Solid as an OAK - Broyhill Asset Management
2033
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Solid as an OAK

Over the past couple of months, we’ve reviewed some common behavioral errors made by investors in The FourFold Pattern and Buffet vs Modigliani-Miller, explaining that:

Students of Modern Portfolio Theory are encouraged to take more risk in exchange for higher returns. But good students know there are exceptions to every rule. Low-risk stocks have substantially outperformed their high-risk peers measured by any yardstick over time.

Investing in high quality companies is an easy decision for us given today’s highly fragile economic landscape. At the same time, we can exploit the persistent opportunity offered by more certain profits, along with the average investor’s lack of interest in these boring businesses. Despite the obvious benefits of this approach, not many have the willpower to stay true to the concept. Investors crave excitement. Stability is simply not exciting. As a result, many find it hard to resist the temptations of hugging the benchmark, following the herd, or going for a little excitement even if it’s “just for a second, just to see how it feels.” We are quite happy with boring when it comes to equity investing. We prefer to focus on exceptional companies rather than speculate on mediocre businesses with uncertain futures.

Today, we are sharing our investment thesis in once such exceptional company, trading at a significant discount to our conservative estimate of intrinsic value. The presentation embedded below was initially prepared for a discussion with the Bowden Investment Group at Appalachian State University.  As a mentor to the school’s CFA Institute Research Challenge Team, I fully expect that these students are now equipped to win their second consecutive challenge in North Carolina.  Let’s shoot for the America’s this year, team!

Solid As An OAK

Bottom Line:

Ideal investments are those few high-quality businesses run by superior management teams with significant ownership interest, favorable industry tailwinds, and a visible catalyst to realizing value. We believe OAK demonstrates all of these characteristics and currently trades at a significant discount to our estimate of intrinsic value.

Management has consistently exhibited great skill in raising capital when investment opportunities are abundant and has demonstrated a consistent ability in investing capital at superior risk-adjusted rates of return. Put simply, this is OAK’s moat and represents a unique and sustainable competitive advantage in the industry.

OAK is recognizably the preeminent credit manager in the alternative investment industry, which is growing at rates above the broader asset management sector as institutional investors sacrifice liquidity for higher returns in today’s low-return landscape. We expect accelerating cash distributions in 2013 and 2014 to serve as a catalyst for increased investor attention. As OAK harvests gains produced by the seeds sown during the last crisis, we believe the shares should be rewarded with a higher multiple in line with its traditional peers.

Disclosure: Long OAK.