Investment Style and Philosophy
GOALS: Preservation and Participation
Our goal is to preserve your capital and enable you to participate in equity market returns. These two goals do not oppose each other as one might think. One only suffers a permanent loss of capital when one sells a losing investment. In our experience, patience is usually rewarded.
Perimeter Investments uses a barbell strategy to balance risk and reward. The value portion is a mix of mid and large-cap stocks selected either for attractive yield and/or and extremely low (deep) valuation. A smaller portion of your portfolio will be invested in "asymmetric" opportunities. We think of asymmetric as meaning low valuation relative to the potential market for the company's goods and services. The common thread to both parts of the portfolio is that we seek investments where we believe patience is rewarded.
Often deep value companies have experienced problems. As a result, the company's stock will be shunned by investors and disparaged by the business media. We endeavor to mitigate the unknown nature of institutional distrust by selecting companies that pay (and who can continue to pay) dividends. We see current income as an anchor in our strategy.
In this part of the portfolio, we will take concentrated positions in some of these companies. Right now, July 13, 2020, our top 5 holdings make up more than 50% of the total portfolio. This high level of concentration tends to make our portfolio more volatile. We don't have a fixed minimum percentage of assets targetted when we buy these companies. Typically we will plan to purchase 3% to 5% positions in these larger companies.
Our asymmetric opportunities portfolio consists mainly of companies working to disrupt current business. Stocks in these companies tend to be very sensitive to "headline" risk. Things like the FDA asking for more information, or quarterly revenue being below expectations or guidance. We believe we have a deeper understanding or longer-term horizon than those reacting to the headlines. Frequently, we have found that the market reacts poorly to a headline that seems bad but is actually good. If this happens, it is usually when companies report earnings. We limit ourselves to purchasing no more than 2% of the fund in any one of these smaller companies.
In both cases, we believe in patience. Companies can improve without the market understanding the improvement. Things like free cash flow, profit margins, or return on investment can exceed expectations. Just the same, institutions will still shun the stock because of past sins. Perimeter's usual response is to wait things out.
For mutual and exchange-traded fund investors, we will create a similar barbell with large capitalization, index, sector, and very small and micro-cap funds.
Fiat Chrysler one that worked
An example that worked was Fiat/Chrysler. The stock returned more than 3 times our cost over 5 years, had we held the Ferrari shares the company distributed, return would have been about twice that. At a time when the auto industry was booming, Fiat/Chrysler stock barely moved despite the company meeting or beating street estimates. Compared to other auto companies Fiat's stock value was a small fraction of other automakers. We felt their distribution of Ferrari and possibly other divisions might put a floor under the stock. It was almost three years of steady improvement for Fiat/Chrysler stock to measurably outperform its peers. During those three years, we repeatedly asked ourselves if the future we expected remained reasonable. It requires patience.
Sprint and Clearwire dead money
An example that did not work was Sprint/Clearwire. After holding the stock for several years we wound up selling Clearwire for about our cost. We were attracted to Clearwire because the company held more usable wireless spectrum than either AT&T or Verizon. We thought this would put a floor under the stock. It did not. Sprint held a controlling interest in Clearwire. Sprint believed Clearwire's success came at Sprint's expense. Sprint started to compete with Clearwire and treated Clearwire shareholders like a proverbial red-headed stepchildren. In 2013, SoftBank purchased Sprint for what we believed was a low purchase price. After several years, Softbank sold Sprint to T-Mobile for about 20% more than it originally paid.
Tales from the Asymmetric Portfolio
We seek companies that have high growth potential in new markets. So far most of what we have done has been in healthcare and technology.
We bought both companies that transport stem cells. We still own one and are well ahead.
We have 2 anti-viral investments. One is just beginning to realize its potential, the other has yet to ship its innovation. Both stocks had done poorly prior to recent investor interest in anti-viral innovations. Today we are up in one and still down in the other.
We invested in a company that enabled medicines, like testosterone, which require painful muscle injections to be injected automatically and nearly painlessly under the skin. We are happy with the company's progress. The stock continues to languish. We have a modest profit and still hold shares.
We invested in a security software company. At that time, we believed the stock did not reflect its potential or progress. Very quickly, This time we sold the stock ahead of schedule.