Quick Take: The Aegis Value Fund (AVALX) has lagged its peers by a bit lately, but it has stayed well ahead of them since its inception five years ago.
This year through last month, Aegis Value was up 18.3%, versus 19.7% for the average small-cap value fund. But for the five years ended in July, it gained 17.6% on average, compared to 7.7% for its peers.
Scott Barbee, the fund’s lead manager, describes himself and the other members of his team as “deep value” investors, who look to buy stocks selling at severe discounts to what they think a company is actually worth.
The managers focus on very small companies and have no qualms about sitting on a cash cushion when they can’t find stocks they like.
The Full Interview:
In a camp of money managers hunting cheap stocks, Scott Barbee’s tent would be pitched at the far end.
Barbee, who heads the team that runs the Aegis Value fund, looks for shares trading at deep discounts to what he thinks they’re actually worth.
“On the value axis, we’re at an extreme,” says Barbee, who oversees the fund with William Berno and Paul Gambal.
Initially, the managers focus on stocks trading for less than a business’s book value. Once that hurdle is cleared, their interest will be piqued by companies that buy back shares. Such repurchases can indicate that management wants to boost value for shareholders to its maximum, Barbee says.
Barbee also keeps an eye out for catalysts that can lift a stock, like a restructuring or an industry consolidation, and he likes to own companies that aren’t widely followed by Wall Street. These stocks, he notes, can soar once mainstream analysts begin tracking and recommending them.
Because of their modest size, many of the companies the fund owns don’t appear on major brokerage houses’ radar screens, Barbee says. While the managers trawl for big bargains, they buy little companies: those with market caps of up to $1 billion. “We tend to be on the smaller side of small,” he says.
Although the fund’s performance has at times led investors to flood it with cash, the team won’t rush to put the money into stocks and will hoard dollars if it can’t identify enough investments it deems suitable, Barbee says.
The market rally that began this spring has caused the fund’s assets to swell to about $260 million from $150 million five months ago, Barbee notes. At the same time, however, investment opportunities have “really dried up,” so the fund has doubled its cash allocation to 30% since March, he says. Those assets include money invested in the fund by Barbee and his co-managers.
One stock the manager’s have been adding to lately is Amer Pacific (APFC), a specialty chemical maker that produces a component of fuel for booster missiles and rockets, including those used in the space shuttle program.
The stock, which ranks fifth in the portfolio, got beaten down after the accident that claimed the Columbia in February cast doubt on the future of the program. Barbee, though, thinks flights will resume next year, which would put American Pacific in position to benefit if they do. The fund increased its stake in the company in late June, he says.
The fund has also been buying more shares recently of Standard Commercial (STW), its top stock. The company buys and processes tobacco that it sells to cigarette makers.
“In a market where everything else has kind of run up, these kind of companies have been very stable cash generators,” Barbee says, adding that they look “very solid.”
The fund, Barbee says, upped its stake in Standard in the second quarter, when tobacco-related stocks weakened because of litigation confronting Altria Group (MO). Altria’s Philip Morris USA unit had been ordered to post a bond while the subsidiary appealed a $10.1 billion verdict against it in a class-action suit related to its “light” cigarettes.
Barbee, though, does not see the legal problems affecting suppliers like Standard.
That Barbee is willing to stick with a troubled company if he thinks it has potential is illustrated by the fund’s investment in Luby`s Inc (LUB), a restaurant chain that has been having financial difficulties and that Barbee cites as one of the stocks that hurt the fund’s performance earlier this year.
Even if Luby’s is forced to declare bankruptcy, the value of its real estate alone is “tremendous,” and its stock, which has been recovering, is still trading at a “significant” discount to the worth of those assets, Barbee says. He is also confident that Chris Pappas, Luby’s president and chief executive officer, can turn the company around.