we are not far off). It is important to note the conservative nature of this valuation since a recent release from the company implied 2015 growth projections of 4-7% and revenue in its most recent quarter was up 8% with high single and double digit growth coming from its healthcare, communications and products divisions respectively. If one were to adjust the growth rate to 6% throughout, which is not an unreasonable estimation, the company's fair value reaches above $100 and with enough patience and discipline, this company will be worth much, much more. Since 2005, the company's revenue has more than doubled, net income has more than tripled and free cash flow growth YOY has increased 7.86% implying a company with very strong cash generating capabilities. Moreover, the company boasts a healthy 43% dividend payout ratio, which gives the company plenty of opportunities to increase its dividend substantially, which will only enhance shareholder value.

    It is obvious Accenture is a cash generating machine, but what are some of the main growth catalysts for the company in the future?

    The answer to this question can be summarized in one word: digital. Currently, the company is focused on revolutionizing large enterprises through a unique method. Rather than integrating and incorporating large clients with new technology, Accenture sees large organizations reinventing themselves in the digital world. The trends are on Accenture's side: in a recent study by McKinsey, "35 percent of B2B pre-purchase activities are digital, which means B2B companies need to invest in web sites that more effectively communicate the value of their products, SEO technology to make sure potential customers are finding them, and social media monitoring to spot new sales opportunities." Accenture is betting that this trend in digital marketing, media and design will continue given its recent purchase of Relative Media.

    Moreover, the WSJ has predicted by 2020 that "the network of physical objects accessed through the Internet that contain embedded technology to sense or interact with their internal states or the external environment will hit 26 billion units". Accenture is betting on a more integrated and digital world, and it is helping prepare businesses for this brave new world. An example of this is its work with GE. As stated in its Technology Vision 2014, "GE is betting on the industrial Internet, building cloud-based services with intelligent analytics so that it can collect and combine vast amounts of industrial-machine data and equipment data, extracting unique insights to be used to set new performance standards in major industries such as energy and aviation." Accenture, with its size, scale and very capable 300,000+ workforce is one of only a handful of large tech processing players who can implement such a system seamlessly and the proof is in the pudding - the company invested over $640 million in 2014 on innovation, research and development to help businesses transform in the new digital landscape.

    This new digital world that Accenture is betting on is meant to transform global commerce forever. From supply chain management, consumer behaviour, business applications, analytics to smart machines, digitally integrated cyber security and new digital business architecture, Accenture has focused its core operating divisions on a vision that is unlike many other large tech names. Companies like IBM may be catching up to the cloud revolution and companies like HPQ or Microsoft may be reorganizing their business models yet Accenture always seems to be one step ahead of the game. Accenture has managed to develop a very specific growth platform focused on what it believes will revolutionize business. Although it is still early, I believe transformative digital trends will shift big global business practices and Accenture is uniquely positioned to accommodate this shift.

    Tags: ACN, long-ideas
    Dec 11 8:01 PM | Link | Comment!
  • Emerging Markets Represent An Opportunity For The Value Investor

    Over the past 12 months, the US stock market - as measured by the MSCI US Equity Index - has risen about 16% and is dancing around all-time highs. Overseas the picture is a bit less clear cut. Europe overall has moved up about 16%, Japan 0.13%, China about 1.3% and Emerging markets roughly 2%.

    Based on data supplied by FactSet, a financial analytics firm, the US equity market is now among the most expensive in the world when you compare stock prices to company fundamentals such as per-share earnings, dividends and net assets.

    Furthermore, emerging economies are expected to grow two to three times faster than developed nations like the US, according to International Monetary Fund estimates.

    Is it time to jump into emerging markets? Or is America a safe house against world uncertainty thus wholly deserving of the lofty valuations commanded by its companies?

    Well, according to JP Morgan Asset Management now is one of the best times in history for investors to buy into less mature economies. The bank has gone so far as to predict that emerging markets will rise by 10% or more in the coming 12 months. This pop would reverse recent losses and offer a solid gain.

    Although we don't feel comfortable making such predictions we do share the Bank's optimism as emerging market shares are very cheap against book value. For example, the MSCI Emerging markets index which is made up of shares of the biggest companies in these regions is currently trading at a price to book ratio of below 1.5 which is the lowest it has been since 2007.

    Interestingly, research by JP Morgan has found that since 1995 each time this valuation has dipped below 1.5 the stock market in the next 12 months has tended to deliver returns above 10%.

    This occurred in both July 1996 and November 2002, when emerging markets suffered an ugly setback. Shares rose by 27% and 30% respectively in the following 12 months.

    In fact these low valuations are totally out of step with fundamentals. In a recent article in Fortune Shawn Tully points out that:

    "These countries have younger populations and a greater abundance of natural resources than the developed countries of Europe and North America. The BRICs -- Brazil, Russia, India, and China -- generate 22% of the world's GDP, and owe only 5% of the sovereign debt.

    By contrast, the developed countries control 62% of global output, and pay interest on 90% of the government bonds. With fast-growing workforces and ample supplies of crops and minerals, the developing countries are in a stronger position to cover their future interest burdens, and hence channel more of their future growth into private investment, than many western nations are. Few developing nations shoulder total debt exceeding 50% of GDP. For the emerging economies, Brazil is a huge borrower with debt to GDP of around 68%. By contrast, most of the big western economies -- including France, Italy, the U.K., and Germany -- carry burdens of between 80% and well over 100%. Japan's ratio, for that matter, tops 200%."

    What about the risks of exposure to emerging markets?

    At present there is certainly a fear that emerging markets are not the answer. Aside from the normal risks such as political instability, market volatility, liquidity concerns, poor corporate governance and foreign exchange rates, investors of late have been concerned about China's slowdown and surging inflation in India, Argentina and Turkey. Nevertheless, the main popular concern are the potential effects of the US Federal Reserve's "tapering". Investors fear that "tapering" and rising US interest rates will cause capital to flow out of emerging economies as cheap yield hungry capital will be on the decline.

    If money rushes out of emerging economies the value of their currencies could be depressed which can cause damage. Nevertheless, there may be a silver lining as the value of currencies would be determined by market forces which could in turn help export competitiveness.

    The bottom line:

    With such attractive valuations, it should not come as a surprise that in 2014 the best performing markets are as follows:

    Best Performing Markets of 2014 Ticker YTD

    Market Vectors Egypt ETF EGPT 26%

    iShares MSCI Indonesia ETF IDO 23%

    iShares MSCI Philippines ETF EPHE 15%

    iShares MSCI Thailand Capped ETF THD 11%

    iShares MSCI Turkey ETF TUR 10%

    iShares MSCI India Index ETF INP 8%

    iShares MSCI Brazil ETF EWZ 6%

    *Data as of May 27th

    Although, based on the risk factors outlined above, these markets should be considered risky and some would go so far as to say that such picks represent contrarian plays, we contend that the risks are over exaggerated. It should be remembered that one of the reasons why US companies have done so well in the last 12 months is due to the growth in non-US markets and thus if one can stomach some volatility, emerging markets should make up at least a small proportion of any value investor 's portfolio as low valuations today can lead to higher investment returns over time.

    -Matthew Castel, Head of Strategy and Investor Relations

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 15 9:07 PM | Link | Comment!
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