How A Great Value Stock Is Like A 6-Foot Tall Second Grader

Forbes June 30, 2015 0

When Chuck Myers’ scans the stock market these days, he doesn’t see an awful lot to get terribly excited about. That isn’t exactly shocking, considering Myers, portfolio manager of the $6 billion Fidelity Small Cap Discovery Fund, is a value investor operating in a bull market that has pushed stocks to record highs

When Chuck Myers’ scans the stock market these days, he doesn’t see an awful lot to get terribly excited about.

That isn’t exactly shocking, considering Myers, portfolio manager of the $6 billion Fidelity Small Cap Discovery Fund, is a value investor operating in a bull market that has pushed stocks to record highs. The lack of exciting opportunities is best viewed through the lens of his fund’s turnover, which was above 100% in 2009 as he flipped the fund’s entire portfolio, buying up home builders, auto dealers, REITs and other battered stocks poised to lead the market out of the crash.

These days that turnover has shrunk, running at 10-15% and reflecting a market in which most stocks are fairly valued or expensive, with fewer compelling stocks of the type Myers typically targets.

(Credit: Chris Lyons for Forbes)

Fidelity’s Chuck Myers. (Credit: Chris Lyons for Forbes)

The term he uses is that every stock he buys need to be “an order of magnitude better” than one in his current portfolio. That’s industry jargon that means each holding needs to really stand out, “like a 6-foot tall second grader,” as Myers puts it.

A married father of three boys, Myers has sons in kindgergarten, second grade and third grade. “I sort of know how tall a second-grader is,” he says, generally around 4-feet tall. So it would be pretty striking to see a class of second graders with a 6-footer in their midst, and that kind of jarring juxtaposition is the point he’s driving at.

“That’s how I think about investing. I’m looking for the 6-foot tall second-grader where it looks so different from everything else in the market it’s sort of obvious.”

Those opportunities are few these days, as shown by his portfolio’s low turnover. Myers said he’d be happy to trade more in order to take advantage of opportunities, but in a market with low volatility and highly-correlated stock moves, he’s content to sit on his hands and focus on minimizing costs and taxes. “Because I know a volatile opportunity will come out at some point, and when the opportunity arises we’ll take our hands out from under us and figure out what stocks look like six-foot tall second graders.”

Myers, one of the New Money Masters featured in the recent Forbes Investment Guide, grew up the Cleveland suburb of Parma, Ohio, participating in investing competitions after initially being exposed to finance through a sweetheart deal with his podiatrist father: pick an investment, keep any returns, and dad will eat the losses.

Even then, Myers steered toward less-illuminated corners of the market. His first pick was an Australian closed-end bond fund called First Australian Prime Income. He also bought shares in companies like textbook publisher Houghton Mifflin.

During his undergraduate years at the University of Pennsylvania’s Wharton School, Myers interned at a local Morgan Stanley Morgan Stanley office in Philadelphia. After completing his five-year program with an MBA, Myers sifted through a number of offers before deciding to join Fidelity as an analyst for small-cap equities.

From his first investments as a pre-teen, Myers has been drawn to small caps, mostly because so many dismiss them. What reinforced that view more than anything was the brief period of Myers’ career at Fidelity spent hunting larger game.

A few years after starting, he spent a two-year stint in London. The assignment: covering large-cap European telecom companies.

It didn’t take long for Myers to realize he was out of his comfort zone. What stands out is a day spent at Vodafone’s Vodafone’s investor day, held in London’s Savoy hotel.

“It was in a ballroom that held a thousand or 1,500 people and every seat was taken,” Myers recalls. “I walked in and said ‘you know what, this isn’t my game.” He figured that rather than competing to know more about a big company, he’d focus on digging for treasure among the small, unloved stocks Wall Street couldn’t be bothered to consider.

The results speak for themselves. Since taking over Fidelity’s Small Cap Discovery Fund in 2006, Myers has topped his benchmark and most peers, beating the Russell 2000 over the last three, five and 10 years. The fund closed to new money in 2013.

Myers considers Joel Tillinghast, his assigned mentor on day one at Fidelity, to be among his most important mentors. Tillinghast was then early on in the legendary track record he’s built at the Fidelity Low-Priced Stock Fund, which has delivered an average annual return of 14.4% since 1989.

Benjamin Graham, the father of value investing and mentor to Warren Buffett, famously believed that any investment analysis requiring more than simple arithmetic was not worth the effort, and Tillinghast passed along similar lessons that Myers still applies today. One example: trying to sort through the wreckage from the collapse in energy stock.

“Trying to figure out energy is like doing multi-variable calculus, and I’m trying to focus on companies where [the investment case] is obvious with simple arithmetic,” he says.

During the financial crisis, for instance, auto dealers were trading at 4-5 times earnings, incredibly cheap, and auto sales were at levels that appeared unsustainable in anything but a Depression scenario. With energy though, Myers says he has no idea whether the “right” price of oil is $90 a barrel, $60, or anywhere in between or outside the two.

“I’ve been wanting to pick away at [energy companies], but I’ve been very selective,” he says.

A key mentor outside Fidelity has been the billionaire founder of Baupost Group, Seth Klarman. Myers has gotten to know his fellow Boston-based money manager over the years, but says most of the lessons he has gleaned come from Klarman’s hard-to-find book “Margin of Safety,” something of a sacred text among value investors. A used copy currently listed on Amazon carries a $1,499.95 asking price; Myers snagged his copy for around $400 a couple decades ago and got Klarman to add his signature. The inscription – “To Chuck, May all of your investments have a margin of safety, Best Regards, Seth Klarman” – is something of a touchstone.

The margin of safety concept illuminates some of Myers’ current thinking on the market. For instance, the housing and automotive industries were both huge winners for Small Cap Discovery coming out of the financial crisis, but Myers has cooled on the latter.

Myers’ stance generally leans toward the defensive, but after having lost less than the market in 2008 he knew the stocks that protected him from the worst of the downturn wouldn’t be the first to rebound.


Article originally posted in Forbes website.

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