This is part one of a two-part interview with Ben Struble of Strubel Investment Management, part of ValueWalk’s exclusive interview series. Throughout this series, we are publishing weekly interviews value-oriented hedge fund, and asset managers. You can find links to the rest of the interviews in the series below:
Interview With Scott Miller Of Greenhaven Road Capital [Part One]
Interview With Scott Miller Of Greenhaven Road Capital [Part Two]
Steven Kiel Of Arquitos Capital Talks NOL Investing [Part One]
Steven Kiel Of Arquitos Capital On Firms With Valuable NOLs [Part Two]
Interview With Joe Koster Of Boyles Asset Management [Part One]
Joe Koster Of Boyles Asset Management On Cambria Automobiles [Part Two]
Elliot Turner, CFA Of RGA Investment Advisors On Checklists [Part One]
Elliot Turner, CFA Of RGA Investment Advisors: eBay Special Situation [Part Two]
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Strubel Investment Management independent fee-only full-service wealth management and financial planning company. Founded by Ben Strubel in 2009, the firm’s investment philosophy is based on three important premises: low investment costs, asset allocation, and sound fundamental analysis.
Strubel Investment Management invests in companies that have unique advantages, such as producing or providing useful consumer products or services, a strong brand name or important intellectual property, providing a good or service at the lowest price, or having a pseudo monopoly. And most importantly, before initiating a position Ben Strubel always insists on a margin of safety: The company’s stock must be purchased below its intrinsic value.
The interview is divided into two parts – sign up for our newsletter to ensure you do not miss part two.
Ben Strubel
Rupert Hargreaves: How’s Strubel Investment management different from other asset managers?
Ben Strubel: Well, I think our biggest difference is how we go about managing client investments. We try to bring institutional quality asset management to everyone, not just big clients. So, rather than putting together a portfolio of mutual funds or ETFs, we make the investment in individual stocks and bonds in client accounts. We’re the ones managing the portfolio. We also provide comprehensive financial planning services, a sort of one-stop-shop for at least everything on the investment side of financial planning.
We’re the only one managing the account, not farming it out like you’d see at other wealth managers.
RH: How do your Spoke Funds fit into that?
Ben Struble: Spoke Funds is a term to differentiate what we do, and better explain to clients who are just used to mutual funds. We have two main Spoke Funds, one that’s conservative, and one that’s aggressive. Those are the hubs, and that’s where I have my money invested; I invest alongside clients.
Each client account is linked to these funds. So, for a retired client that’s looking for income, the stock portion of their account would be linked to the more conservative dividend fund. For a client who might be moderately aggressive, they might have the stock portfolio of their portfolio, 50% in the conservative portfolio and another 50% in the more aggressive fund. It’s a way to think about how we manage accounts, and building each client's account out of the building blocks we have for each fund. We fill in the rest with bonds or cash, whatever the client is looking for.
RH: What are you looking for in stocks you pick for these two funds?
Ben Struble: The aggressive fund is a bit simpler in terms of stock selection. The main screening criteria we use is for companies that are trading cheap but also have high returns on capital -- based on Joel Greenblatt's Magic Formula. We this screen as a starting point.
However, right now with the market valued a lot higher than when I first got into the business, I've started to look at special situations more. If it's a good business that's been managed badly and an activist investor has come on board we're interested. We have a couple of situations like that.
Moving onto the dividend portfolio, we looking for the same sort of thing but for companies that pay dividends. We’re not just looking for high dividend yields here; we’re also looking for a low payout ratio. We want a company to have room to grow the dividend.
The dividend cover ratio actually tells you a lot about a business. For example, a high payout ratio may signal that the company has reached maturity; that’s it’s struggling to find places to reinvest its cash. That’s the initial screening criteria, which gives me a rough idea of where I’m going before I start to dig deeper.
RH: Can you expand on your aggressive fund strategy a bit more?
Ben Struble: Sure, there two main categories of investment we look at. Firstly, if the market has marked down the value of the company, and we can categorically prove that the market is wrong -- that’s something we’d be interested in.
To give an example, a couple of years ago defense contractors were marked down by the market due to impending budget cuts. If you went and looked at some of the Department of Defense documents, where they spelled out what they were going to do, where they were going to make the savings and where they were going to reinvest those savings, you could see a big portion of the savings came from personal savings, such as troop benefits, admin costs, etc...
Some of the savings were earmarked to be re-spent on new weapons systems and upgrading the old systems. Another point here is that most people failed to realize that the defense budget is broken down into two parts. There's the standard budget, and then you have the OCO or the Overseas Contingency Operations budget, which is the war in Iraq and Afghanistan, etc…, The OCO budget is used as a slush fund to make up for cuts in the base budget. In other words, cuts to the base budget were offset by additional contributions from the OCO budget. With this situation, you could see that if defense sector revenues went down, they weren't going to fall significantly as the military would use the OCO budget to make up for budget shortcomings.
Take Lockheed Martin for example. If you did a reverse DCF or even basic P/E multiple and looked at what the market was saying...If I remember correctly, using the DCF the market was saying that the company would experience a free cash flow contraction of 5% p.a. for five years, which seemed pretty ridiculous based on the budget documents. You could be fairly certain that what the market was pricing in wasn’t going to happen. We like situations like that.
The second thing that would make me say “yes” would
The post Ben Strubel Of Strubel Investment Management On Lockheed Martin And Darden Restaurants [Pt. 1] appeared first on ValueWalk.
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Rupert may hold positions in one or more of the companies mentioned in this article. You can find a full list of Rupert's positions on his blog. This should not be interpreted as investment advice, or a recommendation to buy or sell securities. You should make your own decisions and seek independent professional advice before doing so. Past performance is not a guide to future performance.