Private equity investing is all the rage with pension funds and college endowments ramping up returns with their estimates of the value of their limited partnership shares.
There are value investment portfolio managers who see incredible discounts to these estimates of value in their publicly traded portfolios.
Private equity investments at a big discount to public valuations: is this a current sweet spot for investors?
Scott Hood and Evan Fox detail their logic in two exclusive interviews in the Wall Street Transcript.
Scott Hood, Chairman and Portfolio Manager, First Wilshire Securities Management
Scott Hood, CFA, CFP, serves as Chairman and Portfolio Manager at First Wilshire Securities Management Inc. He joined First Wilshire as an analyst in 1993, was promoted to Chief Executive Officer in 2001, and became Chairman in 2019.
“…On the institutional side, we’ve noticed there’s been less and less interest in active management, and a lot more interest in private startups, private equity, and maybe real estate.
We have studies going back over 90 years on the market and value and small cap and mid and large and international, and we’ve been in this remarkable time of a very few large tech stocks in the U.S. dominating the world’s returns.
So, I spend a lot of time on the more technical aspect of that, and also trying to give examples of these hundreds of small companies that trade almost like private equity.
They’re like private equity without the high valuations; there are all these great companies that are a bit forgotten, because there’s not as much interest in those inactive and small companies.
On the individual side, say high-net-worth individuals, I spend a lot of time explaining First Wilshire and our research process and what’s different.
You asked, what are people worried about?
They were worried about politics, so we had to explain that there really hasn’t been a correlation between who got elected and performance in the stock market.
Every time there’s an election, there’s a big group of people who say, “I’m getting out of here if so-and-so wins,” so we’ve tried to put this into broader, historical context, to explain that it’s probably not a good idea to take all your money and make extreme decisions based on a single election.
And then we’ll spend time explaining that, well, when the market’s gone up a lot, people tend to feel more excited, and then they have too much money in the market, and then when things get a little scarier, they tend to take money out — and usually it should be the opposite.
I guess I’ve learned in decades in the business that psychology can be more important than earnings, growth and valuations, so we spend a lot of time with the clients on that.
I explain a lot about our history and our firepower.
We’re all, I’d say, academic, investing business nerds.
We don’t have a marketing department, so we’re not out there banging the drum about First Wilshire.
And the problem is, most companies are all about marketing and not much on the meat and potatoes, and they bring in massive amounts of assets to be put willy-nilly into the same junk that everybody else has.
Somebody like us, who does so much work with such a long track record, we have to explain to clients the difference between us and these other companies that they may have a more favorable impression of them than they should, in our opinion of course, just because the marketing dollars are hitting them in the right way.
Obviously, I’m a little sour about that.”
One small cap company that is wildly undervalue according to the First Wilshire portfolio manager is Aviat Networks (NASDAQ:AVNW).
“There’s a company called Aviat Networks (NASDAQ:AVNW).
They’re based in Austin, Texas.
Aviat does private networks, and in this case “private network” refers to a private cellular and internet network in an area where it works better to do microwave and radio technology rather than wiring an entire area.
Say, a large industrial park, or stadiums use these and are a growing area.
Multiple dwelling unit projects are a growth area.
The company provides the equipment, software, design and installation for these systems.
They had three years of really strong revenue growth and earnings.
Then they had — and this was the time we got interested — an internal control accounting issue.
It was the first quarter last year, and the stock really got hit.
It wasn’t material and it wasn’t intentional, but it really hurt the stock.
Then they came back with strong quarters again, just the stock hasn’t caught up with the performance.
It’s a low p/e company.
It’s trading about 8 times next year’s earnings estimates.
Balance sheet is in good shape.
A lot of growth opportunity ahead.
You look for turnarounds, in a sense.
When they have a problem, you take a look.
A lot of times they’re down for a reason, and it’s going to be hard to turn it around.
We didn’t feel that was the case here.
We felt that the business was in great shape, and the discount that came from the accounting interruption was just too much.
And it’s recovered a little bit, but has a lot further to go.”
Evan D. Fox, Co-Portfolio Manager for Pzena Investment Management
Mr. Fox became a member of the firm in 2007.
“For small caps especially, I think those first couple of questions — why does it exist and is this a good business — make it important to understand that many of the companies that we’re investing in are leaders in some sort of niche market, and that’s what creates the fantastic opportunities.
They’re not going after markets with tens of billions of dollars of revenue.
Instead, we have companies like Shyft Group (NASDAQ:SHYF), that is a leader and one of two companies making step-in vans, which are the ones UPS and FedEx use.
We also own MasterBrand (NYSE:MBC) and American Woodmark (NASDAQ:AMWD), which are leaders in making kitchen cabinets throughout the United States.
And Steelcase (NYSE:SCS), which is one of the two largest office furniture manufacturers in the world.
We have a whole range of other companies that are leaders in specific areas, and that’s what makes it exciting — that we can have fantastic businesses that many people have never heard of.”
Private equity investing through the public market: get the complete exclusive interviews plus many more only at the Wall Street Transcript.
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