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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,
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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
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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
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