Finding Value Stocks that 3X w/ Samit Umatiya from UIG Funds

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4:05Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now. Welcome to the Investing for Beginners podcast. We've got a special guest for you today. I'm excited to have this conversation. We have Samit Yamatia, managing partner at UIG. really excited to have you on uh i we were just talking right before we got on the air and uh you have a relatable backstory and you're the type of guests that our audience will love because you follow all the same principles that we do so really excited to hear about how you manage a portfolio and how you've gotten to where you are so thank you for joining us today samit Yeah, thank you, Andrew, for having me.

4:59Before we get into it, I just want to share how I got into this business. But before I do that, just kind of an overview on what I do. I just manage an investment fund out of Austin, Texas. We're a value-oriented fund, and I'll get more into what value is. but basically, you know, about seven years ago is when I got introduced to the financial markets, you know, just how everyone gets introduced, you know, they day trade, they make some money, they lose a lot, and then you live and learn. But my kind of thought was that, you know, this isn't really a sustainable way of being a market participant.

5:40And I mean, I don't see how I could run a house and pay the bills being a day trader. And so my kind of thing was that, how do the big dogs in this industry, you know, make it? And so that's kind of where I started reading books on, you know, Peter Lynch, Warren Buffett, Ben Graham, all these, you know, investing geniuses. And so I picked up The Intelligent Investor. That was the very first investing book I read. And I think that really changed what investing is for me. And that completely changed how I view stocks. Um, and so I think, I think that was a, that was a game changer for me. And so now I've been doing this for five years and, you know, hopefully we got another 30 years going strong.

6:25Yeah. Uh, that's awesome. How, how did you, how did you get the thought to look at what the greats are doing? Do you remember if there was a moment or was there something in your day trading journey where you lost a bunch of money or you just got really frustrated? Like what, what was that like? Do you remember? I don't, I don't, Andrew, I don't think it was about the money per se. I mean, I did, you know, the beginning you make money and it feels all good and then you lose money and it's just like a whole emotional rollercoaster for me. It was more so the emotional aspect of it. You know, I couldn't bear myself sitting at a desk, looking at a screen 24 seven and, you know, not being able to do, you know, my other hobbies and pursue my other hobbies.

7:13And so it was kind of eating at me psychologically. And I was, you know, I told myself, you know what, I'm just going to burn out like this. There's no way I can do this full time. Um, I mean, there, there are day traders out there that do this full time and, you know, maybe kudos to them, but it's just a tough business to be in. And the odds are very much against you. And so for me, it was more so the fact that I wanted work-life balance. And after reading Intelligent Investor, I had a shift of mindset because in investing, the less activity there is, it sounds very counterintuitive, but the less activity there is, the better you're off being from a return standpoint.

8:01and you know when that kind of you know clicked and i read about all these stories about you know investors not touching their money and letting compounding doing all the work for them you know makes things much easier on you you don't have to sit glued to the screen 24 7. no not at all um that is definitely one of the big benefits that i i really relate with as well the compounding and and not having to do too much. Um, when you mentioned value, so what does, and then you also mentioned, you know, Peter Lynch, Benjamin Graham being the starting point, but what does value mean to you today? And then how did you think about it as a beginner?

8:45That's a good question. I think value is very subjective, Andrew. I think, um, value, what it means for me and what value may, might mean for you are two completely different things. And I think that's the that's the very interesting and fun part of this whole business because you know i could look at you know for example apple like analyze apple's business and i could have one takeaway and you could look at it and be like okay you know what i don't agree with you apple's very overvalued so i don't see how you think it's undervalued so we could be looking at the same business and get a different take on what value is for each other but for me value it is subjective but values basically if you want to put it in financial and technical terms um it's the future cash flows discounted back to present value uh using a discount rate um i don't want to get very technical and go into that but basically you want to see how a business is performing right now what their future free cash flow is going to be and you want to see whether the price you're paying today justifies you having access to those future free cash flows for example let's say you have a business that's trading at a billion dollars, right?

9:56Their market capitalization is about a billion dollars. And in the future, you have, let's say they sign long contracts of 10, 15 years, and you have certain cash flows in the next 10, 15 years of 500 million. I mean, it's a no-brainer that you'd buy the business, right? And so it's those types of businesses that give me a sense of value. And in my mind, I'm like, okay, this is, it's a very obvious idea and a lot of value in that play. And so, you know, let's go out there and buy it. How often are you coming across ideas like that where it's like, all right, this is so obviously value. I'm going to have to pull the trigger on this.

10:42You'd be surprised. If you talk to a lot of fund managers, they'll tell you that for every 100 ideas that they look at. So maybe filter through 10 and then end up buying like five or six. For me, I guess the advantage of being a small investment fund is that there's more ideas and there's capital. And I think Buffett also talks about this. The smaller you are, the more access to ideas that you have. And it's kind of very intuitive and straightforward because when you look at businesses, they're broken into tier. You have big caps. mid-caps, nano-caps, micro-caps. And so when you're managing, let's say, less than$100 million, you have access to buying those businesses, even those nano-cap, micro-cap businesses.

11:30And a lot of the opportunity is in businesses that are not just big cap or the mag-7, but just businesses that nobody's even heard of, but they provide essential services and products to, you know, the everyday American. Um, and so I think that's where, that's where the value going back to your question. I think that's where the value is. Um, and a lot of the, these businesses that we hold are trading around$2 billion in market cap or less. That's cool. Um, So did the way you find ideas, did that change when you started managing money versus when you're a casual retail investor? I mean, things do change when you start taking other people's money.

12:24Obviously, you have a fiduciary responsibility from the legal aspect and a regulatory aspect that manages their money in their best interest. but before I was managing other people's money and just managing my own capital, I think the process and the research aspect of it was still the same. Obviously, you don't have the pressure and the burden and all these eyes looking upon you that you have to make the right decision. So I guess as a retail investor, I'm sure a lot of you out there don't have to deal with that. But I think that's one of the major things. But I mean, at the end of the day, if your research is right, you're looking at quality businesses, then nothing should really change.

13:11What are some of the benefits, what are some of the joys of managing other people's money? You talked about how there's more tension to you, obviously a little more pressure, but what are some of the benefits? I mean, outside of the work-life balance, you know, every morning I get excited might sound nerdy, but I get excited to read up on businesses. And, you know, it's a puzzle to me. You know, what I do as a fund manager, I think it's a puzzle. Every day you have a new puzzle that you need to solve. And I think I'm a little, I would say, obsessive when it comes to finding the unknown and finding out the mystery.

13:47And so maybe from a psychological standpoint, it gives me this dopamine rush of, you know, I need to figure this out. I need to get to the bottom of this. And so I, even before that, I used to be big in rabbit holes and conspiracy theories. And so I don't know, maybe I got some part of that from, from there. Um, but no, I, I do enjoy, you know, finding out why a business isn't performing well, why it is what the management's doing. I like checking up on details and trying to get to know every little thing. can you give us an example of it can be positive or negative a business who has been doing things really well or a business that has been doing things poorly and what kind of things you saw that made you determine okay this business is doing great or this business is doing poorly so to answer your question um as i mentioned a lot of businesses out there that are great businesses, but we've never heard of, like not even myself.

14:51I haven't even heard of majority of the businesses we invest in until I start the research process. And I think that's the beauty in it because when you're investing in these businesses, you avoid the noise of wall street. You avoid the noise of all these, you know, retail hype investors and FOMO, and you get to avoid all that. And I think that's where the real alpha and real returns are generated. For example, one of the businesses that, you know, I'll talk more about later that we looked at, it's called Vion. They're a global telecom operator. They perform business, they offer services in emerging countries.

15:33And some of those emerging countries have like geopolitical unrest right now, you know, hyperinflation and just issues like that. But over the long run, you know, that stuff doesn't matter because over the next 20, 30 years, these emerging countries are obviously going to grow into more developed countries. You know, that's the trend. That's how America was. Look where America is right now. These countries are headed in similar directions. And they don't have to be America. You know, even if they're 30 % of America, you know, companies like Vion, as I mentioned, you know, they're going to stand to do a lot of money.

16:08because you're underpenetrated in terms of technology. You're underpenetrated in terms of access to quality banking, quality education. And so once that quality of life and those standards pick up, I think businesses that are global into emerging markets are the first ones to profit off of that. That's cool. What does this business do that you're talking about? So basically, they started as a global telecom operator. So when you think about telecom operator, you're probably like, oh, it's a business that has heavy capital expenditures, a lot of costs into PP &E. But they've kind of left that in the past.

16:50And what they're doing right now, they have this asset light approach. And so what they're doing now is they're monetizing a lot of their tower assets, their infrastructure for their telecom operations. They're monetizing that and they're redeploying that capital into initiatives such as fintech services, entertainment services, streaming services. What do you want to call it? Healthcare ride sharing services. For example, Vion, they just publicly IPO'd their Ukraine operations. operations. And a lot of what they do in Ukraine is they have a ride-sharing service there. They also have their telecom operations there.

17:35And so their historical base, their customer base from their telecom operations, they're using that historical base to leverage into these new verticals such as FinTech, entertainment, healthcare. And the penetration already in those segments are very low, as I mentioned. And so there's just insane growth in terms of you know, where that country is going to go. And so they have about five or six of these markets. They operate in Ukraine, Bangladesh, Pakistan, Uzbekistan, Kazakhstan. So they operate in these countries where the population is very young. For example, Pakistan and India, these countries have the average population of, you know, late 20s, which is insanely young compared to, you know, America.

18:19And so when you see how young their population is and contribution they're going to make to their own countries in the future, it's crazy to see how that would just trickle down to, you know, beyond and their end markets. And so I think that's kind of like the thesis. It's these growth plays that I look at. But Andrew, that's just one part of it, right? You also have to pay attention. What are you paying for this business and for this stock? You know, I mentioned to you, if you're going to pay a billion dollars for a company and it's generating you 500 million for the next 15 years, that's ideal.

18:54It doesn't get much better than that. And so that's kind of where you have to pay attention to, okay, this is a good business, but what am I paying for it today? We all know how important it is to make smart decisions in our business, our investments, our finances. Getting the best for less matters. Yet how many of us have looked at our life insurance policies lately. You have to ask yourself, is your coverage enough given all the economic uncertainty? Or are you overpaying? Do you have any new health conditions that you might need to be covered for? I've been putting off looking at my life insurance for too long, but now that's going to change because I'm going to select quote.

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21:16Whatnot.com slash sell. I just made a new stock the third largest position in my portfolio. And I actually just finished the deep dive report on it called the Newtonian Compounder, How 60 % Returns Power on Unstoppable Machine. It's available for our Value Spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal once the stock hits$45. Check it out at einvestingforbeginners.com. Yeah, makes sense. How do you determine that? Is that a numbers-based thing for you? Are you looking at the growth potential? How are you thinking about, okay, this is a fair price or this looks a little rich?

22:00so i think there's there's many different things you want to factor into your overall valuation valuation isn't just supposed to be quantitative it's also qualitative you take both of those into consideration let's start with the quantitative part i'm sure your your readers want to your your listeners want to get to the bottom of this just tell me you know how do i how do i look at a few multiples or whatever it is and you know how do i how do i start with this But I think the key thing to look at is free cash flow. And when I say free cash flow, free cash flow, there's numbers of ways you get to free cash flow.

22:35But the easiest is you go on the cash flow statement and you look under state at the very bottom of cash flow from operations. you take that cash flow from operations number and you subtract it by the capital expenditures that the business is putting into, you know, into CapEx. And that's when you get that, the free cash flow number. And so that's the number I'm looking at. That's the first number everyone I think should look at. Obviously, there's other numbers like the balance sheet and the income statement you want to also pay attention to, to find out the financial health, whether this company is, you know, what they're paying, for example, what an interest expense compared to what they're bringing in revenue.

23:16And so there's things like that you want to pay into. But the most important thing is free cash flow because that's the number that gets sent out to you as a shareholder in terms of dividends, repurchases, or just management trying to invest that money back into the business. And so I think that's where a lot of people, they don't look at free cash flow. They just look at earnings. But if you've paid attention to Buffett, he's always a big proponent against looking just at earnings because earnings can be diluted. Earnings can be misconstrued. There's one-time expenses in earnings. So you have to adjust for these things and you adjust it by bringing it back into free cash flow.

24:00Because that earnings number, Andrew, also includes your non-cash charges, depreciation, amortization. And so you want to get back to the true economic value of that business and free cash flow kind of gives you that how did you learn about free cash flow i think some people might pull up a financial statement and get a little overwhelmed there are a lot of metrics a lot of line items how did you personally start to master financial statements so i want to say i want to say college but i'm going to be unreal with you. I started looking at financial statements before college. You know, I went into my valuation class, you know, I don't want to say knowing it all, but I had a pretty good idea of, you know, these are the three statements.

24:45What do you need to focus on? What do you not need to focus on? But for those people that are just starting off and you're investing for the first time and you're looking through companies for the first time, I think I would say the first thing you should do when you open a 10K is go to the cashflow statement, statement of operations. Look at each line item in the cash flow from operations. See the top line number is always going to be earnings. That's where you start. And so check that number. See what the company is earning compared to their revenue. See their net income margin. See their operating margin.

25:21And then make your way down to the non-cash charges. Okay, how much is this company depreciating in terms of their, in relative to their asset base? Do they have a lot of assets? Do they have a lot of recurring capital expenditures that need to be paid out? And so I think when you look at the inputs into the free cash flow and you learn what each of those inputs are, I think it makes it very easy for you to start predicting, not predicting, but, you know, estimating what future cash flow is. For example, if I'm in a very young, high growth company, then I know myself that, okay, in the first few years of this business, they're going to generate low amounts of free cash flow because a lot of that money is being reinvested and redeployed into the business.

26:05So obviously, they're not going to take that free cash flow and pay the investors a dividend. You know, they're not going to do repurchases. so i think you have to understand in the context of the business that you're analyzing that what are these free what are these inputs that go into free cash flow and what is what is management going to do with you know with that free cash flow and so i think that goes to my other point on the qualitative side because i mentioned to you there's quantitative and there's qualitative and so when i say management i think that's the biggest thing from a qualitative standpoint that someone looking at a company should look at.

26:44And the best way to gauge whether a management is aligned with their shareholders and is going to act in the best interest of their shareholders, you have to see what the management has done before. So when I say before, I mean a track record. Do they have a good track record? Are they equity holders into the business as well? How much of the equity do they own? you know what what is their background before this position where were they at before what was their performance at that business where they were before how well did they do there and so these are questions i think from a qualitative standpoint you know every investor before he buys a single share in a business these are the questions that you should ask yourself internally yeah so true and i know i'll put you a little bit on the spot here but i'm curious if you can think of or if you've seen examples of that not working out for shareholders where a CEO comes in and basically takes whatever great free cash flow they had and then it kind of turns in the other direction.

27:54Does anything come to mind as far as examples of that not turning out well for shareholders? I think, yeah. So no, there's this, there's this technology company called Serata. And basically what they do is they do data migration. So if you're trying to move across businesses or across organizations within businesses, and you just want to move data, you know, they have the IP to do that. And so basically that's, that's, that's the service they offer. And so about three or four years ago, there was the CEO and founder of Serata. His name was Dave Richards. And basically, he was misleading investors and kind of telling them that these are the new contracts that we signed with Fortune 500 companies.

28:46This is how much in revenue they're going to be bringing in. Turns out a few years later, those contracts were fraudulent. so he was promising setting all these targets of okay this is how much the company is going to do in free cash flow this is how much the company is going to do in revenue he had all these targets but obviously you can't make those targets when your contracts are fraudulent and so i think um i was looking at the company fortunately we weren't invested during that time but it was a company that was on my radar and so i've been following it for the last few years now and um I think that's one of the biggest red flags that you can, I mean, you can't really protect yourself from things like that.

29:28You get caught off guard when the management's making promises to you and they don't end up keeping up on those promises because they've lied to you from the get go. It's really hard to keep up with that. But I think you start getting red flags when you have that constant dialogue with your management, the investor relations team. And, you know, when you find out what type of person the character of the management is, I think that's when you realize that, okay, you know, there were red flags. I just chose to ignore them. Right. Yeah, that's a very good point. How do you handle biases? You know, we love to get excited about particular businesses, particular stocks, and we need techniques to manage our emotions.