The past couple of weeks, we’ve talked about how looking at the right 13F filings can reveal some of the greatest investments to make right now.
It’s like having Wall Street’s best analysts working for you, for free… If you know what to look for, of course.
But before we move on to other segments of 13F analysis, I want to take one more trip into the land of deep-value investing. It’s a neighborhood that many people talk about, but only a few people ever visit.
Which is too bad, because the profits to be made there are impressive…
In many ways, the deep-value neighborhood reminds me of Greenwich Village in the 1970s. A lot of people claim to have been there, but few actually were – driving through on a double-decker tour bus doesn’t count.
Similarly, lots of people talk about value investing. But almost no one actually practices value investing.
If you want to be the biggest fund, which means collecting the most fees, you cannot be a successful deep-value investor.
You can be a relative value investor and buy companies that trade at lower valuations than the indexes or competitors, sure.
There are several money management and mutual fund firms that started as deep-value investors and got too big to continue and had to move to relative valuation.
You can do what Warren Buffett, Seth Klarman, and several other wildly successful former deep-value investors have done and become a bear market buyer. It’s the best way to deploy billions of dollars into liquid securities at low valuations.
This is because being a deep-value investor – that is, buying stocks that trade in the lowest decile of valuations based on price to tangible book value – usually involves smaller companies. And it is impossible to move the needle of a multibillion-dollar firm investing in small companies.
After all, even a 10X return doesn’t mean much if the initial investment wasn’t a big chunk of your billion-dollar fund’s portfolio.
But having billions of dollars and nothing to do with them isn’t a problem for you and me.
For us, the kinds of companies deep-value investing targets are plenty big enough to move the needle in our retirement accounts.
That’s right – when it comes to deep-value investing, you and I have a huge advantage over the big players on Wall Street.
The firm I will highlight today understands this, and says on its website that it will always prioritize performance over asset growth.
Since opening its doors in 1998, the firm has done precisely that. Aegis Financial Corp.’s Small-Cap Deep Value Fund (AVALX) has just $274 million of assets despite outperforming the S&P 500 by a little over 50% since inception.
Much like Donald Smith and Company, which we talked about last time, Aegis buys stocks at the lowest valuations based on price to tangible book value.
Donald Smith and Company uses the bottom 10% of stocks based on this measure, and Aegis widens the universe to the bottom 20%.
The firm then begins the underwriting process of evaluating the companies to make sure they are financially strong enough to survive until they thrive.
They take that surviving universe and do a deep dive to cut the list down to the 40 -50 stocks they will own in the fund.
Most of the stocks will be smaller companies no one has heard of.
Many of the companies owned by the fund will be in industries the market hates.
For instance, the firm’s mutual fund, AVALX, currently owns quite a bit of coal stock and was buying more at the end of the year. It also holds a lot of gold and metals miners as well as steel and alloy producers.
The newfound religion of ESG (Environments, Social, and Governance) investing that has infected Wall Street over the past few years hates all these industries.
As hated as these companies may be, they are collectively a big reason why the fund had a positive year in 2022.
They are also a big part of the reason that owning the top 30 holdings of Aegis Financial has beaten the S&P 500 by about 2-to-1 over the last decade.
The four largest purchases of the firm in the last three months of the year were coal and gold stocks. However, I am not a gold fan and will leave it to gold-loving readers to decide for themselves if Centerra Gold Inc. (CGAU) and Equinox Gold Corp. (EQX) are appropriate for their metals stock allocation.
Both are cheap based on asset value.
Coal was supposed to be on its way out, but underinvestment in oil and gas and a massive overcommitment to unachievable energy policy goals have revived the industry.
History books will not be kind to the current habit of developing energy policy based on politics (no back-patting here for anyone – both sides do it), but that is the world we live in today.
Aegis was buying more of Peabody Energy Corp. (BTU), and Hallador Energy Co. (HNRG) as 2022 came to a close.
The fund increased its position in energy and materials stocks in the last quarter as these sectors weakened.
A quick web search will take you to Aegis Financials’ website, where the fund managers’ letters serve as an advanced course in deep-value investing.
Deep-value investing is not for everyone.
It should be, but fortunately for the handful of us who embrace the concept, the idea of buying cheap stocks never takes hold with most peopleFor those of you who love bright and shiny things when it comes to investing, our next edition of the Hidden Profits Report will look into finding the very best tech stocks no one has ever told you about…
This dividend stock beat the market by 2,325% in the past 22 years!
It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.