Yahoo Finance Glenn Greenberg: The best value investor you've never heard of
You've probably never heard of a value investor called Glenn Greenberg. Once named as 'the next Buffett', Greenberg's returns over the past few decades have been almost second-to-none. His fund, Chieftain Capital Management returned 25% per annum on average, before fees from 1984 to 2000, while the S&P 500 returned 16% per annum on average over the same period. Up until 2008, Greenberg had achieved a record that was as good as, or better, than that of Warren Buffett.
Different approach
Like Buffett, Greenberg wants to buy 'good' businesses, those that are unchallenged by new entrants, have growing earnings and are not likely to be technologically undermined. Additionally, Greenberg sees himself and his partners as owners of a business and its cash flows, so rather than using relative valuation metrics, he values potential investments using discounted cash flow models.
You can find Stockopedia's own discount cash flow calculator here. Typically, when assessing companies using the DCF method, investors require a return of at least 9% to 10%, for blue-chip stocks, in order to compensate them for the risk they are taking. Greenberg on the other hand uses a hurdle rate of 14% to 15%, lowered from 20% to compensate for the current interest rate environment. The higher than average discount rate of 14% to 15% is Greenberg's margin of safety -- in this respect he is similar to many other value investors.
Greenberg is an investor not a trader. He believes that investors should invest looking for businesses with slow, steady rates of growth, not high risk, high reward trades. Companies that return plenty of cash to investors are also favourable.
Alongside the DCF analysis, Greenberg's investing criteria are simple:
Greenberg generally invests upwards of 5% per security and the average number of positions in his portfolio over the years has been around 12. It is not uncommon for Greenberg to devote around 20% of his portfolio to a single security. As of November 2014, Greenberg's top three holdings represented almost 55% of his, and his partners' portfolio. The top five holdings account for 72% of the entire portfolio.
The holdings
Valeant Pharmaceuticals is currently Greenberg's largest holding, accounting for 32% of assets under management. Second is Express Scripts Holding Co, which currently accounts for 13% of the portfolio.
Express Scripts provides healthcare management and administration services on behalf of its clients. Those clients include insurers, government agencies and workers compensation plans. There are few companies that are able to effectively compete with Express Scripts, as the company is the industry's largest player.
Over the past few years the company's growth has been explosive:
And cash generated from operations has grown at a similar rate:
It's possible to use Stockopedia's discounted cash flow calculator to figure whether or not Express is still cheap at present levels.
Over the past ten years Express Scripts' free cash flow has grown at a CAGR of 24.2%. According to Stockopedia's figures, cash flow is expected to grow at a rate of 13.9% p.a. through to 2018, then 8.5% p.a. through 2022 before settling into a long-term growth rate of 3%. The company's current sustainable free cash flow is $4 billion, and according to Greenberg's figures, investors require a return of 15% for the risk they are taking.
Using these figures, it seems as if Express Scripts is overvalued at present levels:
The third largest holding, weighing in at 9.3% of Greenberg's portfolio is VistaPrint N V. Fourth, accounting for just over 9% of the portfolio is Charles Schwab, a savings, loan and financial services' holding company.
As one of the biggest stock brokers for private investors within the U.S. and indeed the world, it's easy to see what Greenberg sees in Charles Schwab. The company is a great play on the recovering stock market, or it has been over the past five years as investors have returned to the market.
Greenberg started buying Schwab during 2012 at $12.50. Once again, after factoring in a discount rate of 15% in the DCF calculation, Charles Schwab looks to be rather expensive at present levels.
Weighing in fifth, accounting for 8.4% of Greenberg's portfolio is Kinder Morgan Management LLC. This is just one of the many companies that make up the Kinder Morgan empire, a multi-billion dollar group of business that control natural gas and oil infrastructure around the U.S.. The huge size, dominant market position and critical infrastructure nature of Kinder Morgan means that the group has a wide margin of safety. It was recently announced that the many branches of the Kinder Morgan empire would merge.
Weighing in sixth, at 8.3% of the portfolio is Microsoft and once again, it's easy to see why.Microsoft has a dominant market position, generates an impressive free cash flow and has a hefty cash balance. Microsoft was given as an example of the perfect company, in Joel Greenblatt's The Little Book That Beats the Market.
As a dominant player in the tech world, Microsoft's is able to achieve and sustain market-leading returns on capital and cash generation, which when compounded over the long-term, translates into rapid book value and share price growth.
Over the past six years Microsoft's book value has expanded at a CAGR of 17.8%, its cash balance has expanded at a CAGR of 22.1% and thanks to stock buybacks, book value per share has expanded at a CAGR of 19.7%. The company currently has a net cash balance of $65 billion.
Conclusion
Greenberg's strategy is simple, find great businesses with a wide most that generate plenty of cash. If you want to screen the market for your own Greenberg bargains, Stockopedia has all the tools you need. You can find out much more about Stockopedia right here. Why not take a free trial to get started.
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Read more investing articles & commentary from Rupert Hargreaves
