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Transcript
R E P R I N T E D F R O M D E C E M B E R 2 , 2 0 1 3 A Conservative, Value-Oriented Investment Approach Focused on Free Cash Flow Yield CHARLES GOLDBLUM, CFA, is the President and Founder of Hurley Capital, LLC. Mr. Goldblum has more than 20 years of investment experience in equities, fixed income and commodities. He worked as an Equity Research Analyst at SG Cowen Securities Corporation, CIBC World Markets Inc., and First Union Securities, specializing in technology companies. Before First Union Securities, Mr. Goldblum was a copper and nickel trader for Trafigura, Marc Rich + Co. AG and Glencore International AG, and he was based in New York City, Moscow and Switzerland. Mr. Goldblum majored in English and German area studies at Tufts University. SECTOR — GENERAL INVESTING TWST: Can you tell us a little bit about Hurley Capital? What are you total assets under management and who tend to be your clients? Mr. Goldblum: Hurley Capital is a registered investment adviser. We do separately managed accounts for high net worth investors and institutions. Our investment approach is conservative and valueoriented. We manage long-biased concentrated portfolios of 15 to 20 securities, focused on companies in strong sectors, with high free cash flow yields and strong capital management or reinvestment rates. Our portfolios are “long-mostly,” meaning we can short, but do not always short. We have about $120 million under management now. TWST: What is your outlook for economy and the markets at this point, and how do those views inform your approach to investing? Mr. Goldblum: Our investment approach looks at the economy on a sector-by-sector basis. So while I can comment overall that the economy seems fine — things are looking to be a little bit better in Europe and a little bit better overseas — our view and the view that informs our investing is done on a sector-by-sector approach, and I’m probably better suited to comment on that. TWST: Let’s discuss that approach. Mr. Goldblum: OK, so our investment process focuses on finding the right sectors and cheap companies within those sectors. We’re currently focused on capital-investing-oriented sectors such as industrials, M O N E Y M A N A G technology and energy infrastructure. We think that a lot of the stock market rally earlier in the year was money switching over from bonds into stocks generically and into defensive sectors in particular, whether that was consumer staples or utilities. We thought with the economy being stable to positive, that the real investment opportunity was in the capital spending areas — so industrials in the first place, we’ve expressed that through names like Delta (DAL) and General Motors (GM). In technology, although we’ve done a lot of investing in software in the past, we pivoted more toward the capital spending in the hardware area, so names like EMC (EMC) and Seagate (STX) and Cisco Systems (CSCO). And then on energy infrastructure side, we’ve invested in pipelines and other MLP-related investments such as Crestwood Equity Partners (CEQP), SunCoke Energy (SXC) and Enbridge Energy Management (EEQ). TWST: Can you elaborate a little bit more? Once you’ve identified the sectors that you like, what makes you choose a stock, what qualities are you looking for? Mr. Goldblum: OK, so our investment approach has always been, since we manage money for high net worth individuals, we’re looking for low downside and high upside opportunity. We get there by focusing on cash flow. What sort of cash does the company produce every year beyond its operational needs, and then what sort of return does it get on the cash it produces and reinvests in the business? So as an example, with HCA Hospitals (HCA), a long-time investment for us, they traded at 11% free cash flow yield when we first E R I N T E R V I E W MONEY MANAGER INTERVIEW —— A CONSERVATIVE, VALUE-ORIENTED INVESTMENT APPROACH FOCUSED ON FREE CASH FLOW YIELD invested. And we loved the trends in the hospital space, and more So, we don’t invest in the $1 stock that will either go to zero or to importantly, they always put their money to high-return uses, whether $10 because it has a high expected return, because my clients, and it was buying back their stock at this high cash flow yield or investing truth is me personally, can’t bear the one that goes to zero, even if in building up their hospital base in areas where they are already some percentage of them might work. So while we may give up strong, which is a high-return investment for those grand slam opportunities, we believe them as well — so we focus on free cash flow that focusing on managing the downside, Highlights yields first and foremost. whether that’s, (1) on an investment-byTWST: On the flip side, are there investment basis; (2), by maintaining cash if Charles Goldblum discusses his any sectors, geographic regions or types of we can’t find enough investments to fill the investment approach, which is stocks you are avoiding right now, and why? portfolio that suit our investment process; or, conservative and value-oriented Mr. Goldblum: Our strategy also (3) shorting stocks. Those are all the weapons with a focus on free cash flow allows us, not requires us, to short stocks. To that we use to manage volatility. As an example, yield. Mr. Goldblum centers on end, we look to find the stocks that we would like looking at our performance going back, we’ve companies in strong sectors, and to short using the same process we use to find generally done pretty well in good markets tries to find the inexpensive stocks in the long side, so we’re looking for the and really outperformed in down markets, companies within those spaces. stocks with really horrible free cash flow, poor which is a promise lots of managers endeavor He is currently focused on sectors growth prospects alongside high valuations and to keep that we have kept. that are capital-investing-oriented, high expectations. These days, it’s easy to find TWST: What other stocks are such as industrials, tech and everything except for the high expectations on the particularly representative of your investment energy infrastructure. areas we’ve looked at. approach, and what do you like about each? Companies include: Delta Air Lines One of the sectors we don’t like is Mr. Goldblum: We’ve done a lot of (DAL); General Motors Company home improvement retail. Home Depot (HD) investing over the years in MLP-related stocks. (GM); EMC Corporation (EMC); and Lowe’s (LOW) stocks have done very well So, MLPs refer to master limited partnerships, Seagate Technology Public Limited this year, up 25% and 43%, respectively. They’ve which are partnership entities which are Company (STX); Cisco Systems reported great sales growth and have benefited publicly traded, which — it’s sort of like REITs (CSCO); Crestwood Equity Partners from the resurgence in the homebuilders. And I but for typically energy infrastructures or LP (CEQP); SunCoke Energy (SXC); think that will dissipate. I think the reason why pipelines or gas-processing facilities, etc. And Enbridge Energy Management LLC we haven’t shorted them is that expectations for they’ve been growing in popularity as folks (EEQ); HCA Holdings (HCA); The these stocks aren’t that high going forward. have been looking for yield. As energy Home Depot (HD); Lowe’s Where they had very high same store sales in the infrastructure has proliferated with shale gas Companies (LOW); MPLX LP first half, they guided to much lower in the and shale oil being found all over the country, (MPLX) and Marathon Petroleum second half. So without high expectations, we these areas need to be connected to Corporation (MPC). can’t short them. infrastructure and refineries, etc. Because of Another sector we’ve looked out to that, we’ve had an opportunity to find special short has been restaurants. Restaurants have certainly underperformed situations in the sector that perhaps hasn’t been surfaced yet. the market, but many of them haven’t really gone down a whole lot. For So, a great example this year is a company called SunCoke restaurants, there has been more price competition among the restaurant Energy; symbol is SXC. Market cap is approximately 1.5 billion, stock chains, and their customer base has been pressured by higher payroll price $20.70. What’s interesting about SunCoke Energy is that they’re taxes this year amid the slow-growth economy. While many restaurants not really in the oil and gas business. They have a technology where they have missed expectations, expectations weren’t so high, so we didn’t turn metallurgical coal into metallurgical coke. They do this for steel really see the opportunity to do well by shorting. But that’s another producers typically on or near their facility where they load this coke sector we’ve looked to avoid. directly into their blast furnaces. “Looking at our performance going back, we’ve generally done pretty well in good markets and really outperformed in down markets, which is a promise lots of managers endeavor to keep that we have kept.” TWST: Are there any additional aspects of your investment strategy that make you unique, things that you think you do differently that clients particularly appreciate? Mr. Goldblum: I think lot of individual investors are riskaverse; they want upside without any downside. Our investment approach has been attractive to high-net-worth individuals because of our focus on limiting downside in each individual investment. So that’s a pretty boring business, but they have created an MLP which they will start selling their plants into over time starting next year; so what’s interesting about it is that here’s a business which on its own might trade for six or seven times EBITDA, but they will likely sell these assets to an MLP that they’ve created and sponsored at nine to 10 times EBITDA, which is a significant premium to where the stock is today. SXC will receive a bunch of cash back, which they will redeploy MONEY MANAGER INTERVIEW —— A CONSERVATIVE, VALUE-ORIENTED INVESTMENT APPROACH FOCUSED ON FREE CASH FLOW YIELD into creating more assets to sell to the MLP while at the same time garnering an increasing portion of the MLP’s cash flow through a preferential sponsor treatment. So we think the stock, which is at $20.70 today has probably another 30% to 50% upside from here if they actually do what we think they will do by selling their assets. 1-Year Daily Chart of SunCoke Energy Chart provided by www.BigCharts.com TWST: Can you share an example of a stock that you’ve recently sold, and tell us what triggered the sale? Mr. Goldblum: This past week we sold a company called MPLX (MPLX). MPLX was another MLP, which we bought right on the day of the IPO last October. It’s an MLP created by Marathon Petroleum (MPC), a large refiner here in the U.S., under duress from its investors to benefit from the valuation arbitrage between the low valuation of refiners and the high valuation of MLPs. We bought it because we thought they could create this MLP and grow it at a rate faster than the market expected. Very quickly, really three to six months after we bought the stock, it rose 30-some odd percent and was paying a 2% to 3% distribution along the way. So that was initial expected return over this first year or so, and that happened. We thought that was a great opportunity for it to grow further should Marathon Petroleum have chosen to accelerate the rate at which they sold their ample assets into the MLP. We wound up selling last week, because they continued to reiterate a slower-growth plan relative to their capability, and therefore we determined the stock’s valuation was anticipating more growth than it was actually going to produce. So we’re happy with the return we have to-date and the likelihood of upside we thought was diminished. TWST: As we head into 2014, what’s your overall advice or guidance message for investors at this stage? Mr. Goldblum: OK, so it’s an interesting time in the markets. I’ve heard a lot of folks are still on the sidelines, they’re still nervous about the market, they’re still unsure about what the future holds. Clearly with our Federal Reserve printing money like crazy and the economy not growing well, and unemployment still pretty sticky, it’s an uncertain investment environment. On the other hand, the market has more than doubled since 2009, and there is sometimes pressure to feel like, well, you have to be involved, because as more money is printed, the value of the money you have in the bank goes down. For today’s market, we believe our conservative approach, which has managed to keep up in good times or protect in bad times, should be an attractive model for investors looking to participate without taking undue risk. We believe our process will help us to protect assets going forward. Obviously, past isn’t prologue, but I think the problem that individual investors face is, how do you gain exposure to a rising market without taking undue risk? I think investors have to look at the process that managers take, their historical track record of using that process and judge for themselves which way to go. We believe when looking at us in that respect, we’ll standout versus a lot of the alternatives. TWST: Thank you. (MES) CHARLES GOLDBLUM, CFA President & Founder Hurley Capital, LLC 825 Third Ave. 33rd Floor New York, NY 10022 (212) 605-0665 www.hurleycapital.com © 2 013 T h e Wa l l S t r e e t Tr a n s c r i p t , 6 2 2 3 r d Ave n u e , N ew Yo r k , N Y 10 017 Te l : ( 2 12 ) 9 5 2 - 74 0 0 • Fa x : ( 2 12 ) 6 6 8 - 9 8 4 2 • We b s i t e : w w w. t w s t . c o m