Selectively putting cash to work

Stephen Groff's picture

The market volatility we are all seeing today is a good reminder that remaining level headed and sticking to a consistent process is the way to compound wealth over the long term. Investor optimism and pessimism can swing wildly and acting emotionally can often be a costly way to operate.

Over the past couple months, we have been able to put capital to work in some new and existing holdings at prices we find quite attractive. Does this mean we are at a market bottom? We frankly do not know and would not be surprised to see volatility persist. There are many forces at play which can drive markets up or down which, I personally believe, few (if any) forecasters have shown an ability to predict with any accuracy or consistency – although that does not stop many from trying.

What we can control is the price we pay for a business. Being patient until the businesses we wish to own trade at prices where the potential reward is attractive compared to the risk we are taking on, seems logical to us.

In today’s environment, we are finding more of these opportunities. We have funded these buys from elevated cash levels (15-20% across many equity mandates) while trimming positions in names where the risk / reward is not what it once was (often in many perceived “safe” holdings where investors are hiding in periods of volatility).

One business we are buying is an American financial company which trades at a substantial discount to book value. The business has improving end market fundamentals and significant legacy costs which will roll off over the next two to three years, materially improving returns on equity. At the same time, management is becoming far more aggressive and returning capital to shareholders in an intelligent way. We get the free option of a rising rate environment, which would only turbocharge earnings growth should it materialize. (Again, we are not calling for it, but it is nice when you are not paying for it to begin with!) 

Another is a rock solid transportation business with an irreplaceable network that can transport freight at an incredibly cost effective rate across its vast network. This business has meaningful pricing power, is rightsizing its cost structure in light of softer demand in some business lines and can continue to compound earnings per share. You can purchase this business at a far lower multiple today than six to nine months ago at what are very good prices for a business of this quality.

We have also been adding to an existing holding at increasingly attractive prices (yes, we were early). This holding is levered to various commodity-end markets which as we know are quite challenging at the moment. What intrigues us here is the substantial free cash flow the business generates, the turnaround plan new management is implementing and the fact that parts of its business appear to be stabilizing. Most importantly, is the fact that the market is now pricing in a scenario we do not believe is realistic over the medium-term (meaning patient investors are getting paid well to take on the risk, in our opinion).

We have written a number of times including as recently as a month ago that there are pockets of the markets that felt frothy. We do not feel compelled to own anything we do not find attractive on an absolute basis and will hold cash in that case. While this can mean we miss out when momentum is in full swing, it does help protect capital when the music stops. We are seeing a number of businesses with questionable fundamentals and high valuation correcting rapidly as we speak both north and south of the border – I think you know what we are alluding to.

We are strong believers in the companies we own today and their ability to compound intrinsic value (per share) over time. While markets will fluctuate both up and down, owning quality businesses run by intelligent and well-aligned management teams at attractive prices is a long term formula for success. I personally will be adding to my holdings of Cambridge funds in the coming weeks – and am excited to own more of the many quality companies we hold within our funds.

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