Sarbit Advisory Services follows a strict investment discipline that calls for extremely intensive research into companies before we buy, with an eye towards protecting and enhancing your investment.
Unlike many investment funds, at Sarbit we do much more than model a company’s financial statements and market expectations. They tell only one limited part of the story. We invest significant resources to help us dig deeply into the layers beneath the corporate façade.
Looking for red flags
Our internal team, in addition to, not one, but two Information Research Specialists focus on:
Corporate Integrity – legal and press searches on management/company
A company may appear to be a bargain from examining the financial statements. However, we believe it is necessary to check on their corporate history – has there been wrongdoing on the part of the company; criminal behavior where convictions have taken place? A press check helps us identify if the company has behaved in an unethical manner, although not necessarily illegal activities but ultimately, not in the best interests of shareholders.
Power of the company’s business model
Has the company demonstrated that they have the characteristics we look for: sustainable competitive advantage, growing free cash flow generation, etc.?
Management track record
This is a critical element in investing in a company. Who is minding the store; where have they worked before and do they have history of achievement? In other words, are they the right people we are happy to have managing our business?
Ongoing discussions with unique
experts, clients, suppliers and peers We utilize individuals whose expertise is in the field of finding such people who can answer important questions about factors that will have an impact – both positive and negative – on the company and its future.
We believe that avoiding potential pitfalls is a fundamental aspect of capital preservation and growth over time – which is our ultimate focus at Sarbit.
At the end of our identification of a business to purchase, we believe we have identified an “Equity Bond”. This combination of these two terms: “Equity” and “Bond” produces a new concept.
Separately, they are different investment vehicles. Bonds are debt instruments, which have coupons, printed on their certificates informing the investor what the return will be. An observer is able to calculate their return fairly accurately assuming the bond is held to maturity. On the other hand, equity certificates do not have coupons identified on their share certificates. Of course, there is a “coupon” or return in a common equity but it’s not identified anywhere. It is the investor’s job to determine what that yield is going to be. In our experience over the decades of investing, we have learned that in reality there are very few companies where future returns can be identified. With most businesses, profits (or losses) can only be identified in the rear view mirror. And, even when we find an “Equity Bond”, we are happy if we can identify what the range of return will be. The fact is, it is nearly impossible to derive an exact figure; an approximation is good enough.
Thus, our goal is to identify companies with bond-like characteristics; companies where we are able to predict with some degree of accuracy the future range of returns over the next several years. Only then, can we determine the approximate value of the business and know whether we are paying a bargain price.
Surveying the Market: The Rent-A-Center Story
When a company’s public statements raise doubts about their truthfulness, we will undertake our own extensive market surveys to find out what’s actually happening in the marketplace.
A case in point is the story of Rent-A-Center. This huge company rents furniture, appliances and electronics to the public through a chain of more than 2,700 stores in the United States. They’re a powerhouse in their sector but at one point they issued an earnings warning, claiming that they would not achieve their financial targets. The reason? The company blamed gasoline prices. But at that point in time petroleum prices had only gone up marginally.
The company’s public statements didn’t ring true to us and so we decided to check directly with their stores. We contacted dozens of their retail outlets across the U.S. in a lengthy survey. 85% of them gave us a different story than the company line. Far from gasoline prices being the problem, their store managers said the company’s troubles came from their next biggest competitor, Aaron Rents. Aaron’s was undercutting their prices and advertising that to the public.
So, we went back to Texas and confronted the executives at Rent-A-Center. They didn’t have much of an answer for us. Traditional fund companies had never gone to such lengths to question them. Their only response was to ask us for the names of the store managers who had spoken to us! Our response was to sell our shares in Rent-A-Center.