Value manager AZVALOR sees intrinsic values rise during poor market conditions
The intrinsic value of companies investigated by value managers Azvalor is continuing to rise despite markets punishing the investment style.
In their latest quarterly report, the ever-transparent team at Azvalor continue to point to the ever-widening gap between the intrinsic and market value of companies. They also highlight exactly how value managers make significant returns for investors over the long term by turning the spotlight on some of their investments including the Korean firm Hyundai.
In the case of Hyundai, the stock has been held for almost five years and has been falling in price every year until March of 2020 when its stock price rose by 157%. Azvalor says that the total return on the 54-month-old investment was made in just three months, so rewarding investors who had the “patience” to wait for the market to recognise the intrinsic value of the business.
Azvalor’s most recent report also shines a spotlight on how current adverse markets are proving both advantageous and problematic, and how value managers are storing up gains for the future. For example, the firm partially sold out of Barrick Gold, Agnico and Pan American (strong, quality companies whose shares have risen since acquisition, on average, by over 100% with gains of over 13%, 34% and 30% respectively in the last quarter alone). Monies realised from these sales are being used to buy into strong, quality companies with even greater upside potential. For example, the firm bought into Sociedad Quimica y Minera, a lithium and speciality fertilizer firm whose share price had fallen 50% over two and a half years. The acquisition was made in the strong belief that its competitive position is very strong, and its end markets are in the low phase of a cycle. “We believe it will be an excellent investment in five years’ time,” says the firm.
While the wider market’s is focusing on growth stocks, some companies, which were out of favour with generalist investors, are benefiting from years of business adjustments with strong improvement in the financial number of firms such a Freeport-McMoran and Barrick Gold. This improvement in the quality of stocks in Azvalor’s International portfolio is pushing up their ‘intrinsic value,’ that is, the ‘true value’ - estimated by its managers both quantitatively and qualitatively. In the International portfolio the estimated value has increased from €219 per stake to €230 over the quarter covered by the report.
Given the continued improvement in the strength and quality of many firms and the lack of recognition of such value by the markets, Azvalor says that there are now many more attractive, quality companies into which Azvalor would like to invest and these opportunities are arising across a number of different sectors:
“The coronavirus pandemic has caused a drastic drop in stock prices in many quality companies and some could represent interesting investment opportunities. The number of potential companies on the bench is now larger than ever since we launched Azvalor,” (five years’ ago).
The Azvalor team also describe what makes for a ‘quality’ business investment by describing their characteristics thus:
1. They have some barrier to entry, which is sustainable, and returns above the cost of capital are generated because of it; there is room to continue investing the generated profits at high rates of return.
2. They have an owner and the right corporate culture.
3. They have solid balance sheets and credible accounting.
4. The reason why they are cheap is a problem of a temporary nature.
Azvalor freely admits that they have made mistakes within their portfolios as the intrinsic value of some companies such as Transocean and Valaris, have fallen, particularly because of the pandemic.
“This is bad news. The good news is that if, as in the past, these errors are the exception, we can continue to create value despite them…”, says the firm.
Azvalor’s quarterly investor report can be found at:
Fortuna Asset Management Communications
Tel: 07540 336998