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Glenn Greenberg's Investment Process: Buy Cash Flow Cheaply

·3 min read

- By Rupert Hargreaves

Gleen Greenberg has been one of my favorite value investors for some time. I first discovered this investor around a decade ago, and his style of investing immediately appealed to me.

I found that Greenberg looked for value by analyzing company cash flows in much the same way as other value investors such as Warren Buffett (Trades, Portfolio) analyze companies. Greenberg wanted to find companies with a solid competitive advantage so that he could estimate their cash flow potential in the long run. He would then look to buy at a discount to his cash flow estimate.

This approach in itself isn't unique. However, where Greenberg differed from other investors was with his use of discount rates. The value investor used high rates of 15% to 20% to discount cash flows. This was his margin of safety.

Greenberg's approach seems to have worked well. Based on the information we have, he returned 25%+ per annum between 1984 and 2008. Up until 2008, Greenberg had achieved a record that was as good as, or even better than that of Buffett.

Greenberg is still investing money for investors at his firm Brave Warrior Advisors today. As far as I know, his investment strategy has not changed.

Greenberg's top holdings

Looking at the fund's latest 13F, which reported stock holdings at the end of December 2020, it's clear that Greenberg's strategy is still based on the idea of buying high-conviction positions and holding.

The largest investment at the end of last year was Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). This position was worth 11.9% of the $2.7 billion portfolio at the end of 2020.

What's notable about this holding is that Greenberg only started buying Berkshire in the second quarter of 2019. He quickly built the position up to the largest in the portfolio, which suggests that he believed (and still believes) it was deeply undervalued.

The second-largest holding in Greenberg's portfolio at the end of 2020 was Aon PLC (NYSE:AON). This position had an 11.6% portfolio weight at the end of last year. Aon PLC is a global professional services company which provides commercial risk solutions, reinsurance solutions, retirement solutions, health solutions and data and analytic services. The company is a free cash flow machine with free cash flow per share totaling $11.90 in 2020.

Capital spending came in at just $141 million for the year compared to an operating cash flow of $2.8 billion. Management used the excess cash to buy back stock ($1.9 billion) and pay dividends ($412 million).

Aon exemplifies the kind of businesses Greenwald likes to buy. It has a strong brand, size advantage and robust cash flows.

The next largest holding in the portfolio was JPMorgan Chase (NYSE:JPM), with a 10.4% portfolio weight. JPMorgan has a strong brand, and in 2018 and 2019, the lender returned a total of $43 billion to investors through buybacks and $22 billion with dividends. I've used the figures from 2018-19 as limits were set on bank cash returns last year due to the pandemic.

The fourth-largest holding at the end of 2020 was HCA Healthcare (NYSE:HCA). Once again, this is a company with size economies that has a good track record of growth. Cash generation is substantial as well.

In 2020, the healthcare facilities operator generated a free cash flow of $6.4 billion on operating cash flow of $9.2 billion and capital spending of $2.8 billion. In 2019 and 2018, buyback and dividend cash returns totaled $1.5 billion and $2 billion for each year, respectively.

Greenwald's approach to finding undervalued equities is incredibly straightforward. The companies outlined above are perfect examples of the process in action. For Greenwald, cash is king, and buying cash at a discount is the overriding aim of his investment process.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.