Q: Would you tell us about the history of the Croft Value Fund?
A : We expanded our business from separately managed account management to mutual fund products with the launch of Croft Value Fund in May 1995.
Croft Leominster, Inc., the advisor to the Croft Value Fund, was founded in 1989 by my father Gordon Croft and brother Kent Croft. We are based in Baltimore, Maryland and my brother Kent and I manage the fund with the help of five research analysts.
Currently, the firm manages $830 million, of which $300 million is the asset base of the Croft Value Fund.
Q: What core principles drive your investment philosophy?
A : We are a family-owned management company investing along with our investors. In other words, our interests are aligned with those of investors in our funds.
Although we prefer to hold on to the companies for at least three years, we may sometimes hold them for periods longer than five years. Since we look for out-of-favor companies that offer longer term value, we are prepared to hold them until the value is realized in the market price.
As contrarian investors, we are not afraid to take views that are not in sync with Wall Street or the popular view in the marketplace.
Q: How does your philosophy translate into the fund’s investment strategy?
A : To start with, we look at one stock at a time and consider ourselves bottom-up investors. Our long term investing orientation enables us to consider stocks that may be in unpopular industries or neglected by investors. Furthermore, we believe that value is not limited by the market capitalization, so if we can understand a business and if the stock meets our value criteria, we will purchase the stock regardless of market cap.
In general, we pursue the following types of companies. Those that are trading at a discount to their intrinsic value, those that are at a distressed multiple of earnings, or names that seem to be temporarily out of favor due to short term issues.
Our contrarian approach to investing helps us in evaluating companies that possess earnings power. However, when a company is out favor because of a temporary problem it may offer us good value too. These companies may be suffering from a product launch delay, management turnovers, market shifts or many other issues that are short-term in nature and can be solved in few quarters. Yet, investors are not willing to wait for the management to rebuild the broken trust and they may avoid buying the stock.
In addition to buying out-of-favor stocks at a discount to their net assets, we also screen for companies whose inherent business model allows them to regain earnings and revenue growth. Ideally, we seek companies that can eventually grow organically.
There are two potential developments when companies that were once off the track could regain their momentum. First, investors recognize the earnings power of the company and start bidding up the stock, and, second, earnings multiples start expanding. Consequently, both reactions of the market lead to increasing the stock price.
Q: How do you research companies?
A : For our idea generation we primarily rely on our internal and external experts. Additionally, we receive a lot of research reports from brokerage firms on Wall Street and from independent research providers. We scrutinize these reports for broader themes, market dynamics and general trends.
Once that information becomes available, we begin our analysis by focusing on companies with business models that demonstrate earnings power and that we understand well. As part of our research process, our internal team of analysts meets every Monday to put forward new ideas for discussion. Additionally, we like to visit companies and meet management.
We look for companies with the potential to grow at a faster than expected rate and with the financial strength to weather a downturn in the economy or at an industry level. Although we traditionally evaluate companies based on earnings multiples and cash flows, we also want to find stocks with near-term earnings catalysts and valuations that do not reflect the earnings power of the company.
Our preliminary watch list comprises 200 companies that we generally follow by keeping a close eye on their business development and stock prices. However, we do not run any specific screens all the time.
Q: Would you illustrate your research process with some examples?
A : One good example is Valmont Industries, Inc., a global producer of fabricated metal products and irrigation equipment.
Valmont makes high end irrigation systems that save farmers 50% of the water usage while increasing their crop yields. We bought Valmont back in the spring of 2009, when the valuation was much cheaper and we estimated a good growth rate going forward.
Initially, we identified the stock after talking to some analysts, before spending a lot of time to learn about the company and the industry. When we acquired the stock it was trading at a multiple of less than six and since then it has appreciated a lot.
The stock is neither cheap, nor expensive, and it is currently trading at 12 times earnings. However, we still believe that the company can further sustain its earnings growth as farmers look for ways to improve crop yields and cut operating costs.
Q: Would you give another example?