Jun 18, 2010
DDI Interview: Greenstone Value Opportunity Fund
Hunter, of Distressed Debt Investing has a really fantastic interview with the folks from the Greenstone Value Opportunities Fund. I suggest you read the whole thing (, ). Here is an excerpt:
If you were to peg one valuation technique you really rely on – what would it be? And why?
We track 400 companies across different market capitalizations and industries in a proprietary universe of companies that we feel have at least a chance to be a “deep value.” Underlying each company is a unique spreadsheet where the company’s financials are massaged by us to adjust for one-time events, seasonality, cyclicality, and so on. All of the underlying company-specific spreadsheets flow into a master valuation sheet, using real-time pricing data, that sorts the universe based on what we call a reward-risk ratio. This is a calculation of the multiple of the potential upside from current market if it reaches fair value relative to the potential downside from current market in a worst case scenario. All this model really does is stop us from spinning our wheels looking at companies when we should be focusing elsewhere. Because the universe we follow is very diverse, it also alerts us to flows in and out of certain industries and capitalizations. The other thing about the model is that sometimes companies get cheap for days, months, or just a few minutes. If it’s just a few minutes, it can be harder for us to react if we haven’t done the work…you win some you lose some…but if we stick to our process and discipline we’ll make it work more often than not. From there the valuation technique goes down another tier to EV/EBITDA and Market Cap/Free Cash Flow. We use an adjusted annualized number of the most recent quarter’s EBITDA or FCF, and we rarely if ever rely on forward estimates. What we are looking for are companies that are trading at 5X or less of these two multiples, and the process helps us focus us on the stocks that are the cheapest. Once we’re alerted, then the fundamental hard work begins.
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