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Ariel's Rhupal Bhansali's Philosophy of Non-Consensus Investing

Ariel Investments is a firm with a value investing philosophy founded by John Rogers (Trades, Portfolio).It is based in Chicago, Illinois, with offices in New York and Sydney. Since 1983, they have been disciplined, long-term investors with a turtle for a logo, which represents their patient, long-term approach. Ariel's Rupal Bhansali was recently interviewed on the contrarian investor podcast.

Bhansali began her career in 1989 working on the long-short side for Soros Fund Management. In 2009, Forbes called her a "Global Guru," and in 2015, Barron's named her a "Global Contrarian." Just this year, Bhansali became the newest member of the prestigious Barron's Investment Roundtable.

In the podcast interview, Bhansali explains her philosophy of non-consensus investing, which is further described in her book "Non-Consensus Investing: Being Right When Everyone Else Is Wrong."

There are two basic tenets to her investing philosophy:

1. You have to be correct on a non-consensus opinion.

2. You have to find something that is overlooked by most.

Summarized, that is what non-consensus investing is about. That makes a very different investing environment from what people are used to. In most areas of life, if you do everything according to the status quo and make no mistakes, you will score well but in non-concensus investing, you have to think different AND be right.

Bhansali lays out a practical example of how everyone on TV is focused on earnings risk., but very few investors are focused on balance sheet risk, at least until the last moment when a stalwart like General Electric (GE) suddenly lises 40% of its value in one day. Bhansali asks herself questions like, "Can a company repay its debts? Will it miss payments?"

The entire stock market deals with this bias. Financial leverage is off the charts. This will come back to bite equity investors if they are currently handwaving it.

On FANG and MANG stocks

Investors are disproportionately looking at FANG stocks (an acronym for Facebook, Amazon, Netflix, and Google). It is not the way to make money. It is a way to lose money. It is a crowded trade. Instead, she is investing in MANG. With MANG, she highlights Michelin (MGDDF), Ahold (ADRNY), NTT Docomo and GlaxoSmithKline (NYSE:GSK).

Michelin, a tire producer, is viewed as a consumer discretionary, but tires are not discretionary according to Bhansali. The shelf life is longer than shampoo, but it is just not optional. You need tires. Meanwhile, it pays a 3-4% dividend. It trades at 6.11x free cash flow, EV/EBITDA of 5.6x and a P/E of 11.35.

Ahold is a food retail chain with dominant franchises in the Netherlands and Belgium. It trades at 14x earnings and 8.5x EV/EBITDA. The balance sheet is sound with a limited amount of debt and quite some cash.

Bhansali calls NTT Docomo the Verizon (NYSE:VZ) of Japan. NTT Docomo trades at a net cash position. It yields 5%. The yen is an appreciating currency according to Bhansali. The company throws off a tremendous amount of free cash flow generation. It trades at 12x free cash flow, It trades at a 6.81 EV/EBITDA. It is undervalued and has low balance sheet risk and earnings risk.

GlaxoSmithKline (NYSE:GSK) is a major pharma company. It trades at only 12x EV/EBITDA. That's not super cheap, but it is growing at 5% per year and the revenue is very high quality and high margin.

Disclosure: No positions.

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This article first appeared on GuruFocus.