One of my favorite value investors is Glenn Greenberg (Trades, Portfolio). This fund manager currently manages Brave Warrior Advisors, where he has worked for over three and a half decades.
Greenberg was one of the first fund managers whose strategy I felt I really understood. When I first met the investor, his strategy was based on the simple principle that investors should always look to buy stocks that are trading at a steep discount to their intrinsic value. To find this value, he would calculate the value of a stock using discounted cash flow analysis and use a relatively high discount rate in middle to high teens.
Not only would that establish an appropriate value based on cash flow, but it would also build a safety margin into its analysis. Greenberg’s approach has worked incredibly well. Based on publicly available information for his time managing Brave Warrior, he made over 25% per year between 1984 and 2008.
Based on this track record, I like to keep an eye on the positions that appear in this value investor’s portfolio to see if any clearly undervalued securities appear, which may merit further analysis.
According to the hedge fund’s latest 13F, which details the portfolio’s equity positions at the end of June, the largest positions remained mostly unchanged from the previous period. The two largest holdings in the portfolio, representing 15% and 10% of assets respectively, were Anthem (NYSE: ANTM) and AON (NYSE: AON).
A new position entered the top 10 – Fidelity National Financial (NYSE: FNF). Greenberg acquired 6.3 million shares of this company during the second quarter of the year, giving it a portfolio weight of 9.4%. At the end of the quarter, the position stood at $ 273 million.
Fidelity is a financial holding company that provides title insurance, escrow and other securities related services. At the time of writing, the stock is trading at a price-to-earnings ratio of 8.5 and offers a dividend yield of 3.2%. Over the past six years, earnings per share have grown at a compound annual rate of 32%. Revenue has grown from $ 6.6 billion in 2015 to about $ 10.7 billion in 2020 (revenue is expected to be $ 13 billion by 2021).
According to the GuruFocus discounted cash flow calculator, the stock could be worth up to $ 350 per share, up from the current $ 48.60 per share, if its free cash flow increases at a compound annual rate of 20% for the 10 next few years before falling. at a terminal growth rate of 4%. This is based on the growth rate of the company’s free cash flow over the past 10 years, which was on average 22.6%. The discount rate used in the equation is 8%.
Even reducing the growth rate to 3% per year for the foreseeable future throws up a final fair value of around $ 105 per share. I think that incorporates a substantial safety margin considering the high discount rate and the below average free cash flow growth figure.
These numbers seem to suggest that this stock is deeply undervalued due to its cash flow potential. Perhaps this is the reason why Greenberg decided to initiate a position in equities during the second quarter.
Two other new positions appeared in his portfolio during the three months ending at the end of June. The first was MasterCard (NYSE: MA). The hedge fund added 558 shares of this company during the period. This position was worth $ 204,000 at the end of June, giving it a 0.01% weight in the $ 2.9 billion equity portfolio. The other new position was Squarespace (NYSE: SQSP). Greenberg and his team acquired 6,000 shares of the website provider, investing a total of $ 356,000.
This article first appeared on GuruFocus.