I first met Conor, the author of Value Situations, sometime in the middle of 2021. We hopped on a Zoom call to introduce one another, and discuss (amongst other things), the investment process and the act of writing a newsletter. It soon became pretty clear that Conor (great name) has a wealth of experience married with an interesting history across private and public markets.
I have long enjoyed his writings, which focus on valuation, asymmetry, catalysts, and downside protection because he oft covers names that are far outside of my own wheelhouse. Conor is an industry professional, sharing thoughtful, high conviction ideas, in a format that is succinct and free from waffle. It’s also free of charge to subscribe. Readers will know that I love sharing high-quality work in this newsletter and, in this discussion, I hope that it highlights why Value Situations should be a part of your own newsletter stack.
The Interview
Conor
Firstly, thanks for taking the time to chat today, Conor. A further congratulations on the growth of Value Situations which you started back in June 2021.
Before we dive into that, you spent the majority of your career as a private equity investment professional managing investments across private credit, direct equity, special situations, and public equities. How did you carve out this career path and how do you feel it has shaped you as the investor you are today?
Conor Maguire
Firstly thanks for the opportunity to discuss Value Situations with you Conor, which I’m pleased to say has now surpassed 3,500 subscribers as I write this since the last time we spoke.
Regarding my career path, I come from a business family (real estate) and so always knew I’d end up working in business or finance. I studied English and Philosophy at university out of interest and to broaden my horizons rather than opting for something more “practical,” with the intention of pursuing a business/finance path after that. After graduating from university, I trained as an accountant with a Big 4 auditing firm following some advice from career mentors that accountancy provided a great grounding for a business career. I qualified as an accountant in 2009 as the Great Financial Crisis and a property market collapse hit here in Ireland, and as I wasn’t interested in being an auditor or a practising accountant I went back to university to study for a Masters degree in Finance while I figured out what I wanted to do next.
This eventually led me to a career in private equity with Bain Capital’s Credit business where I worked across a very broad mandate, with some exceptionally smart people across a really diverse range of investments. I think what shaped me the most as an investor was the emphasis on downside protection – there was always a focus on a margin of safety and underwriting investments using conservative assumptions and thinking through various possible outcomes, including what losses might look like if the thesis is wrong or does play out as expected.
Conor
Whilst we are on the topic, could you outline your investment process for us? What are you looking for and what is the modus operandi that you follow? You say you have a downside risk bent, so some colour for readers on why that is so important would be great.
Conor Maguire
Yes, my approach is pretty simple in that I am a fundamental value investor and so I’m looking for undervalued companies and assets – these don’t necessarily need to be the best businesses, or high ROIC compounders (I’ve found that this tends to be an overcrowded area of the market). As Howard Marks wrote in The Most Important Thing, “High quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them.” My view is that almost any asset can offer good value at the right price.
In terms of my process, my framework has three legs or criteria:
1. Valuation - Given my PE background, I value companies from an acquirer’s perspective based on EBITDA, EBIT and/or FCF as appropriate. Equities represent fractional ownership interests in businesses so to properly value a business you need to appraise the entire enterprise and then work down to an equity value. I view price/earnings ratios, EPS etc. as almost meaningless for business valuation purposes as these are really superficial metrics that are easily distorted as well as being incomplete measures for business valuation.
2. Downside Protection – this is usually ignored in most analysts’ research, but in the same way that valuation tells you how much you can make (if your analysis is correct), a downside analysis addresses the question of how much you can lose if you’re wrong for whatever reason. You cannot make a serious investment without knowing the downside, so I view this analysis as essential. I’m always amazed how this is omitted from stock pitches.
3. Asymmetry – this third criteria really combines my fundamental valuation work with my appraisal of the downside risk from the first two criteria. I am seeking situations where the upside from value realisation is a multiple of the downside risk, which effectively skews the odds in my favour.
A final requirement, which I think is implicit in the valuation analysis, is that there must be a clear or plausible catalyst for a re-rating within a medium-term timeframe, of 2-3 years.
Conor
Given that you have spent time in both the private and public realms, what do you feel are the differentiating skill sets that are required to perform in each of those buckets, and do you feel that those skills translate, or cross-pollinate, into the other?
Conor Maguire
I think the fundamental analysis and valuation skillsets are the same for any asset, whether public or private. The main difference with private markets is that the information is less readily available and you often have to do more digging or speak to more people to get a feel for what’s going on with a company as there aren’t annual reports, 10-Ks and investor decks readily available. In the public markets, this would probably be thought of as scuttlebutt, but I think fewer public market investors do this compared with private market investors. Conversely, something that private markets don’t have to factor into their analysis as much is market sentiment – for example, a stock might be undervalued but due to market sentiment it might just stay cheap for a protracted period of time as public investors are just not interested in it or its story. In private markets, particularly now given all the dry powder, you can often find a buyer in an off-market deal.
Conor
Special situations. Could you give us a broad overview of what that means, why you like working with them, and perhaps what you feel are the conditions that must be present in order for it to be a compelling opportunity?
Conor Maguire
Special situations are conventionally thought of as investment opportunities based on particular corporate events working out (Warren Buffett referred to them as “work outs” in his Buffett Partnership days), such as mergers, spin-offs, bankruptcy exits and the like. So special situations investments have a clear, identifiable catalyst at the outset. For anyone interested in learning about this style of investing, I’d recommend Joel Greenblatt’s book “You Can Be A Stock Market Genius” which although a little dated, gives a good intro to special sits investing.
For me in practice, special situations investing is intelligent opportunistic investing, where a company or asset is mispriced usually due to it being either overlooked or misunderstood and has a clear or plausible event or inflection-type catalyst within a short-to-medium term timeframe that will drive a value re-rating or unlock. These types of investments are much more interesting to me as I think there’s simply a greater chance that they’re mispriced than looking at say Facebook, Apple, or other “CNBC” household name stocks. With Facebook or Apple, for example, there are 40+ sell-side analysts covering these, with access to management, industry experts etc so these stocks are more likely to be efficiently priced most of the time. So I’ve no edge in looking at these names, and I’m unlikely to have anything useful or interesting to say about them either. So I prefer to concentrate on more unusual situations where mispricing and therefore significant upside is more likely to be found.
For such ideas to be compelling to me, I typically seek out situations offering 50%-100%+ upside within 2-3 years. A good example of this is Dole Plc which was the first high conviction idea that I published in my newsletter (discussed here). The Dole situation was originally a merger/de-listing of an Irish and UK-listed fresh produce business called Total Produce Plc, which owned 45% of US produce business Dole Foods. Total Produce announced it was going to acquire the remaining 55% of Dole Foods that it didn’t own, then de-list from the Irish and London exchanges, and then IPO the newly merged business on the NYSE.
Total Produce was a small-cap with maybe 3 analysts covering it, while Dole Foods was privately held. This merger would create the largest fresh produce business globally (2x larger than its closest competitor) while the NYSE listing would provide much greater liquidity and analyst coverage. So this was a really transformative catalyst for Total Produce.
The really interesting thing about this set-up was that US produce businesses are valued at much higher multiples vs. European peers, and with the newly merged Dole being the global market leader, my thesis was that if I bought shares in Total Produce before it de-listed, I’d get a cheap “pre-IPO” entry price into the global market leader in an essential consumer staple category. Additionally, the floor value being set for the IPO of the new Dole business was sub-8x EBITDA vs. 14x+ for US-listed peers. So this was a situation that was cheap, with an imminent event-driven catalyst, and was somewhat overlooked on account of Total Produce being a relatively obscure small-cap and the complexity of the merger/de-list/IPO process.
My thesis for Dole hasn’t played out as of yet, but it’s only been a newly public company for ~7 months or so, so it’s still early in terms of my underwrite investment term.
Conor
I personally enjoy reading Value Situations because you cover a number of names that are not in my wheelhouse. In that way, it’s similar to having an outsourced analyst provide me with new ideas.
What does your idea generation process look like?
Conor Maguire
Firstly, thanks for that feedback and I’m glad you describe it as like having an outsourced analyst, as that’s exactly what I want the reader to get from it. My intention with the newsletter is that it supplements the reader’s own idea generation process, in that they are getting professional quality ideas and analysis, so it’s just like having an outsourced analyst.
As regards my idea generation process, it’s really just reading widely. I read lots of news, articles, books, blogs etc. every day in the hunt for ideas. I like to find my own ideas so I avoid reading any sell-side research and I tend not to read other analysts’ work online, in order to maintain originality and build my own thesis and conviction that I can stand over.
Once I find an interesting idea, I’ll do what I call my value screen where I assess current value vs its historic valuation through a cycle and vs. peers and private market transactions. If it appears fundamentally cheap based on this screening exercise, I’ll add it to my “idea bench” of names to work through. Beyond that, it’s a case of doing the proper work on the idea then, reviewing historic financial statements, filings etc and those of peers, talking to people in the industry, understanding the industry and what’s going on within it, such as issues, themes, risks, opportunities etc. If I can build conviction following that, then the idea becomes a candidate for a high conviction idea for my Model Portfolio and I’ll usually do a detailed investment memo-style write up to refine and present my analysis, which I’ll then publish in the newsletter. Ultimately that’s what I see as the value-add for my subscribers.
Conor
You wrote a piece in September called “The Arithmetic of Asymmetry” where you succinctly deliver a verdict on the importance of capital preservation. This particular piece reminded me of Yen Liow and his thoughts on ‘actionable volatility’. Here, he suggests that ‘high prediction’ environments are conducive to actionable volatility.
How do you decide between what is actionable and non-actionable volatility in the names you own (and don’t)?
Conor Maguire
Firstly to frame my view of what makes an idea actionable - an idea is actionable for me if it meets all of my key criteria:
1. It must be fundamentally undervalued with a clear or plausible catalyst for re-rating with 50%-100% upside
2. It must have limited downside risk in terms of permanent capital impairment, with a low probability of that downside scenario actually materialising,
3. Combining 1 & 2 above, it must offer an asymmetric reward-to-risk ratio where the upside is 3x my assessment of downside risk.
If an idea meets all three criteria, then it is actionable.
With regard to non-actionable volatility, to me, that would be a situation where a name may seem fundamentally cheap and trades on a low multiple, but where the downside risk (of capital loss) is high, if the thesis doesn’t work out – for example, if a stock looks cheap and could offer a multi-bagger return profile, that might seem great, but if the downside is possibly to zero, I’m not going to be interested. I try and follow Buffett’s rule in this regard in that I won’t underwrite catastrophe risk for a stock. 100% upside compensates me for say 20% capital impairment in a downside, but not 100% potential loss.
Conor
I appreciate all the context on your process there Conor, thank you. Moving on, why have you decided to take this skillset that you have developed and direct it towards self-published research at Value Situations? What’s the overarching goal there and what are you hoping to deliver with your work?
Conor Maguire
I’m doing this because I really enjoy it, I like digging through news and other sources of information to find interesting investment ideas that I think the wider market is missing, and I believe I have the requisite professional experience and skillset to properly analyse and value companies.
My goal really is to share interesting and original ideas with readers to supplement their own idea generation and add value by pointing them to where they can make high, absolute rates of return independent of wider market sentiment or price action. To your earlier point regarding the outsourced analyst, I would see my readers as getting access to a professional HF/PE analyst’s ideas and analysis to assist them in their own investment process.
My one caveat here is that Value Situations is not intended as investment advice and nothing I publish is a recommendation, so readers should always do their own due diligence.
Conor
What have been some of your largest takeaways (both good and bad) as you approach the first ~9 months of breaking off on your own?
Conor Maguire
The two main takeaways I’ve had is; 1) If you try and add value by putting out quality work, you’ll generally receive a lot of value in return from people. People are generally very supportive and receptive to my work, which is encouraging, and the online analyst community is full of helpful and really smart people, so I’ve really enjoyed making new connections in that regard, and; 2) it is a challenge to produce high-quality insights or analysis on a weekly basis – in reality, if an analyst at a HF comes up with say 4 really good ideas a year, that is a great year. Weekly or monthly high conviction ideas is just not realistic, and the quality of ideas and analysis would quickly deteriorate if I tried to meet that level of frequency. I’ve found a small proportion of my readers seem to expect conviction deep dives every other week, which I think is unrealistic.
Conor
Given that I speak to so few UK-domiciled analysts, I would like to take the opportunity to ask you about your thoughts on the gulf in retail participation if you were to compare the UK and the US. Currently less than 5% of the UK population fund a stocks&shares ISA account. Despite the average account size growing from £3.3K to £9.3K from 2009 to 2019, the number of ISAs have fallen to 10-Y lows of 2.4M (3M in 2009). Elsewhere, the ONS suggests that just 14% of the population invest outside of their pensions, compared to 50%+ in the States.
Why do you feel the UK are so reluctant to invest, whether it be education, risk appetite, culture, would love to hear your thoughts?
Conor Maguire
I think that’s possibly due to a cultural difference or mindset when it comes to savings and investment, where the stock market and Wall Street perhaps has an outsized influence in the US, compared with the City in the UK. I haven’t studied the hard data or facts on this, but my sense would be that there is a greater risk appetite in the US for stock investing, as well as a more proactive wealth management industry off the back of the introduction of 401k plans in the 1970s. By contrast, the UK and Europe have always tended to be more conservative when it comes to personal finance, and with a relatively less dominant financial sector and so perhaps that has resulted in the disparity.
Conor
Following on from that question, what were the early influences in your life that led to you identifying your interest in the investment space?
Conor Maguire
I originally trained as an accountant and earlier in my career, I worked on M&A due diligence and corporate valuation assignments for the firm I worked with. That got me interested in valuing companies and at the same time I developed a deep interest in value investing. I read all the classic books on the topic, from Benjamin Graham to Buffett’s letters, to Seth Klarman, Joel Greenblatt and many others. From there I gradually made my way over to the buy-side to work with Bain Capital, one of the largest PE/alternative investment firms in the world. So that’s how I found my way into the investment business.
In terms of an early influence, I would say that might be Dr Michael Burry – his insistence on being an original thinker and turning over many rocks to find that interesting idea that no one else has spotted still resonates with me today. Michael Lewis highlighted this particular aspect of Burry’s approach in The Big Short when he wrote that “the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual.” This makes complete sense to me – to beat the market average return is rare and unusual, therefore to achieve this must necessitate a differentiated approach to that of the average investor.
Hence my interest in overlooked, special situation-type investments. Lewis also quotes Burry on this point, where he said “If you are going to be a great investor, you have to fit the style to who you are.” So with Value Situations, I’m trying to find names and situations that I find interesting, using my professional experience and skillset (which I think is differentiated from a lot of long-only, public equity investors).
Conor
Are there any words of advice to up and coming analysts who may be reading and wish to pursue a similar career path, whether public or private?
Conor Maguire
I’d offer two pieces of advice. Firstly, strive to be an independent thinker, and to be creative rather than formulaic in your approach. And secondly, when you have an investment idea, knowing the downside and why you’re comfortable taking that risk is as important as knowing the valuation upside. I’ve seen lots of people pitch a stock with a view that it’s worth x% more than the current price, while never even considering how much they could lose if they’re wrong in their thesis. It’s an inescapable fact that we all get some calls wrong, so that needs to be factored into the investment process.
Conor
Lastly, where can readers find you and your work, and do you have any concluding items you’d like to say?
Conor Maguire
Yes, people can follow me on Twitter where my handle is @ValueSituations, and my newsletter can be found at valuesits.substack.com. With the newsletter, I write a weekly newsletter on current and potential new ideas, and every 6 weeks or so I try to publish a high conviction investment memo edition on an idea I find compelling and actionable.
As for concluding remarks, thanks for inviting me to do this Q&A, I’ve enjoyed it and hopefully, your readers find it interesting too.
Conor,
Author of Investment Talk