Jonathan Bloom was running an antique map and art gallery in New York when a client remarked that his knack for scouring auctions and estates for valuable lithographs, maps, and other rare finds was a lot like value investing. He gave Bloom two books on the topic, Seth Klarman’s Margin of Safety and Bruce Greenwald’s Value Investing guide.
The exchange inspired Bloom to apply to Columbia Business School and its lauded value-investing program, and eventually led to an internship in Milwaukee. “When I graduated in May of 2009, the demand for art dealers turned investment managers was slim, to say the least,” he says of his decision to move to the Midwest.
A decade later, Bloom has deep roots in Milwaukee—his in-laws have even relocated there—and he plans to spend the rest of his career at Fiduciary Management, a 28-employee, $22 billion firm that focuses on high-conviction value investing.
“You could tell value investing was in his blood,” says Pat English, the firm’s chief executive and chief investment officer. English hired Bloom as an analyst in 2010, promoting him to director of international research in 2015 and director of firmwide research in 2017. The duo now co-manage the $4.9 billion FMI Large Cap fund (FMIHX).
The fund is extremely concentrated, with 20 to 30 holdings, but its record gives credence to its approach. It ranks in the top 7% of its large-blend peer group over the past 15 years. While year-to-date performance has been a drag on more recent trailing returns, this is par for the course. “We usually lag a little bit in the up markets, but then more than make up for it in the down market,” says English, 58. “We think the ingredients are in place for a pretty big bear market.”
Rather than move to cash, as many value managers do when they see trouble brewing, the team—which includes seven seasoned analysts—is buckling down on its own value philosophy: taking long-term positions in businesses that have sustainable competitive advantages, conservative balance sheets, high returns on invested capital, and valuations that provide a margin of safety. “If you’re starting with a stock that trades at 60 or 70 cents on the dollar relative to its intrinsic value, you have some good downside protection,” says Bloom, 38.
The fund has held its largest holding, Berkshire Hathaway (BRK/B), since its 2001 inception. Berkshire's portfolio of subsidiary companies ranging from Burlington Northern Santa Fe to Geico, plus minority stakes in major companies and $122 billion in cash, make Berkshire “the ultimate defensive stock,” English says.
Solid companies under a temporary cloud have long been portfolio staples. The fund started buying Quest Diagnostics (DGX) in 2017 when questions about Medicare reimbursement cast a pall over the country’s largest independent clinical lab company. The stock price, at 15 times forward earnings, doesn’t reflect long-term trends of an aging population and continued cost containment. Plus, Quest and its closest competitor, Laboratory Corporation of America Holdings (LH), are effectively a duopoly, English says.
The fund bought Dollar Tree (DLTR) in July 2018 when concerns about its acquisition of Family Dollar were hitting the stock. Its business model insulates it from e-commerce, and its move to raise prices over $1 should add to its margins, the fund managers say. Dollar Tree will either turn things around for Family Dollar or sell it, but at a low valuation, “we could win either way,” English adds.
Recently, English and Bloom have been focused on companies that, at first glance, seem most sensitive to a weakening economy. But in reality, shares in many of these companies could prove more resilient than so-called safety stocks.
Home-improvement conglomerate Masco (MAS), whose brands include Behr Paint and Delta Faucet, is one example. While it sometimes gets treated like a housing stock—such as when interest rates rise—Masco really isn’t a call on housing, Bloom says. Home repair and improvement drive 90% of its business, he notes. “In the last down cycle they had a resilient demand profile,” he adds. “These tend to be low-ticket, high-impact products in categories that are growing.”
Masco has a return on invested capital of more than 20%, savvy management, and strong balance sheets across its portfolio of companies, Bloom says. At a recent $38 a share, the stock trades about 25% lower than its historical multiple. Put it all together and Masco is worth about $50 a share, Bloom and English say.
It’s a similar theme for HD Supply Holdings (HDS), which provides products and services to commercial construction and industrial customers. The managers first invested in the company earlier this year when it was trading around 12 times earnings, or 15% lower than its historical multiple.
Roughly two-thirds of the company’s profit is derived from facilities maintenance, repair, and operations for multifamily housing, hospitals, hotels, and senior living. “This is actually a very defensive business,” says Bloom, noting that HD’s facilities maintenance grew 5% organically in 2008. The company’s national scale and local density also offer pricing power.
When it comes to taking care of their portfolio, the fund managers tend to gravitate to companies that don’t require a great deal of maintenance. To that end, they favor businesses that are predictable and easy to understand. “What we don’t want is to have analysts spending 80% of their time on two names where the news flow is just tremendous,” says Bloom.
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