Our Concentrated Deep Value Strategy

Investment Philosophy

We specialize in identifying deeply undervalued stocks enduring difficult business conditions and possessing qualities that attract activists and private equity investors.

Carbon Beach manages accounts according to strict deep-value investment principles. We employ a fundamental, bottom-up method of valuation, and a consistent investment process:

  • Deep value investment: Value investment is a method of security analysis pioneered by Benjamin Graham, and popularized by his former student, Warren Buffett. Graham’s Security Analysis (1934) offered the foundational insight that the market price of a security is distinct from its intrinsic value, which can be calculated by analyzing a company’s financial statements, and business prospects. If the stock trades at a sufficient discount from its intrinsic value to provide a margin of safety it can be purchased. Over time its price will revert towards its intrinsic value, and the stock should be sold. We focus on balance sheet value; corporate acts and management / board of directors’ impact on value
  • Concentrated: We invest with conviction, holding only our best ideas. Our portfolios hold sufficient positions to reduce the risk of loss from any individual stock, but few enough to capture outperformance. As a result, our performance will be highly idiosyncratic
  • Engaged: We seek a dialogue with the managers of our portfolio holdings, pushing for the highest standards of corporate governance, and recognition of shareholders’ rights.
  • Consistent, disciplined portfolio management: Our investment process seeks to avoid behavioral errors and cognitive biases
  • Evidence-based, research-intensive process: We conduct research into security valuation and portfolio management, and invest on the basis of those findings–not on conventional wisdom.

Investment Process

Carbon Beach builds our portfolio by following an investment model developed following extensive research detailed in the books Concentrated Investing (2016), Deep Value (2014) and Quantitative Value (2012):

  1. Universe: Carbon Beach starts with a universe of approximately 3,000 U.S. stocks and ADRs with a market capitalization between approximately US$250 million and US$3 billion. We avoid the regulated returns of utilities
  2. Forensic credit and accounting analysis: We eliminate stocks at highest risk of financial distress, earnings manipulation, fraud and short raids because they offer no margin of safety
  3. Valuation: We identify stocks trading at the greatest discount from intrinsic value using an ensemble of value metrics, but primarily the Acquirer’s Multiple® (introduced in Deep Value and Quantitative Value). We seek real businesses with strong operating earnings and balance sheet protection. We examine the best security to express a position, either option or equity
  4. Legal and corporate diligence: To identify near-term catalysts, we conduct a diligence process, examining capital structure issues including off-balance sheet and contingent liabilities, historical income statement write-downs; corporate issues including management and board history and attitude towards shareholder value; and activist 13D filings
  5. Engagement: We review each position’s prospects for constructive engagement to more rapidly close the price-to-intrinsic value discount
  6. Portfolio formation and rebalancing: We form a portfolio of stocks possessing the best combination of value and potentiality for a near-term catalyst, rebalancing towards the best opportunities

Shareholder Engagement

Carbon Beach is an engaged shareholder, seeking from the managers of portfolio holdings the highest standards of corporate governance, and recognition of shareholder rights. We believe that engagement is the best method of enhancing and accelerating value creation for all shareholders:

  • We are engaged shareholders, not activists: There is an important distinction between being engaged and activist. Where an activist may run a public campaign, we prefer to operate behind the scenes and engage directly with management, respectfully and constructively. We may broaden the discussion of our investment thesis and proposals with other shareholders through the financial and social media where appropriate
  • We are determined, but not obstinate: If the model tells us to sell, we’ll sell out mid-engagement. Activists can become beholden to positions that they have publicly criticized, believing that to sell out is to lose. If we make a mistake, or the prices rises to our target, we sell and move on whether the company has responded or not
  • We seek to maintain liquidity: We’ll never take a step that limits our ability to trade and sell out at a time that suits us
  • We seek simple, obvious win/win outcomes: We target companies where simple, obvious changes can have outsized results, whether it be an operational restructuring through better working capital management; an improvement in corporate governance; or more efficient use of cash (M&A, share buybacks, dividends, debt reduction)

Choose Your Portfolio Strategy

One deep value equity strategy expressed two ways.

Concentrated Deep Value

A highly concentrated long-only portfolio of ten (10) to fifteen (15) deep value U.S. equities and ADRs with a catalyst in the tradition of Graham and Buffett. The strategy is highly idiosyncratic and not managed with the objective of achieving a particular return relative to a benchmark index. However, to compare the performance of the strategy with a measure of performance, reference may be made to the HFRI EH: Fundamental Value Index over a over a three-to-five year horizon.

Hedged Deep Value

Hedged exposure to our Concentrated Deep Value strategy. We use a market-timing model to determine when to fully hedge the long portfolio by selling the index. The strategy is highly idiosyncratic and not managed with the objective of achieving a particular return relative to a benchmark index. However, to compare the performance of the strategy with a measure of performance, reference may be made to the HFRI EH: Fundamental Value Index over a over a three-to-five year horizon.

More Information About Our Deep Value Strategy

If you’d like to learn more about our deep value strategy or our portfolios, join our private list and we’ll send you our investment guide and keep you up-to-date with our performance.

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Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Wiley Finance)

Cover of Deep Value

From the Inside Flap:

Deep Value offers investors an authoritative exploration of the philosophy of deep value investment. Written by Tobias Carlisle—an active value investor and the well-known blogger at greenbackd.com—this important resource describes the evolution of the various theories of intrinsic value and activist investment from Benjamin Graham to Warren Buffett to Carl Icahn and beyond. Filled with engaging anecdotes and meticulous research, the book illustrates the principles and strategies of deep value investing and examines the counterintuitive idea behind its extraordinary performance. Deep Value is a practical guide that reveals little-known valuation metrics that activist investors and other contrarians use to identify attractive, asymmetric investment opportunities with limited downside and enormous upside.

Tobias Carlisle presents an insider’s perspective on valuation and activism in a format that is accessible to both professional and general investors. The value investment philosophy as first described by Benjamin Graham initially identified targets by their discount to liquidation value. This approach has proven extremely effective; however, those opportunities have all but disappeared from the modern stock market. To succeed, today’s deep value investors have adapted Graham’s philosophy, embracing its spirit while pushing beyond its confines. In Deep Value, Carlisle examines Graham’s 80-year-old intellectual legacy using modern statistical techniques to offer a penetrating and highly original perspective: that losing stocks—those in crisis with apparently failing businesses and uncertain futures—offer unusually favorable investment prospects. As the author demonstrates, the evidence reveals an axiomatic truth about investing: investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings.

Deep Value shows the place to look for mispricings—in calamity, among the unloved, the ignored, the neglected, the shunned, and the feared.

Buy the book at Amazon.