McGavock Dunbar Hit Some Home Runs for Vulcan Value Partners in 2020

January 19, 2021

McGavock Dunbar, CFA, is Principal and Director of Research at Vulcan Value Partners. Mr. Dunbar joined Vulcan Value Partners in 2010. Prior to joining Vulcan Value Partners, Mr. Dunbar worked as an associate in the investment banking department at Susquehanna International Group.

Mr. Dunbar earned his MBA from the University of Virginia Darden School of Business. He also has a Master of Education and Bachelor of Arts from the University of Virginia, with a double major in history and religious studies.

In this 2,664 word interview, published exclusively in the Wall Street Transcript in 2020, Mr. Dunbar reveals his investing philosophy and some top picks.  Readers can now see if his stock appreciation predictions were correct.

“We have one overriding investment philosophy. And that investment philosophy is looking for companies that have a really stable value, stable intrinsic value, and then waiting for the market to give us an opportunity to buy them at a discount. So we are value investors, as the name implies.

And perhaps in contrast to many other value investors, we’re not just going around looking for cheap stocks. Instead, we’re looking for really good businesses that produce free cash flow, that have high returns on capital and that have a competitive moat.

We think those are some indicators of a stable value long term.

And if a company has a stable value, we’re able to execute our value investing discipline with confidence. We know that the margin of safety should remain until the stock price rises rather than disappearing because the intrinsic value falls.”

This philosophy by Mr. Dunbar has led to some interesting long term appreciation:

“Two thoughts to keep in mind: Number one, the times that the market recognizes intrinsic value can be episodic.

And I think that over the last 12 months, 2019 was really one of those times where prices appreciated rapidly toward intrinsic values. To set the stage for 2019, we saw increased volatility through the second half of 2018, as the rest of the world was getting worried.

We saw this as a tremendous opportunity to add to businesses while their margins of safety were actually increasing since their values were stable.

So while the rest of the market may have been getting more worried, we were actually getting pretty excited.

So we made some changes in the fourth quarter of 2018 that I think led to the good performance in 2019. We bought or added to NVIDIA (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Qorvo (NASDAQ:QRVO) and KKR (NYSE:KKR). The last two were the biggest contributors to the strong performance in 2019 for the Focus strategy.”

This pick has performed well since this March 2020 interview with Mr. Dunbar:

“Qorvo is a business we own and added to significantly in Q4 of 2018 and throughout 2019. It is one of the three major players in the RF filter technology business.

RF filters are, to put it simply, the components within connected devices that allow them to connect to the internet via the spectrum. So any connected device — a cellphone, handset, tablet and in the growing internet of things devices — will need some RF filter components in order to connect to cell towers.

It’s an oligopoly industry with really only three players: QorvoSkyworks (NASDAQ:SWKS) and Avago, which is a division of Broadcom (NASDAQ:AVGO). Because of the nature of their industry, barriers to entry are very high. It will be very difficult for a new entrant to enter this industry.

Qorvo has the type of qualities that lead to what we would consider a stable value. They also produce a tremendous amount of free cash flow.

Over the long term, they are growing their free cash flow very quickly. Qorvo had been experiencing a bit of a growth plateau over roughly the last two years, as there was a pause in demand before the 5G wave kicks in. And really, it will provide a nice tailwind to growth over the next several years.

The pause in growth coupled with some of the noise around Huawei and the global trade wars led to pretty significant stock price volatility. That’s what we’re trying to take advantage of with Qorvo. The stock price has appreciated a good bit in the past 12 months.

We think because of the nature of the 5G opportunity and the growth there as well as some smart capital allocation where the company was repurchasing shares at what we thought was 50 cents on the dollar, we think the intrinsic value has compounded quite nicely, and the stock remains significantly discounted to intrinsic value. So that’s Qorvo.

I’ll also mention that in our more diversified portfolio, the large-cap portfolio, we own the competitor Skyworks as well. We own both businesses in that portfolio.”

Mr. Dunbar is not a fan of large scale M&A for his portfolio stocks:

“We look at all of the acquisitions that our businesses make very carefully. And as a matter of fact, our approach to valuation does include a careful look at comparable transactions in the marketplace.

Typically, we’re valuing our businesses on an absolute value approach — a discounted cash flow analysis. But we’re checking our longhand math against our own proprietary database of comparable transactions. So we’re paying a lot of attention to M&A.

As it regards to the businesses in our portfolio, M&A is a capital allocation decision. We speak to our management teams a great deal about their priorities and their views on capital allocation.

One of their priorities may include doing acquisitions. Generally speaking, we would view large acquisitions with skepticism.

We think they have a quite a bit higher degree of risk, and we would become worried around most large acquisitions made by the companies in our portfolio.

However, many companies can do tuck-in acquisitions quite nicely and have strong capabilities around doing these types of acquisitions.”

Get all the top picks from the Vulcan Value portfolio by reading the entire 2,664 word interview, published exclusively in the Wall Street Transcript.