1. To start off, can you tell us a bit about Shah Capital and the team working at the fund?
Shah Capital is a global investment firm focusing on deep value equity, turn-arounds and special situations with an AUM of over $250 million. The firm was founded in 2005 by Himanshu H. Shah who has over 25 years of global investment experience. As a firm, we believe in dynamic capital and our strategy reflects that. As for new opportunities, we look across multiple sectors with the right set of economics. Our deep analytical research provides us with better long-term risk management and we strive to have multiple paths for exits or value creation hence dynamic capital.
The team at Shah Capital consists of 7 members with significant global experience and diverse background sets. The Research team has over 50 collective years of experience. As a RIA, we have full-fledged compliance and partner relations professionals.
2. What do you think makes Shah stand out from the crowd?
Our ability to blend the bottom up fundamental approach with our intricate global macro understanding is the differentiator. Our analysis goes beyond valuation to strategy of a business, competitive landscape, management capabilities and also the innovation of the company. As long-term investors, we strive to think ahead of the curve anticipating change which often times is contrarian. Our select softactivist efforts have also yielded significant results with companies domestically as well as internationally.
3. How do you go about looking for an investment (both long and short) at Shah; what’s your investing process?
The core of our investment process lies around valuation and the business fundamentals. This drives both our long and short (with QE, ZIRP and NIRP distorting investment process we really have not been short this market since 2012) positions. Having been in this trade for over 25 years along with the experience and intense nature of our research and staying on top of global trends; that gives us the basis for our investment ideas. There is honestly no exact formula for our process but through the years and results, it certainly has been proven. It is the insights from our analysis that really sets us apart.
4. How do you approach valuation?
So while often we could fall into a “value investor” bucket, we don’t let that be the only guidance for us. We are very selective. We do look for a margin of safety here as we don’t mind volatility in a stock but are taking every calculation that we are not stepping into a situation where can have permanently impaired capital. Overall we are looking for companies that are absolutely or relatively undervalued, or both. We are not chasing very high multiples or momentum. Just disciplined investing. This has been a key focus for us and big driver of our success.
5. What are the qualities investors should be looking for when trying to identify the best companies?
We try to develop a very deep understanding of the balance sheet and operational leverage that comes with it. We don’t simply throw out an investment candidate on high debt as really try to understand how that feeds into the business, the assets it owns and the upside potential (or downside) that the debt creates. With new era of “Wall Street” and information overload, the pendulum often swings too far and that’s where opportunities come up. We look for industry leaders which for some reason or another have run into tougher times. We also look for good turn-around candidates – companies which have fallen out of favor but are executing a strong strategy. Naturally management team is the one driving these efforts so we do try to make sure we are both on the same page and this is where our softactivist/consultative approach comes in.
6. How much concentration are you prepared to take in a portfolio, how would you weight your best idea?
We have had 3% positions become 10%+ of the portfolio. That said, we are comfortable with our top 10 positions accounting for between 50-70% of the portfolio. Our deep fundamental research gives us comfort with a concentration like this. On average the portfolio has 20-25 positions.
7. Would you mind sharing some of your current holdings or perhaps your highest conviction idea?
Avon: This is a strong turn-around candidate including a play on rising Mexican Peso, Real and Ruble vs US$. This well recognized iconic beauty brand has been discounted too severely especially with the implementation of major restructuring, domicile change and sale of its money losing North America business. The model for direct sales is still in-tact and growing in the developing countries where Avon is focused on and do see lot more upside.
Coeur Mining: As the commodity cycle was tightening even further last year, we saw the miner space being punished more severely even with supply being cut while the demand for silver and gold was actually rising. The management was also ahead of the curve and truly cut all-in production costs quite significantly, and buying two great mines at attractive prices at the bottom of the cycle in early 2015.
Renesola: This is a $1.1B+ revenue global clean energy player – solar panels, storage, inverters and LED’s. While based in China, the company trades here in the US so naturally treated more as an orphan stock despite its scale, reach and free cash flow focus. Management is focusing on and have considerable expertise on smaller projects throughout the world which we think is a more profitable strategy with lower risk.
8. You own two very controversial companies, Seadrill, and Genworth both of which have operational problems and debt issues. To help our readers understand your investment process, could you comment on why you believe these companies are attractive, despite their problems?
On Seadrill – The entire offshore drilling space has been hit hard with oil plummeting under $30 early this year and still under $50. With considerable debt load market is treating the equity as an optional value, however, we see it as a survivor in light of its profitability, free cash flow generation, smart debt retirement, management credibility, the most modern fleet of equipment in the business, strong lead shareholder and most importantly see oil trading over $50 plus in Q4 and onwards turning the other way in this very depressed activity market. In situations like this, we only risk up to 1.5% of portfolio capital.
On Genworth – It has been in a penalty box since the management blunder in 2014 even though the core business is more profitable and the management has been successful in reducing bloated cost structure and getting return over cost of capital for its Long Term Care business. We really like the BOD’s direction in splitting the company in two businesses to realize its true value which is lot higher than its current share price.
9. The fund invests both in and outside the US. In which other markets around the world are you finding value today?
Outside US, we have been active in China for the last 10 years. Lot of Chinese equities listed in US and Hong Kong trade at orphan valuation compare to their global peers as well as their brethren trading in Shanghai/Shenzhen. We are positive as corporate governance is getting better and do see more consolidation to drive higher profitability. The companies we look at in are often global leaders in their innovation or respective technology. Additionally, foreign investors are extremely under allocated in China equity space.
We have also been positive on Brazil since early this year with the potential of the leadership change.
10. And lastly, what advice would you give to value investors who are just starting out (or even experienced value investors) to help them navigate today’s market?
Stay disciplined to your research process as it must be the foundation and try to block out as much market chatter as possible – one has to really understand the underlying business vs price movement. The second bit would be to really understand the global dynamics as it is at large a flat and a very competitive world!
Sources: Shah Capital; Thomson Reuters; Company Filings
This interview by ValueWalk.com is not an offer to sell, or the solicitation of an offer to buy, interests in any investment vehicle or to provide investment advisory services. The information presented is only a summary, and does not take into account the particular investment objectives or financial circumstances of any person who may receive it. The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee their accuracy or completeness. Statements concerning financial market trends are based on current market conditions, which will fluctuate and are subject to change without prior notice. Holdings are subject to change at any time.
The specific securities identified in the letter do not represent all of the securities purchased, sold, or recommended within the portfolio, and it should not be assumed that investments in the securities identified and discussed were or will be profitable. The representative securities were selected based on objective, nonperformance criteria with no reference to amount of profits or losses, realized or unrealized of any specific security. Following publication of this document, we intend to continue transacting in the securities covered therein, and we may be long or neutral at any time hereafter regardless of our initial recommendation.
This document includes forward-looking statements, as defined by applicable securities legislation. Often, but not always, forward-looking statements can be identified by the use of words such as “believes,” “expects,” “does not expect,” “is expected,” “targets,” “outlook,” “plans,” “scheduled,” “estimates,” “forecasts,” “intends,” “anticipates” or “does not anticipate” or variations of such words and phrases or statements that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Shah Capital to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Although Shah Capital believes it has a reasonable basis for making these forward-looking statements, readers are cautioned not to place undue reliance on such forward-looking information. Forward-looking statements made in this report apply as of 8/17/2016. Shah Capital disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date thereof.