Our research team is perpetually busy, but periods of acute price variability in the market present a particularly exciting opportunity to evaluate interesting situations in both portfolio companies and new ideas. We have unearthed an array of these through our proprietary screening tools and group discussions of ideas that came to team members through their own research. Fixed-income opportunities have been of particular interest to us and as a result we have added three new debt securities to the portfolio in as many months (AXL, GT, and THS). While we are always on the lookout for accretive additions to the portfolio, the focus for this letter is our review of portfolio companies’ management with a particular focus on the tools we use to evaluate management.
Within the steadfast framework of our research process, we continue to challenge our investment theses for portfolio companies through observation of senior management’s ability to adapt to changing circumstances as well as a review of how strategies that are already in play are panning out. As fellow owners of companies in the portfolio, we don’t celebrate unfavorable results. However, challenging operating environments allow us an opportunity to assess the elasticity of each company’s balance sheet and, importantly, gain real-time insight into how management teams are responding to tricky circumstances. We’ll take this point in time to remind the reader that we analyze each company’s merit as an investment opportunity on its own and don’t invest in macro trends. That said, we are hypersensitive to how past, current, and future macroeconomic events affect each company in their own idiosyncratic ways. It is through this lens that we view management’s actions and listen to their responses when we speak with them.
A powerful tool we use to understand management’s thinking is frequent, detail-oriented discussions with the people that run the companies in which we are interested. Our research team meets with each portfolio company’s senior management (typically the CEO and CFO) as frequently as is needed to ask questions about the details of the company’s operations and to dig into any unclear information we find during a review of the company’s financial statements. For example, we recently had an hour-long video call with Fluor Corporation’s (FLR) management and learned, in a disarmingly candid response to one of our questions, that past acquisitions have failed not because of the economics of the deals but because of Fluor’s “earn-your-stripes” approach to seniority within the company. Management of acquired companies are viewed as more junior than their titles may otherwise warrant, which has historically resulted in less meaningful integration into Fluor’s existing operations and less-than-ideal financial results.
During that same call, Fluor’s representative detailed his view that domestic steel fabrication facilities are severely lacking in capacity and quality when compared to their Chinese and South Korean counterparts. This comment shed additional light on our recent trip to Houma, Louisiana to see Gulf Island Fabrication, Inc.’s (GIFI) fabrication yard and meet with its CEO, CFO, SVP of Commercial, and SVP of Fabrication and Services. During the trip we observed ample existing fabrication capacity at GIFI’s yard and were able to probe senior management about the particular dynamics of the skilled labor market in and around the Gulf of Mexico that are causing capacity restraint in the market. While the anecdotal comment from Fluor’s management may seem minor at first blush, it ultimately serves to supplement our existing understanding of markets, industries, and companies as they each interact with the world in their own ways.
Few, if any, management teams have a track record of how they have handled conditions akin to the present day. For that reason, we continue to kick the tires on both portfolio companies and new ideas, and continuously challenge management teams by posing detail-oriented, fact-based questions and observing their responses. The combination of discussions with management and rigorous analysis of financial statements gives our research team the information advantage necessary to make high-conviction investment decisions even in times of uncertainty.
As always, please reach out to MIAM if you have any questions or would like to discuss any particular companies or ideas.
This document is published by Milwaukee Institutional Asset Management (MIAM), a division of Global Value Investment Corp. (GVIC). MIAM is the institutional investment advisory division of Global Value Investment Corp., providing investment advisory services to institutional investors including Registered Investment Advisors and Broker-Dealers. All statements or opinions contained herein are solely the responsibility of Milwaukee Institutional Asset Management. The material, information and facts contained in this report were based on publicly available information about the featured company and were obtained from sources believed to be reliable but are in no way guaranteed to be complete or accurate. This report is for informational purposes only and should not be used as a complete analysis of any company, industry or security discussed within the report. This report does not constitute an offer or solicitation to buy or sell any security, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. An investment in any security referenced in this report may involve risks and uncertainties that could cause actual results to differ from the analysis provided herein, which may not be suitable for all investors. Past performance should not be taken as an indication or guarantee of future results. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. Employees of GVIC may have positions in securities referenced in this report. ‘Intrinsic’ or ‘Appraised’ value refers to MIAM’s quantitative and qualitative assessment of the value of an enterprise. Market capitalization is a measure of the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current quoted share price. MIAM’s investment strategies generally invest in a smaller number of securities than some other strategies. The performance of these holdings may increase the variability of a strategy’s return. There is no assurance that dividend-paying stocks will reduce price variability. Value investments are subject to the risk that their intrinsic value may not be reflected in market prices. For purposes of distribution in the United States, this report is prepared for persons who can be defined as “Institutional Investors” under U.S. securities regulations. Any U.S. person receiving this report and wishing to affect a transaction in any security discussed herein must do so through a U.S. registered Broker-Dealer. Neither Global Value Investment Corp. nor Milwaukee Institutional Asset Management is a registered Broker-Dealer.
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