The last presentation of the day at the New York Value Investing Congress was from Joe Altman and Chris Kyriopoulos of Compound Capital. The small hedge fund partnership operates from Nashville, Tennessee where the investment managers lead a concentrated, value focused investment management firm.
With just 82 investors and $42 million under management, Altman and Kyriopoulos can focus their time on discovering the next great value investments. Their approach is to find small, unknown, and overlooked stocks.
Their fund takes a long-term view, avoids leverage, and focuses on companies with strong cash flow. And they like frugal companies with low capital spending and low operating expenses.
Since launching the fund in 2008, this has been a winning strategy. Compound Capital has delivered an average annual return of 16%. That’s enough to turn a $1 million investment into over $2 million in the last five years.
Ascent Capital Group (ASCMA)
- $2.5 billion enterprise value
- Is in the business of home alarm systems and contracts
- #2 in alarm business – after ADT
- Dallas call center supports alarm service contracts
- 600 independent dealers who sell for the company
- Holds +1 million alarm contracts or “annuities”
- 11% annual growth in customers
- All residential homeowners (no renters or business customers)
- Only 18% of U.S. households have alarm – it’s a growing business
- Average customer pays $41 per month, growing at 4% per year
- Acquisition and rollup opportunity as smaller alarm companies sell out
- 38% free cash flow earnings
- Spun off from Liberty Media – John Malone is a major shareholder
- Alarm companies typically trade at 10 – 14x net operating cash flow
- Only 4 analysts follow the stock
- Trades at 9.7x cash flow, versus 12.1x for ADT
- Customers stay with company for 8 years, versus 7.2 years at ADT
- Estimates intrinsic value per share of $125 (a 60% premium to today’s share price)
Covanta Holdings (CVA)
- Controls 2/3 of U.S. waste-to-energy disposal businesss
- Takes trash and incinerates it – an alternative to landfills
- $4.8 billion enterprise value
- U.S produces most waste per capita
- Moving away from landfills - not space for more
- Coventa solution: 90% of waste volume is incinerated – low level of pollution
- Paid to take in garbage, paid when transfers trash into power
- 23 garbage incinerators owned, additional operated on fee basis
- $6 - $9 billion replacement value of the owned incinerators
- Barriers to entry, since most communities don’t want on “in their back yard”
- Equity shrunk by 18% since June 2010 through share buybacks
- Stock trades at less than 10x free cash flow
In conclusion, serial compounders are a tax efficient way to build long-term wealth. The team at Compound Capital like these two off the radar companies as wealth builders for the long-term.
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