Each month, we screen for attractive “bond replacement” investment candidates by looking up the reports of investments purchased by “Superinvestors” covered by the Dataroma site. Dataroma follows 64 managers that are all using value-based strategies.
The fourth quarter of 2018 was an embarrassment of riches for the January 2019 CCC as a number of value-driven managers jumped into the broad market selloff to buy shares in companies they found attractive. So, while we had to look at 9 funds just to assemble 10 CCC candidates for December 2018, we could have looked at a number of single funds for this edition of the CCC!
In the end, we settled on fund manager, Richard Pzena, who is CEO and CIO of Pzena Investment Management and the manager of the Hancock Classic Value fund. Pzena started his firm in 1995. He earned a BS summa cum laude and an MBA from the Wharton School of the University of Pennsylvania in 1979 and 1980, respectively.
Pzena’s philosophy is based on ranking companies from the cheapest to the most expensive on the basis of current share price to normal long-term earnings power. He purchases shares in good businesses that are selling at a low price. He understands that it is often unrealistic to expect such opportunities to be available absent some sort of problem which causes the price of the shares to drop. The question Pzena and his team try to answer is whether the issue that caused the drop in price is temporary or permanent. Given the broadly positive shift in Pzena’s Hancock portfolio holdings, we are left to conclude he and his managers see the current price drops as temporary and the resulting valuations as attractive.
In our screen, we looked for any transactions that met the following criteria:
- Stocks listed represented more than 2% of the portfolio’s value
- Stocks listed were a new purchase for the fund OR the position was increased by a material amount (+20% or more)
These conditions were designed to screen for the stocks in which the manager had demonstrated the most confidence (by portfolio weight) and about which he had made an active decision to invest. As we explain in our video introduction to “Bond Replacement” investments, we are using these portfolio managers’ actions as an indication of undervaluation.
In the end, 10 of Mr. Pzena’s holdings met the above screening criteria.
You can find the spreadsheet here:
A PDF copy of the spreadsheet is embedded below. Please reach out if you have any questions about these materials!