#106 - Ross Glotzbach: Long‑Term Concentrated Engaged Value

26:18I guess a broader market event could also cause a company to fall into your buy zone and maybe a larger percentage of them all at once.

26:26Ross Glotzbach:So, yes. You know, you look back to in the wake of Liberation Day, barely less than a year ago. It doesn't seem that long ago as we record this in January. That was in April. We were getting a lot busier then. And we did find some new investments to make then. this gets back to what we've always got to be ready. You know, we have our worldwide master list as we call it, where it's, it's not the world's most elaborate spreadsheet, but it's got what you need company name, what we think it's worth our kind of qualitative score in terms of what we think the quality of the business is. And then we wait.

27:08Ross Glotzbach:And most of the time we don't get a pitch to swing at, but we just need a few. I mean, again, if you're doing long-term concentrated investment in a 20-stock portfolio, turn it over on average again, that three to five years I gave you earlier, we only need a few great ideas per portfolio per year. That's also why we can have a small team of analysts, which we think is important, and have us all be generalists, which we also think is important. Number one, that makes it a great place to work because you can go anywhere. You don't have to sit in your little sector silo all day and say, well, I think we should buy this one in this industry because it's cheaper than that one in that industry.

27:48Ross Glotzbach:Maybe it is, but maybe we don't need to own anything in that industry, or maybe we need to own both. It will never be quite as quote quantifiably repeatable as a quantitative, purely quantitative process, which I'm sure others will do well at, have done well at, Although those methods have to shift and change over time, too, just like ours do. But it is more quantifiable and repeatable than it might seem. And that's how we get into it. What's the rationale for saying that a portfolio with about, let's say, 20 holdings or so is sufficiently diversified? And at what point does adding more positions start to dilute your highest conviction ideas?

28:32Ross Glotzbach:You and the listeners might be familiar with some of those academic studies that found you can get the proper amount of diversification from 12 stocks. We think that's probably too low, although we've had some separate account concentrated clients like that, because there is more inter-intra correlation between those 12 entities than would be kind of academically possible. Especially if they're all in the same sector. More likely than not, you know, at any given moment, there's going to be certain industry sectors that are more out of favor than others. And it will make sense to own both Albertsons and Kraft Heinz, which relate to food.

29:11Ross Glotzbach:It could make sense to own both Rainier and Potlatch Deltic, which are doing Timberland and are actually merging at the moment, which we are in support of. But you're right. So 12 is just never really going to be possible. um so then you go to the other extreme okay well i think a key question again back to passive and how available that is these days there's math out there there's a good book called concentrated investing that has a good table in it um along these lines and i guess by the name of the book it might be a little biased uh but once you start getting over 35 or so uh different companies you start to mathematically look probably too much like the index to justify being a truly active long-term investor.

30:00Ross Glotzbach:So then it's somewhere between 12 and 30 ish, right? And we had settled on 20 for a lot of reasons, but we think you're getting a focused, concentrated portfolio, a proper amount of diversification that's more than that 12, but acknowledges, you know, there's, You might own some in the same industry every now and then. Again, stays focused with this team. I want to go back to that team size. You know, we can have a team of five to 10 analysts seeking out ideas. And if we say we've got, you know, kind of three core strategies here that are going to need 50 or so stocks, the math on that, again, with that three to five year turnover means if each analyst is finding two, maybe two and a half ideas on average per year, they're doing their job.

30:51Ross Glotzbach:And, again, it's hard when you've got a big, huge team to have true contrarian views because there's always going to be somebody who doesn't like something. And sometimes you've got to have a disagree and commit moment, you know, that kind of cliche from Jeff Bezos. That's easier to do with a smaller team that can truly cover the world in a cumulative business like this. You mentioned earlier that you invest in your own strategies and are your biggest client. How does that shape decision making, risk control and general engagement? It is the best kind of risk control because it's your own money and it's not a game.

31:33Ross Glotzbach:And, you know, risk control can have a lot of factors. We're, again, proud at Southeastern for 50 years to have no SEC sanctions or client lawsuits. And we think about that every single day. And, you know, we'll never go anywhere close to the line on anything. It's just not worth it. But this also gets back to this willingness to close the strategies. And again, that sounds like I'm some value investor today talking about closing a strategy. It sounds kind of crazy, right? But we've done it for every single strategy that we've ever had at Southeastern. And that's a true walking the walk moment.

32:15Ross Glotzbach:I mean, when it's easy to get money, that's probably when you shouldn't be getting money. because then you're doing wrong by your existing clients who are there for you. They're with you in the hard times. You don't want to do wrong by them. Including yourself. That is true. That's another good way to have that alignment working. So again, we want people to join us. Now is a great time to come join us as a client because we are very different from this risky market. We have 60 % or better price to value ratios, which has historically been a good time. So we're open. And who knows, we'll be closed again.

32:53Ross Glotzbach:But, you know, again, we've walked the walk on it. And that's always a key question to ask of any manager who, you know, is not a startup of some sort. You know, have you been closed before? It's a really important point. And I'll just share in my experience, it is really difficult to close when you're hot. And, you know, people are knocking on your door and they want to add money because there's just a great incentive to grow your assets or management because you charge fees on those assets. And the managers who don't have their own money in there, they tend to, at least in my experience, they tend to be open because money's coming in.

33:28And what you just described in some ways is counter-cyclical, where your focus is on generating returns rather than gathering assets. And we know because of fear and greed that we touched on earlier, money comes in after good periods and money goes out after bad periods. And you want to be counter-cyclical by opening and closing at the right time.

33:48Ross Glotzbach:And another key factor on that is we're 100 % employee owned. You know, not only are we required to put our own money into our own strategies, we own the company. So there's no pressure from some big thing way up there. You got to grow EPS this quarter. Like this is not an easy quarterly EPS type business. We're here trying to build long-term value, get the right clients at the right time, do the right thing. I know Southeastern has focused on ESG for a long time before it was a popular thing to do. Did you believe it adds investment value? And how do you explain that to skeptics? So we have always focused most on the G, governance.

34:27Ross Glotzbach:That's, you know, I've said business people price many times. People is the G. And if you don't have the right people on the case, you can have a lot of problems. Now, we've done a great job with engagement historically, where, you know, at times that can be, uh, we might've been wrong on the people and we have to file a 13d. We have to, you know, again, prefer to work behind the scenes to improve the people situation. Maybe we say, Hey, here's a great guy who's on the board or who could be a great board member. That's the kind of thing we want to do on the G because if, if you really think about it, I can't tell a company exactly how to run itself owning, you know, a few percent of it or something it like that.

35:11Ross Glotzbach:We got to get the right people there living it every day, just doing the right thing. Again, corny phrase, but it's just, is this company, are these people doing the right thing? Now, you know, when ESG was its hottest, we weren't riding that bandwagon too hard. Now ESG might be a little bit colder. Again, like you said, we were just doing this before it even Manhattan name, you know, filing 13 D's in the 1990s. You know, we have not ever done businesses that we think are kind of net negatives for society, you know, a payday loan company, a tobacco company, but we own and have owned and probably will own in the future energy companies.

35:56Ross Glotzbach:Yeah. I think one good example of this back to business people price, one that we own currently is CNX Resources, where it's a natural gas company. And historically, this business started over 150 years ago in Pennsylvania in the coal business. There happened to be some natural gas there too. That's where they've shifted now. They spun off their coal business. But when we invested, they needed some help, especially in retrospect on the governance side of things. We were able to improve their board with great members like Palmer Clarkson, Bernie Lanigan, and especially Will Thorndike, who some listeners might know as the author of The Outsiders, one of our favorite books on business and capital allocation.

36:39Ross Glotzbach:We've owned many of those companies mentioned in it. But Will's been the chairman. He stepped down recently, and Ian is doing a great job having stepped up to be the chairman. It was powerful when we were able to bring a mind like Will's to a business like this just to get CNX focused on the overriding principle of growing your long-term value per share, which correlates most to growing your long-term free cash flow per share. That's not trying to guess commodity prices. That's not trying to just drill to increase production. It's growing free cash flow per share. And CNX has become a very unique company within its industry that understands this much more than others that are just trying to be a play on commodities or something like that.

37:26Ross Glotzbach:That's silly. Every single company should just use all of its resources to grow its long-term value. And CNX is a great example of how we, you know, worked both behind the scenes and out in public a little bit more on this one to create something that's really delivering. You know, you look over the last five plus years, this company has gone from a single digit stock to a 30 something dollar stock. And we think it's worth over 50 and it's trading for less than 10 times our opinion of its free cash flow power. It's got some quirks as to why that's, you know, can still be missed by the market. But we're excited about where they're going from here.

38:01Ross Glotzbach:And that was a long multi-year journey that can fall under various things on the ESG side of things. But we didn't get into it in the 2010s because it was, quote, ESG or something like that. You know, one final kind of ESG comment is sometimes when we're in a meeting in Texas or somewhere like that, it might be, why is this ESG sliding here? Sometimes we're in a meeting in Europe or some other place. Why don't you have more ESG slides in this presentation? If we're making neither extreme happy, it probably means we're on the right track, which is, you know, I don't know. Just a general comment.

38:46So growth has been in favor for a pretty long stretch. How do you respond to the value is dead claim?

38:54Ross Glotzbach:I don't think it's dead. Still, I'm still here, still doing it. You know, I definitely think that there's, as I mentioned earlier, a lot of different flavors of value out there. We've always been a very eclectic, unique kind, in our opinion. you know, a purely quantitative first order type of value approach where we're only going to buy things that trade at less than book value or things that trade at less than 10 times earnings that which, by the way, I think that approach actually did pretty well last year. You know, that's never been us. We've always been about this, you know, kind of overall view of a company's qualitative and quantitative aspects and then buying at that, you know, aforementioned 60 something percent of what we think it's worth.

39:44Ross Glotzbach:And we think that that has a lot of merit, you know, and true great long term investing is not necessarily all that different, really, between growth and value. We're all looking for something that grows its value, that that value is realized and the market doesn't realize that yet. You know, growth folks might be more willing to use a higher terminal value, higher growth rate, lower discount rate sometimes than we would. And we regret some things that we didn't tweak about that part of our process. You know, in the 2010s, we were using discount rates that were too high for too long and terminal multiples that were too low for too long.

40:25Ross Glotzbach:That does not mean, however, that we're going to start radically adjusting that even more as we sit here today and say, oh, you know what? We were using a 16 terminal and now we're going to use a 20 when the long run market average still has been in the teens, even though we've had a long stretch where it doesn't feel like that. All to say that we have not seen instances of companies that do ultimately get it right, that are not ultimately rewarded, if that makes sense. You know, markets do still work over the long term. They don't always work over the short term, which is why we have this opportunity in certain, again, a very small percentage, actually, of stocks out there.

41:07Ross Glotzbach:There is enough inefficiency for us to keep going. But boy, you know, it does kind of make us feel good as contrarians when the question gets asked often. That makes us feel pretty strongly about the next five to 10 years of where we're going. In my experience, markets can be very cyclical. And the timing of those turns isn't easy to predict, but there are signs. I agree. It's always going to be hard to predict. It's usually going to take longer than you think, but keep going and keep building that portfolio and staying true to what you're doing. Let me ask you this from a value investor's perspective.

41:46Is there an AI bubble forming? Yes.

41:50Ross Glotzbach:So each bubble is always going to be different and it can be inflating, deflating at different times. I know you've had lots of other great guests on who have been asked and answered this question in a lot of good ways. we don't have a ton to add to some of the silly circular financing, you know, to things like how the Mag7s, you know, just over the last three years up 3x with their free cash flow per share is up only about 30%. That's a big gap. I mean, like many things, really pretty much all bubbles. They have a lot of truth at the start, right? These growth stocks that have driven the market for the last 10 or so years were underpriced 10 or so years ago.

42:38Ross Glotzbach:We bought Google before it was called Alphabet, sold it too soon. It's my fault. But it was a value stock, as was Amazon, which we got really close on 10 or so years ago. Sometimes our way of investing can be kind of dumbed down to paying 10 or 12 times true free cash flow power for something that's worth 15, 18, 20 times. We were doing that. You could do that on those stocks and others back then. That doesn't mean it's true today. And there's also a big difference on investing hundreds of billions of dollar market cap companies versus trillions dollar market cap companies. The margin for error at many of these companies that are already kind of starting to kind of both compete against themselves and then in some interesting instances finance themselves, that usually doesn't end well.

43:39Ross Glotzbach:I mean, I will say before Southeastern, I think maybe one of the reasons that I was lucky enough they took a chance on me was that I think when they were interviewing other people in the early 2000s, they got a lot of folks who said, well, you know, I bought all these growth stocks in 2000. And then I learned that value investing was the way to go. And again, doing my own little investing then from a very rudimentary method in 2000, none of that stuff made sense. It was just at prices that were truly crazy. And the math would never work, even if it grew 10, 20 % forever. I mean, I guess if truly forever, it might work, but nothing grows 10, 20 % forever.

44:25Ross Glotzbach:Let's use 10 years, which is a pretty still strong, strong timeframe there. But I don't know if I would have had the ability or even the courage to have that kind of viewpoint. If I'd been in the business, you know, it can be hard to, to just do things that you're missing out on. So I was fortunate to have that work out for me and for Southeastern, by the way, who was doing their own thing, investing in real companies back then, like waste management, you know, General Mills, you know, they had Georgia Pacific and some other Timberland companies. The portfolio in a lot of ways rhymes from back then to what we own today.

45:07Ross Glotzbach:But it took 25 years to get here. You know, I think that's an important part of this. This whole thing is that oftentimes you don't really truly have a bubble that can benefit us value investors like us for the go forward until that bubble has started to suck up other opportunities. You know, I would contrast this moment to kind of 2007 and 2021 when there were a lot of things that were overpriced. And in retrospect, we were kind of finding it hard what to invest in versus today in 2000. I could even go back to, you know, kind of 86, 87 and you know 88 uh there are parts of the market that are understandable that are attractive uh to us that we think we're getting great bargains on you know paying 60 percent of private timberland values or less really for potlatch delta granier that's something you haven't been able to do for a long time getting great brands like heinz um like mission tortillas at Gruma, which is a company in Mexico, those are not the kind of bargains that were available in 07 or 21, but these are great defensive growing companies because they've just gotten so far left behind by the market.

46:34Ross Glotzbach:They're sitting there. Again, we're going to do the work on all of these, but that's the kind of thing that might only come around measured in 25-year increments. And we're glad we've got one of them here. But it was definitely not fun or easy getting to here. But we're here. And the interesting notion is if AI is going to be truly transformational, it needs to impact a broader range of companies. And you think about the companies that you just described. There's probably a lot of potential for automation or cost reduction or something to that effect that may not be reflected in the price as well.

47:11Yeah.

47:11Ross Glotzbach:So just because I did just describe AI as a bubble, as you probably expected, I would say, that doesn't mean we don't think about it all the time. I mean, it's a big deal. And if we own something that can be truly disrupted by AI, we better figure that out and not own it anymore or just avoid it originally, right? If it's something that's new and that we're considering. So that's very important. I don't want you to think that we're head in the sand here about the impacts and the importance of AI or software, whatever you want to call it. Yeah, there's a distinction between the technology and then the companies and the investing side.

47:50Ross Glotzbach:That's right. And what we want are companies that have a strong competitive advantage. The market might, though, miss how they can use AI to their benefit. For example, we know that every public company feels like it has to be able to say something publicly about AI. And we're doing this in AI, and here's how AI helps us. But you definitely have to dig through all those public comments. One interesting new investment that we made last year that didn't seem like much of a value stock at the time was this company called Regeneron. so business people price on this company the business side of things it's a health care drug company it used to be you know smaller biotech now it's many you know tens of billions of dollars and they have dupixent which is one of the best and still strongest growing drugs in the world they have a strong oncology program everybody is focused on this drug called ilea back to my 80 20 comment from earlier ilea is definitely less than 20 of the value but it is pretty close to 80 % plus of the questions on the conference calls.

49:00Ross Glotzbach:Why is ILIA not growing? Because it was the original kind of drug of this company. Everybody still thinks about it that way. But back to AI and what it means for a company like this, because they have been at it for so long and by some measures sequenced more genomes than anybody else privately, they have a ton of incredibly valuable but private to themselves data. How you exactly put a number on what that is worth. I'm not quite sure. They're not sure. It was founded by two great, very smart guys who still own billions of it, Lynn and George. And they're focused on long-term value per share, while everybody else in their industry short-circuits their own internal R &D by buying and overpaying for other companies.

49:46Ross Glotzbach:They've stayed true to what they do and invested in their own R &D, building that incredibly valuable pool of private data. But I was talking to one of them last year about it, and this very topic came up. And it's important to make a distinction between AI that's coming through publicly available data, be it research papers, what have you, versus Regeneron or other companies in a field like this that can have enough of their own data to turn internal AI loose on for true, you know, drug development and other purposes, because that's a big distinction. Because as Regina was saying, as others have noticed, a lot of technical research papers that are published publicly are wrong.

50:38Ross Glotzbach:And when you start plugging that into an AI, there's all kinds of stuff, you know, it just can't distinguish that enough. So if you've got a data source where literally 80 % plus of the papers could have inaccuracies in them, what is that going to do for you? Versus Regeneron knows what's worked, what hasn't. They have built this. They've spent many tens of billions of dollars building it. That's unique. That's valuable. But when everybody else was trying to predict what ILEA was going to make next quarter last year, and we were able to buy Regeneron for what we thought was 10 times or less future free cash flow power with a net cash balance sheet and great partners are going to do the right thing.

51:21Ross Glotzbach:That works. Bring on the AI for a company like this. But it's a different story for each one. Of course, FedEx has tons of data it can use internally. I already mentioned Albertsons. They were talking about AI on their call this morning. They had a little quirk where they're probably a little bit behind Kroger on that because, But that's because Kroger tried to buy that for a long time, was willing to pay a high price that was struck down on the courts. Now Albertsons has caught up, is catching up. But does that mean that I can tell you what Albertsons is going to make next quarter? It doesn't.

51:59Ross Glotzbach:But do I think that Albertsons and Kroger are going to look that different from each other three to five years from now? No. And when Albertsons is at seven times free cash flow and Kroger is at, you know, you can say somewhere in 12, 13, 14 range, which it has been historically, which we think Albertsons will ultimately be worth. That's a gap worth noting. Well, Ross, this has been a great conversation. Thank you for sharing all your insights with us. Very much appreciate it. Thank you for having me. And it's good to talk value investing. There's not many people out there talking about it, which probably means we should be talking about it.

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