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Jeroen Bos On Deep Value Investing [Part One]

Cover of  by Jeroen Bos

Jeroen Bos has more than twenty years of investment experience and is one of the premier deep value investors in Europe. He worked as a scout for Peter Cundill in the London market and authored Deep Value Investing: Finding bargain shares with big potential published in 2013.

Jeroen currently manages the Church House Deep Value Investments Fund, a small-cap fund that looks for unloved companies priced at a discount to their liquid assets. The fund is largely UK weighted and has a bias to the service sectors.

Jeroen was kind enough to answer some questions for ValueWalk about his investment style and how value investing has changed over the years.

The interview is divided into two parts ? sign up for our newsletter to ensure you do not miss part two.


Rupert Hargreaves: You?re one of the remaining traditional value investors that looks for companies trading at a discount to net current assets. In today?s market, are you still finding companies that look attractive from a value perspective?

Jeroen Bos: Yes, there are plenty around. They?ve actually become a lot easier to find over the past year or so. Before that, it was difficult, but now the market is getting very fed up with small companies that are not performing to expectations. These companies tend to be treated quite harshly when they miss expectations and for that reason their share prices are severely compressed creating the opportunity.

RH: You?re still finding deep value opportunities then?

JB: Yes.

RH: What are you looking for specifically?

JB: Really any company that in the past has been able to make money and is now available at prices where they?re cheaper than their liquidation value. And that?s all over the market. Any sector that?s performing badly. You don?t have to look that hard. For example, the oil sector or the oil services sector, bargains are starting to appear there.

RH: In the past you?ve mentioned a preference for service companies. What is it about service businesses that attracts your attention?

JB: They tend to be more resilient, they?re not capital intensive, and as a result, they?re easier to manage in a downturn. Once the company pulls through a downturn any additional turnover usually translates into profit on the bottom line. After the recovery starts to gain traction these service companies generally tend to rebound very quickly.

RH: These sort of service businesses tend to be very cyclical. Do you consider macro implications in your investment thesis?

JB: Well, I?m usually more interested in the company itself and what?s in front of me, rather than the immediate economic outlook because that?s not my main concern. But the stocks and values I?m looking for tend to appear at the bottom of the cycle when people have given up on the sector. If the company has no debt, and you buy at a deep enough discount to intrinsic value, with a large enough margin of safety, then you?re usually onto a winner.

RH: Do you have a particular margin of safety you?re looking for?

JB: Obviously it depends on the company in question. If the company I?m looking at is heavily loss making, then I?d want a large margin of safety because, in this case, any assets on the balance sheet will evaporate relatively quickly. However, if the company is only marginally loss making then the margin of safety I require will be a lot smaller.

RH: Is there one company in particular that?s attracting your interest right now?

JB: One example, if you look a UK stockbroker Panmure Gordon. The company recently issued a trading update where they alluded to the fact that M&A activity slowed down during the first half of the year; the market wasn?t as buoyant as they would have hoped and earnings would come in below expectations. Management still saw opportunities to remain marginally profitable, but the market punished the company pushing the share price down by 30% on the day. The share price has fallen from 150p to 80p in the space of a few months. If you look at the balance sheet, the liquidation value is 105p. So, a margin of safety has been created. I don?t know what the outlook for their market is in the near-term, I know it?s not that exciting, but this broker has been around for a long time, they have plenty of experience. You can definitely say that the stock is very cheap by looking at the balance sheet.

RH: You tend to run a very concentrated portfolio with the top ten holds accounting for around 70% of assets. How do you go about managing risk in a portfolio like this?

JB: Really, I?m not worried about the risk here. Yes, it may create some volatility in the fund but you buy the stocks when interest in them is pretty low, and you may be sitting on them for quite a while before something happens. It can take a while, and sometimes it?s frustrating, but as long as the value is still there the share prices should reflect that over the long-term. You?re bound to suffer a period of short-term underperformance. We?re all in a hurry, and we?d like the investment to turn positive on the day we buy it, but you know, that doesn?t happen in the real world.

RH: Your fund is UK based, but you?re allowed to allocate 30% of assets to overseas investments. One of your top ten holdings is Icahn Enterprises?

JB: Yes we?ve owned that for a long time, we brought it at $50 or so.

RH: What do you like about the company, is this play on Carl Icahn?s management expertise or an asset play?

JB: Carl Icahn is an investor with a very successful track record, and he?s done this for many years. I like his way of operating because he is a value investor but unlike many other value investors he is active and will force management to do whatever to liberate assets and make share prices appreciate. His timeframe is much shorter, and he?s more active in trying to dictate the behavior of the share price by getting involved with management.

RH: He?s looking to unlock value faster?

JB: Exactly, he?s not afraid to immediately fight for seats on the board and get involved??

End of part one. Stay tuned for part two.

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