Randy Dishmon, Portfolio Manager of Oppenheimer Global Value Fund, applies a distinct approach to value investing and identifying undervalued companies.
He values companies by looking at core, fundamental company realities like: operating cash flow, balance sheet strength, strategic assets, private market value and break-up value.
The approach combines a thematic framework to idea generation with fundamental company analysis. Dishmon looks for businesses with durable characteristics and structural tailwinds that can outperform over the long term.
Entry points are sought where a large gap exists between the current market price and a conservative estimate of intrinsic value. Oppenheimer Global Value Fund can serve as a core equity portfolio allocation for investors seeking capital appreciation.
“I don’t buy markets. I’m looking for the best 50 to 60 ideas I can find wherever they are in the world.”
Q: How do you define value?
A: Essentially, all great investments begin with buying something for less than it’s worth. For anyone looking for a formula for great value investing, that’s as close as you’re ever going to get. Value is not a matter of simply plugging certain quantitative factors into a prescribed formula or fitting into a style box. It’s not that easy. The concept of intrinsic value as developed and formalized by Graham & Dodd has always been a flexible one. In fact, in their book, Security Analysis, published in 1934, they make no mention of an exact definition or formula for determining value. They simply advocate buying good companies with favorable prospects priced with a large margin of safety. That makes as much sense now as it did then.
Q: How does your approach to value differ from modern convention?
A: I believe it does in several ways. First, the modern perspective has been that price to earnings (P/E), price to book (P/B), and price to sales in some combination is the appropriate way to define what is cheap versus what is not. This is flawed, in my view. P/E and P/B, in particular, are downstream of an array of accounting decisions. As a result, they can be manipulated or shaped in ways that can serve the incentives of the people preparing the statements, not necessarily an outside investor. It’s why I prefer to anchor concepts of value in numbers that better reflect business reality. Operating cash flow is a much better starting point. It is largely free of accounting distortions and is hard to manipulate. I start my valuation process there.
Second, there has been an evolution of sorts in the last 20 years or so, where more and more businesses operate with relatively modest amounts of physical capital, but loads of intellectual capital. This has meant that some traditional valuation tools like price to book can present a distorted valuation picture. Media and some types of technology companies are probably the most obvious examples of where this occurs. It’s not unusual to see opportunities in these kinds of companies where the cash flow or price-to-earnings ratios are modest, but price-to-book ratio is pretty high.
If you apply a valuation test to determine if the company is cheap, the P/B ratio gets distorted by the capital light nature of the business model. It looks like it is not “value,” but in truth it really is. Relying on rigid, quantitative definitions of value can cause you to miss good, cheap companies.
Third, when I examine the investment merits of a company and value it, I do so as if I were going to take it over, manage it and harvest excess cash out of it. It is a more strategic way to consider investments, more common to control investing or perhaps private equity than mutual fund investing. However, it grounds the process in the operating reality and price of the business at hand, not the day-to-day noise and commotion of Wall Street. As a result, over time, I believe we are more apt to pay the right price for our ideas.
Finally, as Einstein once said, “Not everything that counts can be counted, and not everything that can be counted counts.” I always keep this in mind. There are things which drive or create value like management instinct or creativity that are hard to measure, but can matter a lot. Peter Lynch once warned of the perils of relying too much on just numbers. A judgment about what something might be worth is more than just math. Businesses are living and breathing things in a sense. They can change, and that can markedly affect value, but may not appear in simple ratios.
Q: Do you ever think of value in a relative sense?
A: Short answer, no. Value is an absolute, not a relative, concept. Either a company is cheap or it isn’t. There is no bottom third of this category or bottom third of that sector or industry to define cheap. Relative anything doesn’t protect you from loss. In fact, it can lead you to a value trap. By accounting metrics, a stock might look cheap, but what if the company operates in an industry that will be rendered obsolete in the near future? Do you still think that company is a good value opportunity? What if the industry in which it operates has razor thin margins? What if that company’s management has a track record of poor capital allocation decisions? Some businesses are just never worth owning.
Q: So what would you say to value investors who base decisions off style boxes?
A: Investor beware. I believe “value investing” is not formulaic and should not be bound by rigid style boxes. They went to great lengths to avoid prescribed, stringent standards and technical methods to ascribe value, and so do I. The most famous value investor perhaps ever, Warren Buffett, adheres to this philosophy too. If you plotted all of the publicly traded companies in Buffett’s Berkshire Hathaway portfolio, the portfolio would not plot in the value style box. This is also true of a number of other famous value investors. My track record since inception is a product of keeping my own counsel on value—not letting others decide what it is or isn’t.
Q: Do you have any mentors who shaped your perspective on investing?
A: Yes, I joined the firm in 2001, as an analyst with no formal investment experience. To that point I had spent my career working as an engineer and as a consultant. Yet, the head of the Global Equity team at the time, Bill Wilby, recognized something in me and hired me as an analyst on his global portfolio, then the largest strategy the team managed. I learned an enormous amount from Bill and the rest of the team about how to think broadly, and holistically, about the really big structural shifts taking place in the world. From there we drilled down to businesses which were advantaged and were attractively priced. That remains the basis of what I do today as a portfolio manager.
Q: Why should an investor be interested in a global equity portfolio?
A: Thirty years ago businesses aligned geographically for appropriate reasons—doing business overseas was more expensive, complicated and burdensome from a legal and regulatory standpoint. That just isn’t true today and hasn’t been true for some time. Businesses today operate in real time regardless of the time zone. You’ve got to be structured that way to be effective and competitive. When you analyze businesses for a living, seeing global as the appropriate starting point for an equity investment is just a given. It’s the way the world actually works. Carving up a portfolio into geographic sleeves based on a corporate domicile simply isn’t business or economic reality, and hasn’t been for some time. Global is the right starting footprint and it makes sense to me that one would build from there.
Randall (Randy) Dishmon serves as portfolio manager of Oppenheimer Global Value Fund. His previous positions at OppenheimerFunds included serving as co-manager of Oppenheimer Global Opportunities Fund and Senior Research Analyst for Oppenheimer Global Fund. Prior to joining OppenheimerFunds, Randy served for two years as a management consultant with Booz Allen & Hamilton. He also served for four years as a manager with UtiliCorp United and for seven years as a Vice President/Division Chief with KCI Technologies. Randy holds a B.S. in engineering from North Carolina State University, an M.S. in engineering from The Johns Hopkins University and an M.B.A. from the University of Michigan.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile. Due to the recent global economic crisis that caused financial difficulties for many European Union countries, Eurozone investments may be subject to volatility and liquidity issues. Value investing involves the risk that undervalued securities may not appreciate as anticipated. Small and mid-sized company stock is typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations. It may take a substantial period of time to realize a gain on an investment in a small or mid-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss.