One of our favorite investors at The Acquirer’s Multiple is Mitch Julis at Canyon Partners.
In a recent Barron’s article, Bruce Greenwald was asked who are the best value investors to which he replied, “Warren Buffett, obviously; Seth Klarman [Baupost Group]; Howard Marks [Oaktree Capital Management]; Mitch Julis [Canyon Partners]. They are very disciplined. And you want people who are good judges of business. Glenn Greenberg [Brave Warrior Advisors] is a superb judge of where the moat is, how sustainable it is. Li Lu [Himalaya Capital] is very good at picking management. So is David Swensen [Yale University endowment].
One of the best Julis interviews was one he did with Value Investor Insight in which he discusses his research and decision making process. He also discusses what makes a good investment cheap and safe. It’s a must read interview for all investors.
Here’s an excerpt from that interview:
What specifically makes an investment safe, cheap and good in your eyes?
MJ: Safe companies have staying power, the operational and financial flexibility to withstand the ups and downs of their business cycles and what’s going on in the capital markets. Here we look at traditional credit statistics like interest coverage and whether the base of assets versus the debt level is comfortable.
We also look carefully at the level of free cash flow being generated and the sustainability of that free cash flow given the company’s business model and competitive position. A company’s ability to honor its debt obligations is the basic level of staying power. Once you have a view on that, you can move up or down from that layer in the capital structure. Investing in one type of asset gives us insight into the risk/reward tradeoffs for other types.
Good companies have earnings power, earning a good return on capital and with growth that creates value because returns on incremental capital exceed the cost of capital. As for cheap, we focus on a high ratio of earnings before interest and taxes over enterprise value and whether we have enough upside optionality for which we’re paying very little.
We also pay a lot of attention to capital structure. How much debt is coming due and when? How does the level of free cash flow support the size and composition of the capital structure, in book and market value terms? Is optionality built into the debt, to the benefit of creditors or to the benefit of the company? If a company has high-cost debt but can call it at par, there’s a lot of value in that option. Unless you understand the options a company has vis-à-vis its investors, you’re not really going to understand its flexibility – or lack thereof – to create value.
Other questions included:
- What lessons have you learned from some of your mistakes?
- You put a lot of emphasis on process in your research and decision-making. Describe the key elements of that process.
- How did your fixed-income experience at Drexel Burnham Lambert in the 1980s inform your investment philosophy?
- Does your credit orientation explain why you focus on distressed opportunities?
- In your equity bets, where do you tend to find inefficiencies?
- Have you had success with spin-offs?
- Do you have any rules when it comes to selling?
You can read the full interview here.
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