Marketplace Roundtable: Playing The Long Game

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About: American International Group Inc (AIG), BAC, DIS, GE, SYF, Includes: TWTR
by: SA Marketplace
Summary

William Block of W.G. Investment Research joins the Marketplace Roundtable this week to share why, for him, the long game is the best game in town.

He also discusses five of his favorite stocks, the best piece of investing advice he ever received, and his current top idea.

William also talks candidly about the pluses and pitfalls of being a finance head and how that impacts his investment decisions.

No matter what your background - CFA, CPA, engineer, doctor - even the most seasoned investors can be overwhelmed by the sheer amount of information out there designed to “help” you make informed decisions about where to put your money. As a result, sometimes you might suffer from analysis paralysis. Feverishly researching every nook and cranny of a company’s financials, digesting the latest news, understanding insider insights - how do you know when enough information is truly enough? What if you miss a vital clue to a killer buying opportunity, or worse - a hot mess waiting to happen?

“There is a fine line between knowing enough and trying to know everything about a company before making an investment decision.” So says William Block, President and CIO of W.G. Investment Research LLC, an independent equity research and analysis firm, and the brains behind “Going Long With W.G.,” his Marketplace service here on Seeking Alpha that focuses on long-term opportunities and short-term actionable insights. Known as W.G. Investment Research here on SA, William is a veteran long investor - he’s also a CPA with decades of financial industry experience. We asked him if he felt his financial expertise was a help or a hindrance when it came to making investment decisions. Turns out, it’s a little bit of both. William joined the Roundtable to talk about his long investing approach and experiences, five stocks he believes have tremendous upside, and the best piece of investing advice he ever received.

Seeking Alpha: You’re known primarily for your long game. In fact, even the name of your Marketplace service, “Going Long With W.G.”, speaks to your reputation as a long-term investor. However, you also mention “short-term actionable insights” as a benefit of investing with you. As a long-term investor, what’s important to you? Is there anything you do differently than other longs, anything that sets you apart? What does “short-term actionable insights” mean in the long context, and how do these help long-term investors?

W.G. Investment Research, author of Going Long with W.G.: I look for the companies that I consider core long-term holdings to show that they are not only able to consistently report strong operating results but that their management teams are also positioning the companies for the future. People that follow me are probably tired of hearing the phrase, “this company has great long-term business prospects”, but, in my opinion, thinking through what the next three to five years may look like for a company is extremely important to the way that I invest. But, of course, this is a lot easier said than done.

I consider myself different from other so-called “long-term” investors because I typically stay true to my holding period of at least three to five years (more on this below) for what I consider core positions. With this, my main goal is to outperform the market by investing in companies that have good business prospects and that will be around for the next 20-plus years.

However, making investment decisions based on short-term market movements is an area where even long-term investors are able to make some serious money. This is what I refer to as trading on “short-term actionable insights” because I am a firm believer in the benefits of trading around core positions. An example of this working out well for me was in early 2016 when I purchased Bank of America (NYSE:BAC) shares when the stock price fell to the low-teens when the Brexit fears were causing havoc in the financial sector and the overall market sentiment was terrible. At that point in time, I already had an overweight position in BAC, but I decided to pick up additional shares at ~$14 (and A warrants at ~$4.50) and I sold them for a substantial gain a few months later. I was able to pocket a nice gain even though I stayed long BAC - a tactic that some other long-term investors simply will not do.

At the end of the day, long-term investing is a tried-and-true way to create lasting wealth, but I believe that everyone (not just “traders”) should take advantage of buying opportunities that are caused by unwarranted sell-offs.

SA: Your typical holding period for stocks is three to five years, provided a company’s story doesn’t materially change. Why that time frame? What happens when you reach the end of three or five years? Do you reassess, or if you’re up in the name, take profits? What if the name is down at the end of your typical holding period?

WGIR: Most of my core holdings were positions that I started when the companies were going through some type of major restructuring effort (e.g., GE in 2014-2015) or when the market left the companies for dead (e.g., BAC in 2010-2015), so it usually takes time for my investment thesis for these types of companies to play out. Therefore, my typical holding period has been three to five years because, based on experience, it takes at least this amount of time for a company to turn the corner and show that it is worthwhile investment.

I like to refer to my investing philosophy as a buy-to-hold approach in that I buy a stock with full intentions on holding it for many years, but I am constantly reassessing my investment decisions. I will continue to hold a stock well after the three-to-five-year time period, regardless if I am up or down on the position, if I still believe that the company is worthy of my investment dollars. I do, however, want to stress that I will not hold positions just to reach the three-to-five-year threshold. Instead, I like to give the management teams the necessary time to show that the company has what it takes to make the changes that are needed. Plus, to be frank, I have to also give myself time to determine if I got it wrong.

SA: Looking down your list of public articles, you follow five big names with some regularity: GE, Bank of America, Synchrony Financial (NYSE:SYF), AIG (NYSE:AIG), Disney (NYSE:DIS). There’s a heavy emphasis on finance, which we’ll get to a bit later. How did you end up covering these names consistently? What drives the frequency of coverage, i.e., earnings, news, your own observations? What are your sentiments, either generally or specifically, on these names today?

WGIR: I have been invested in GE, BAC, AIG and DIS for many years, and I initiated my SYF position when the company was first split off from GE in mid-2014. I consistently cover these stocks on Seeking Alpha because, in my opinion, these companies have a tremendous amount of upside potential at current prices. GE and BAC are my top two holdings, and the other stocks are sizable positions in my R.I.P. portfolio, and this did not happen by accident.

For these stocks, I typically cover every earnings report, but I also try to cover all material announcements (i.e., acquisitions/asset disposals, restructuring efforts, mergers, annual investor presentations, etc.). Additionally, I tend to share my thoughts on a specific topic if another author (or analyst) publishes a report that does not jive with what is actually going on with the company.

Overall, I am very bullish on each of these names over the next five years. I have recently published articles on each of these stocks (please see my profile), but below are a few thoughts:

- GE: This digital industrial company has good businesses in great industries (e.g. Aviation, Healthcare, Power, etc.). Plus, the stock is trading at an attractive valuation compared to other industrial conglomerates. The company’s CEO, Jeffrey Immelt, is set to retire later this year, and I believe that he left the company in a great position for incoming CEO, John Flannery. I expect GE to sell/spin-off several businesses through 2018, which will great a great deal of value.

- BAC: This bank is in a position to benefit from several macro trends that will significantly impact the financial sector, with the two biggest examples being a rising rate environment and rollback of burdensome regulatory requirements. I will talk a little more about BAC below but simply put, there is a lot to like about this bank when looking out over the next few years.

- SYF: This company is still finding its footing in the market, but the current management team appears capable of creating a lot of shareholder value. SYF has reported impressive growth (revenue, loan receivables and deposits) since going public and the company should continue to benefit from being the market leader in the private label credit card industry. Lastly, management has goals to diversify SYF’s business by growing the company into a full-scale online bank and this could eventually be a significant long-term catalyst.

- AIG and DIS: Both of these companies are facing issues/concerns - low interest rate environment and poor underwriting results for AIG and changing pay-TV space for DIS - but these storied companies are trading at attractive valuations.

SA: Your education and background are in finance, and you were a CPA for many years. As such, you’ve acknowledged your portfolio may be over-allocated to the financial sector from time to time. Do you find that having a financial background helps your investment efforts, and what is the biggest perk? Conversely, is there anything about being financially savvy that hinders your investing (i.e., your CPA (certified public accountant) background makes you scrutinize balance sheets too closely, or knowing too much makes you overly cautious about certain types of stocks or particular market conditions)?

WGIR: I benefit greatly from being able to effectively analyze a company’s financials because it allows for me to better understand how the company has performed in the recent past, and if I should be concerned about the company’s financial position (full disclosure: analyzing a company’s financial position involves more than just knowing how to read a balance sheet).

Moreover, financial statements tell you a lot about a company and its current management team - e.g., the company’s financial position (from the balance sheet), how the company is structured and the critical information that needs to be considered (from the notes), and how well the company has performed in the recent past (from the income statement & cash flow statement).

Therefore, in my opinion, I benefit from being a CPA because I understand how to navigate through and interpret financials, which is especially important with the ever-increasing trend of companies disclosing both GAAP (generally accepted accounting principles) and non-GAAP figures.

On the other hand, I feel like being a CPA and placing too much emphasis on financials and operating results has caused me to miss some great buying opportunities on several different occasions. However, I believe that there is a fine line between knowing enough and trying to know everything about a company before making an investment decision.

The most recent example of me “going out on a limb” is my investment in Twitter (NYSE:TWTR). I could not imagine a world without Twitter, which means that I believe that the platform/service is a valuable asset, but it is hard to get behind this company (and its CEO) when looking strictly at the financials. Therefore, I have to remind myself at times that investing is not all about the current numbers. So, being a CPA can be both a blessing and a curse.

SA: What’s the best piece of investing advice you’ve ever received, and from whom?

WGIR: The individual that was leading my college investment club in 2004 used to consistently say, “you have to think about tomorrow, not today” when talking about companies that we were either thinking about investing in or selling from our portfolio. To this day, I still remember him making this specific statement when referring to a company that we really liked but that the club was thinking about selling over a bearish analyst report that argued that a company was overvalued (Side note: The company that we were thinking about selling was Apple (NASDAQ:AAPL)).

My takeaway was that it is easy to get caught up in current valuations and near-term prospects of a company, especially when the media focuses on it, but it is important to critically think about where a company is going, not where it is today.

For those that do not follow me on Seeking Alpha, my overall investment philosophy can be summed up in the following two quotes:

* Behind every stock is a company. Find out what it’s doing - Peter Lynch.

* The single greatest edge an investor can have is a long-term orientation - Seth Klarman

SA: What’s your favorite investing idea currently, and what’s the story behind it?

WGIR: Bank Of America has been my top pick for a while now, and I continue to believe that this bank will significantly outperform the market over the next two to three years. I used to put most of my focus on the bank’s ability to cut expenses, but I now believe that BAC is in a position to jump back into growth mode.

The bank’s recent CCAR (Comprehensive Capital Analysis and Review) results - bumped the quarterly dividend to $0.12 (from $0.075) and initiated a buyback program above $15b - show that Mr. Brian Moynihan, CEO, and company are set to return a significant amount of capital to shareholders in the years ahead, but, just as important, there are several other themes that could turn out to be significant long-term catalysts - rising rate environment, partial rollback of Dodd-Frank, tax reform. As such, the more you widen your lens, the more that Bank of America looks like a great buy at today's price.

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Thanks to William Block of W.G. Investment Research for being a part of the Marketplace Roundtable. Check out his author page for more of his work, or consider Going Long With W.G. for just $229.99 a year.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: W.G. Investment Research is long all stocks mentioned.