Additional Information for Service Professionals
Journeyman collaborates fully with a client’s attorney, accountant and tax advisor, insurance broker, estate administrator and other service professionals. Journeyman also cooperates closely with investment consultants, union fund business managers and similar professionals. The following information provides greater insight into the Journeyman investment process:
1. Journeyman Resources
Journeyman accesses macro-economic, secular trend and individual company research, directly and indirectly, from numerous sources, including:
2. Custodial Relationships
Journeyman maintains custodial relationships with the following custodians:
- Interactive Brokers
- Charles Schwab & Co. Inc.
- Fidelity Investments
- TD Ameritrade
- Goldman Sachs
3. Investment Screening Metrics
- Journeyman deploys a combination of fundamental, quantitative and technical analysis.
- Initial Equity Investment screening criteria include a three-year operating history, a market capitalization in excess of $50 million, and financial quality measures, including a three-year average EBITDA/debt service ratio in excess of 1.0.
- Fundamental Factors Journeyman may consider in evaluating an investment include:
- Attractiveness of Industry – Secular « Tailwinds », Maturity Stage of Industry, Company
- Company Product/Service Quality, Customer Acceptance, Uniqueness, Competitive Advantages
- Customer Retention and Growth
- Company History
- Management Quality
- Cost Structure
- Capital Allocation, e.g., attractiveness of prior acquisitions, use of leverage
- Company/ Industry Opportunities and Threats (risks, concerns)
Financial Metrics Journeyman May Consider Include:
- Revenue Growth
- Earnings Momentum
- Earnings Revisions (if any)
- Price to Earnings to Growth
- Price to Free Cash Flow
- Earnings and Share Price Volatility
- Relative Price to Earnings for Peer Group
- Debt Service Capacity
- Financial Leverage and Trends
- Normalized Returns on Equity
- Margin Trends
4. Portfolio Construction
- Journeyman constructs portfolios from the bottom-up, using the research process described herein. Client portfolios will have the following broad characteristics and will be diversified by industry, geography and size with the following parameters:
- Long portfolio will feature 12-20 positions: 8-12 core positions ranging from 5-12%, and 4-8 limited investment positions ranging from 1-3%.
- Short portfolio will feature 2-5 positions, typically ranging from 1-3% and depending on the opportunity set.
- Net exposure to emerging markets limited to 20%
- Net exposure to micro-caps (sub $200M market cap) limited to 30%
- No more than 30% net exposure to a certain industry
- Individual long positions not to exceed 15% of capital at cost
- As suitable to a particular client, Journeyman may deploy ETFs, low cost mutual funds or other strategies
- involving a low-cost third party manager (e.g., the Vanguard Total Return Bond Fund for a client seeking income.)
- Journeyman uses an IRR approach to determine position sizes for both core positions and limited investment positions. More capital is generally allocated to higher IRRs, on a risk-adjusted basis with potential for permanent capital impairment as the primary risk factor.
- IRRs are generally driven by the difference between current market value and estimated market value 2-3 years out assuming a reasonable exit multiple.
5. Risk Management: Sale Discipline/ Particular Spheres of Competence
- Sale Discipline.
- Journeyman sells for one of the following three reasons:
- An investment appreciates and the investment’s intrinsic value and market value converge, leaving an unattractive IRR;
- A better investment idea presents itself; or
- A mistake is made regarding the fundamentals of a business. Journeyman’s discipline requires an exit if an analytical error is made, regardless of how attractive valuation might be. Journeyman realizes losses (or under-performance) quickly in favor of superior investment opportunities.
- Particular Spheres of Competence.
- Journeyman invests only in companies with understandable business models and transparent financials, in order to limit risk-taking to management execution, market growth and valuation.
- Example: Journeyman avoids companies with opaque balance sheets and excessive financial leverage (e.g., financial institutions).
- Journeyman searches for high volume growth opportunities with proven business models in multiple industry sectors, including technology and biotechnology.
- Over the last 3 years, Journeyman’s largest investments have been in the following industries:
- Technology, including security monitoring
- Waste management
- Emerging market consumer growth industries, e.g., cellular technology, beer, packaged products
6. Investment Process Discussion: January 1, 2009–Present
Charles Hoeveler is JCM’s Chief Investment Officer. Charles and Bruce comprise JCM’s Investment Committee. JCM’s investment committee, in turn, draws on numerous knowledgeable individuals within the San Francisco Bay Area and Silicon Valley investment community, venture capital and private equity communities in making investment decisions. JCM uses a “team approach” in making investment decisions. The decision process is characterized by:
JCM engages in Comprehensive Research of Both Macro and Micro Risks….
- Macro analysis from leading economists and strategists
- Primary research on individual companies
- Management interviews (generally IR and finance departments of larger companies, C-level executives of smaller companies)
- Customer/supplier/competitor interviews independently sourced through business network and any other means
- Fundamental company and industry analysis
- Industry trends and competitive positioning
- Identifying secular tailwind
- Influence of technology
- Rigorous financial analysis
- Revenue and margin trends and ratio analysis versus competitors
…….Which Drives Investments in great businesses.
Example 1: January — March 2009.
- The macro environment in January-March 2009 was frightening. Global equity markets plunged daily due to fear of another Great Depression and 20-25% unemployment. Global financial companies were proving to be insolvent and requiring government assistance to survive.
- Out of a bleak environment, outstanding investment opportunities often emerge. Journeyman’s Strategy proposes to capitalize on rampant fear by making long-term investments in the world’s great businesses. The following are examples of investments made in the Strategy from January to March 2009, with the disclaimer that the purpose is not to claim to have ‘called a bottom,’ but simply that the long-term risk/reward to equities was skewed heavily in favor of reward:
- Google: 10x EPS for one of the world’s best business models growing organically at 20%+ through a recession and benefiting from secular tailwind of advertising spend moving online.
- Innospec: A fuel additives manufacturer purchased for roughly 4x forward EPS. Defensive business as people still drive cars in recessions.
- McGraw Hill: #1 positioned Education and S&P businesses trading at a historically low 9x EPS despite high ROIC.
- Canadian National Railway: Historically low valuation for a jewel railroad business with entrenched competitive advantage benefiting from a secular tailwind of higher oil prices driving costs up for the trucking industry.
- eBay: 9x EPS for the dominant online auction company seeing growth from the secular tailwind of increased e-commerce.
- Dr. Pepper Snapple: 9.5x EPS for the #3 company in one of the world’s great businesses, soft drink manufacturing, and benefiting from the tailwind of higher GDP growth in emerging markets.
Example 2: June 2009-December 2009
- By June 2009 it was clear that the economy was beginning a cyclical recovery from the lows of early 2009. The Strategy in a cyclical recovery is to hold positions already in the portfolio, selectively add investments and short when opportunities arise.
- The June 2009 – December 2009 time period featured low equity valuations, making most fundamental-driven shorts unattractive. As a result, the portfolio maintained a bias to higher equity exposure. The following are representative long and short investments from that time period:
- AlarmForce: 12x adjusted EPS for a fast-growing Canadian alarm company with a sustainable cost advantage, better product quality and a huge growth runway as it penetrates the US for the first time. AlarmForce became the biggest position in the Strategy as it benefited from industry growth (2x GDP historically) and compounded shareholder capital through the Recession.
- Pfizer: 6x EPS for the world’s #1 drug company. Pfizer was unloved due to fear that its expiring patented drug portfolio would cause earnings to meaningfully decline. Investors gave the company no credit for its emerging markets growth, cost-cutting in the Wyeth acquisition and commitment to shareholders through a significant dividend yield and share repurchase.
- Short sale: Midas Holdings. Midas was inexplicably trading at the same implied valuation of forward earnings as its competitor Monro Muffler. Midas suffers from structural competitive disadvantage due to its low-quality franchise model, and scattered store base causing an inflated cost structure.
Example 3: August 2010–December 2010
- The late summer and fall of 2010 was characterized by a re-acceleration of the domestic economy after a summer slowdown. Equities were cheap initially, but IRRs reduced quickly as the market marched upward.
- The Strategy shifted as the time period progressed: adding shorts and reducing net exposure. The following are representative investments on both the long and short side:
- Anheuser Busch InBev is the #1 global brewer with dominant market share in the world’s two most attractive markets, the US and Brazil. The beer industry is a classic scale industry which has consolidated dramatically since price wars in 2004 and features mouth-watering economics for the largest companies. Globally, the beer industry benefits from rising middle-class incomes in emerging markets.
- National CineMedia is the #1 cinema advertiser in the US. The company has 27 year contracts with the 3 largest exhibitors, entrenching its competitive advantage and driving a strong network effect (i.e. as the company grows it becomes more valuable to both advertising customers and new affiliate theater networks). NCMI’s secular tailwind is increased alternative advertising spending.
- Short sale: RealD is the leading global provider of technology to enable the 3-d cinema and home viewing experience. Make no mistake, RealD has a fine business model. However, the shares were wildly overvalued implying an expectation that 3d movies AND 3d television would take off. Journeyman’s point of view was that the growth in 3d was a short-term fad that has been seen before (i.e. not a secular tailwind) and that the shares would be re-rated to reflect reality.
- Short sale: Cedar Shopping Centers owns shopping centers in the economically-challenged areas of the United States (generally, in struggling manufacturing towns). The centers are anchored by grocery stores slowing going out of business due to low-cost competition from Wal-Mart and Target. As a result, the business is in secular decline.
Example 4: January 2011 — Present.
- The economic backdrop in 2011 was up and down. Initially, optimism ruled and the markets performed well through the first five months. More recently, excessive global debt concerns have dominated and equities have suffered. As markets decline, the Journeyman portfolio typically becomes more net long due to the same businesses being available at better prices.
- Journeyman’s 2011 strategy was consistent: maintaining positions and adding new investments in companies that perform well in spite of economic challenges, and taking short positions in weaker companies. For example:
- LKQ Corporation: LKQX is the leading company in the recycled and aftermarket auto parts industry. The company has the broadest product assortment, unmatched scale and top mindshare with the auto insurance companies, the most important customer. LKQX revenue and earnings increased through the Great Recession of 2008/09.
- Verisk Analytics: Verisk has the leading transactions database in the P&C insurance industry, making its risk analytics data essential for its insurance company customers. VRSK also was able to increase revenue and earnings in the Great Recession, and is now expanding into the health care, mortgage finance and industrial supply chain industries.
- Progressive Waste Solutions: Progressive is the leading Canadian waste management and recycling company and capitalized on recent economic weakness to buy a competitor and diversify its business into the US. Waste management is typically resilient in challenging economies as volume and pricing remain flat or decline only slightly.
- Short sale — Westpac Bank: Westpac is a leading Australian commercial bank focused on residential mortgages for its loan book. Journeyman shorted Westpac due to the first signs of the Australian housing bubble finally deflating in anticipation of its asset base deteriorating.
- Short sale — Quad Graphics: Quad Graphics is a commercial printing firm that recently went public. Journeyman shorted QUAD due to its industry’s secular decline and the anticipated negative impact of the company’s debt load as revenues decline.
Join the Journeyman Advisory Team
Journeyman is growing rapidly. Our model, generally, is to recruit and hire highly qualified, seasoned individuals who have formerly enjoyed successful business or professional careers. Typically a JCM Investment Advisor Representative (IAR) is retired, in whole or part. All IAR’s must be Series 65 licensed, ethical and in good standing within their communities. Journeyman does not discriminate on any basis.