“I like to joke that I have a small brain that turns at high RPMs.”
Don’t let the easy-going, good ol’ boy charm fool you. Yes, when not in the office, you’ll find Mark Travis competitive skeet shooting or surfing waves off the Northeast-Florida coast. The Jacksonville-based money manager went to the University of Georgia, and loves SEC football and Tim Tebow (can this guy get anymore cliché?).
However, raise the topic of investment management, particularly the small-cap space, and the “aw shucks” attitude quickly fades. His command of the sector makes him deadly serious. He has to be, after all; to outperform in notoriously volatile small caps takes some doing. The fact that he focuses on fixed income tempers that volatility somewhat—but only somewhat.
Intrepid Capital Fund (ICMBX) has a one-year total return of 10.95%, a three-year total return of 9.79% and a five-year total return of 8.54% (as of Dec. 31, 2012), ranking it in the top percentile of its Morningstar category. The Intrepid Small Cap Fund (ICMAX), which he co-manages with Jayme Wiggins, has a five-year total return of 12.45% (as of Dec. 31, 2012).
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“We run four ‘40 Act no-load mutual funds and a long/short partnership here,” he explained when asked about the firm’s philosophy and process. “We try to find the most undervalued equity and pair them off with very overvalued equity. That’s largely been the retained earnings of this firm since we started.”
By started he means 1994. Today, the firm has $1.4 billion in assets and 17 employees; half of them devoted to securities analysis and trading, and the other half to the firm’s RIA and private client business.
“I feel the investment advisor’s pain,” he said. “The first decade of our existence we dealt with private clients, so I know the emotional roller coasters their clients go through.”
Travis said he understands that clients don’t care what happened between point A and point B. He knows they’re prone to buying high and selling low, and tries to have a deliberate, disciplined process that’s low in volatility to “wake up every day with a little bit more money.”
“The process is not sexy; it’s really a lot of reading,” he noted. “It’s going through the 10Ks and the 10Qs and trying to ascertain what the free cash flow is to the enterprise and what that valuation would be. Our estimate of value is more conservative than our peers. In deriving the valuation using the discounted cash flow calculation, we use a double-digit return for what you hope to earn coupled with a low assumption for growth rate. Therefore we tend to capitalize cash flows at a higher number and end up with a lower valuation. We think that should be double-digit; we think you need to be rewarded for taking less liquidity and smaller-business risk.”
Ask him where he’s currently finding alpha, and he wastes no time naming names, highlighting the energy sector.
“Particularly since the spring when natural gas prices hit $2 per McF (an abbreviation for a thousand cubic feet of natural gas),” Travis began, “I think the economics of it, at this point, don’t make sense below $4 per McF for other companies. So one company is Bill Barrett Corp., an energy company whose core business is natural gas and oil exploration, which is trading in the high teens; we think we can get into the mid-30s.”
Another name he’s recently revisited is Patterson UTI, a company with “around 230 rigs. The beauty of their business is that the rigs are mobile. So as some of these producers decide, ‘Hey, this is not economical at today’s gas prices,’ they can move that rig and begin drilling for oil instead.”