Finding Overlooked Opportunities for Deep Value Investing with CEO Chris Towle of Towle and Co - Transcript

Business with Universal Love Deep Value Episode

Michael Sipe (00:02):

Hey there everyone. I'm Michael Sipe and welcome to the Business with Universal Love show. The show that teaches how businesses become reliably profitable using a secret ingredient, unconditional love. We explore best methods to create connection and establish value with you guessed it. The people that make the business remarkable companies are built not just on great products and services, but on the energy of its customers, shareholders, workforce, and management teams with at least 70% of the public considering themselves spiritual, unconditional love is a core element that needs showcasing. Join me as we explore. What's great about business and how you can model those stellar qualities in your own business.

Michael Sipe (00:54):

Well, folks, in this episode, I'm super excited to have Chris Towle on the show because we're going to talk investing and growing wealth. Chris is CEO of Towle Co and his work focuses on finding deep value in companies for investment. They've been at this for decades and their discipline and selection process track record speaks for itself. But what you may not know is how they also use some nontraditional ways to evaluate the heart of a company. When we talk deep, we're not talking only about a discounted price. We're talking about what makes for a company's solid foundation. Towle Company's mutual fund is available for all investors. And after the interview, check out more of their offerings in the show notes, let's get going well. Hey Chris,

Michael Sipe (01:46):

Welcome to being on the show today. I've wanted to chat with you for a while now about investing and some of your success let's jump right in and share with our listeners a little bit about what deep value investing is.

Chris Towle (02:01):

Yeah, sure. Thanks for having me on Mike. It's fun to do these sorts of things in the world of social media, and it's a powerful tool for learning that's for sure. Toll and company was founded in 1981 by my father, Woody toll, who in my mind is one of the great currently living deep value contrarian stock pickers. He has done an extraordinary job with his own personal capital and then offering those services to friends and family. He started out his career in mergers and acquisitions for Brown shoe company in st. Louis and the 1970s. And he was director of corporate development there. Before that his father, my grandfather was a professor at the business school at Olin, at Washington university in St. Louis. It was really that combined with his experience as a corporate development director and his appreciation for stock pickers like Benjamin Graham, sir, John Templeton, a gentleman named John Neff.

Chris Towle (03:04):

And of course the Warren Buffet of the 1960, he blended sort of that his approach to the stock market through those two, through the two lenses of truth, additional stock pickers and this private equity, merger and acquisition approach that he had learned and executed during his time at Brown shoe company. So he peeled out on his own with about a million dollars under management in 1981, and started hanging a shingle out and was a sole practitioner from 1981 to 1994. And then I joined him in October of 94. We had about 20 million under management and neither one of us obviously had worked for an asset management firm. Neither one of us were classically trained security analysts. We did not have CFA. And we said, boy, we have a really unique sort of strategy here. That's very interesting and differentiated. How can we offer to the world and be, and benefit others?

Chris Towle (04:05):

And so we set out together in 94, it was a little bit like American chopper, the reality TV show, where you have a father and a son trying to hammer things out and figured out, we didn't swear as much yell at each other and we weren't competing, right? We didn't have separate chopper custom shops that were competing, but we were working in unison with the same goals in mind. And so it was from there where we slowly built this boutique of institutional firm. It took quite some time. It's now been 25 years. We've been working together. It's been a real blessing, but I think we have people say, how do you work with your father? And I say, you've got to have number one, you have to have unconditional love. Number two, you have to have a shared vision. And number three, you have to know how to really amplify each other's strengths and make sure that they're complimentary and well understood by both parties.

Chris Towle (05:01):

And so we've been able to figure that out and it's been incredible in what we do. You know, deep value investing is a really kind of a lost art. Now, when I started out in the industry in 1994, there were probably 20 to 25 institutional deep value managers or asset managers that served high net worth and institutions. And gosh, I'd say now they're probably a half a dozen that are still around and we can talk about that later if you want Mike, but just kind of the changing landscape of the institutional asset management world is really, really fascinating. What's happened in the last twenty-five years. So my role has really just been developing the firm and does it take to be a true institutional asset managers? So you wear a lot of hats when there's just two of you. And now we're managing about 750 million and we have a mutual funds and a team of 10 and a bunch of smart people around us have made us better. And presumably we've been able to give them great opportunity and a real sense of satisfaction and impact in their own lives and a sense of purpose. So that's kind of a very high level, Mike.

Michael Sipe (06:10):

Yeah, that's great. Chris, thanks for sharing a little bit about the history there and congratulations on being able to take that sort of boutique-y value investing and make it an institutional level investment opportunity for others, and to grow it to the scale that you have done. That's a great accomplishment, of course, but I really love how you talked about some of the three principles there of unconditional love, shared vision and amplifying the strengths. And then you touched a little bit more on your own employees of hopefully they get some satisfaction out of the work and they get their own opportunities to grow within the firm. So in that regard, those are great foundations to, to build from. What's been your observations about the receptivity of the institutional firms coming in and using your products and services in terms of their views on it. Yeah,

Chris Towle (07:06):

It's really tricky. So our strategy is very much or hyper-focused, I would say we're a niche or niche firm, and we typically manage a very small sliver of an institution called an endowment or a foundation or a large family office. We typically manage between two and maybe 8% of their total investment portfolio or liquid portfolio. The key aspect for us really is finding what I call natural buyers of our strategy. And those natural buyers are folks who are not performance chasers. They tend to be fairly astute. I would say are sophisticated investors that know how to appropriately size and investment with us relative to their other investments. If they take the time to understand our process and the benefits and the downside. And then how does that fit into the overall picture and what their financial goals are in a perfect world. You want to find investors that share our view of capitalism, which is kind of a benevolent view of capitalism.

Chris Towle (08:19):

We look at it through a sort of multi-generational lens that says, you know, capitalism is not really just managing money, is not about just making more money, right? It's really the fuel of the economic engine that enables mankind to innovate and be more productive. And then ultimately to be more generous with their capital. And I always think about the great healthcare systems and universities and research centers all around in schools, all around the globe that have been funded by capitalists and their benevolence. And we love to have clients, institutions and private investors that have that ultimate purpose. To really the underlying reason we create capital is to advance the wellbeing of others. And if that alignment is there and they understand what they're investing in, the types of securities we buy, then it tends to be a harmonious relationship and very long-term in nature. That's kind of how we think about it.

Michael Sipe (09:22):

Well, absolutely your success in terms of growth and assets under management points to that. And that alignment you talk about is pretty important. So if you could, you talked a little bit about the Titans of value investing talked about Warren buffet and John Neff and others what's that deep value investing apart from regular value investing.

Chris Towle (09:45):

Yeah, it's a great question. There are so many colors in the rainbow. There are just as many types of value investors in the value sort of kick out for the value style. I think what rather than going into all of the different types, I think what really, to talk about what we do before you do what we do, there's really this mindset, right? That is required to do what we do. And it's kind of a belief in the certainty of progress is there because you're buying companies historically that are struggling fundamentally for some reason, right? It could be internal challenges. It could be they're too high up on the cost curve. It could be in the industry cycle that had wins to be any number of things, but you have to fundamentally believe that good ultimately prevails. And that's the sort of belief that we have.

Chris Towle (10:36):

You also have to be fiercely independent to do what we do. And I think the fact that we have an office in Denver and an office in st. Louis, we're kind of in those a little bit in the flyover States. So we're not caught up in the herd mentality that tends to permeate the investment communities in New York city or London or Boston or Chicago or LA. And that actually helps us quite a bit because you need to resist the herd mentality. You have to be willing to go against kind of groups to find opportunities that are really severely mis-priced. And you also have to have the create discipline in the whole process. And we spent a lot of time bringing as much science and as much information that I say, we have so much data today, you get the dumb stuff out of the way.

Chris Towle (11:23):

And that's part of the discipline where the process itself is actually driving the strategy. And then you can spend more time on the higher end thinking more broadly, strategically evaluating qualitative aspects of the management team or the company itself. But our real starting point, it's fairly unique and from a quantitative screening process, and that is we look at low price to sales and low enterprise value to sales. And then we look at a three year forward earnings yield. And that is basically looking at if companies selling at $10 a share, we have to feel confident that it can make our Wheeler what's called a forward or a return to market value hurdle of 15%, which is basically a three-year earnings yield. If you buy a $10 stock and estimate a dollar 50 and earnings at least three years out, and that's based on mid cycle normalized earnings.

Chris Towle (12:14):

So we use very conservative assumptions that we're looking at sort of the mid cycle performance of the company. And we'd like to buy anytime we invest in a company, if it doesn't have 50% upside potential over say a three-year period, we're really not interested. And that kind of gets you to that 16 to 17% annualized number. So that's how we underwrite all of our investments. That's a very high level, but that's what makes us fairly unique. And then I think a problem, a challenge for many value guys is that they end up buying businesses because they look statistically cheap, right? Because they're trading at a deep discount to the sum of the parts. So the net asset value or liquidation value or book value would have you, but the end up buying those companies without any clear catalyst, right? How is that value? That's there going to be on lock? Is there going to be a transaction? Is there going to be a spinoff? Will there be a rebound and recovery in earnings due to something the company is doing in terms of cost structure or a simple recovery in the cyclical forces of the industry, that the companies that you have to have a catalyst, otherwise you buy these companies in the deep value space and they just, again, we call them value traps, right? Or permit cheap. And that's where I think some classic value investors get tripped up. So that is,

Michael Sipe (13:37):

That's a really good point about the value of the parts versus the value of the whole. And there are a bunch of qualities to that evaluation. And one of the things that stands out to me is the idea that you've holistically looked at management teams, you've looked at what that catalyst might be, and it isn't always the deal as much as the expectation of good performance going forward. That good quality you talked about do value investing firms tend to go and look at kind of behind the curtain as to who the management teams are when they make those selections.

Chris Towle (14:14):

Absolutely. You got it. It's a little bit like a marriage, right. You're investing in the people.

Michael Sipe (14:20):

Yeah, exactly. How do you look at those management teams and look at the intangible qualities that they bring to do that evaluation process besides the traditional book to value forward earnings, things like that?

Chris Towle (14:32):

Yeah. We have a list of criteria that I would say broadly available in databases. That is a way to assist a magically, evaluate a management team and its structure. And we come up with a score and these are things that are centered around. How has the board holler their governance, policies and procedures? How has the management team compensated relative to its peers? And are they compensated? Is their compensation package aligned with the shareholders? Those are some of the things that we look at. We also go into a qualitative exercise, which we call our investment checklist. That's when he asks some qualitative questions that are pretty interesting. And I'll give you a couple here that we run through for every position to kind of get our arms around the management. So it's the management responsive to our inquiry. Does management have a very clear vision? And are they realistic about current conditions that the company's facing and future planning that's basically, are they honest and forthright or are they sort of spitting a tail, right.

Chris Towle (15:47):

As management communicated a sense of frustration around the stock price. In other words, do they see the gravity of the situation? And is there a deep, strong desire to really put forth the effort and strategy and execution to overall the current perception of the business? This is a management team have the necessary background and experience. And of course, how they communicate is really important on their calls and then the calls that we have with them. And then sometimes if a business is going through a transformation, it's also what we do or check our cultural checks, where we end up identifying typically through LinkedIn, or maybe through our own network, we want to get some third party verification around the culture of the executive team, the suite, and how they are as individuals and how they treat their fellow man and their employees. And that is a process that sometimes is very, very revealing because if you talk to former employees and folks that might've worked with that at other firms, it's a good exercise because you can think closer to the truth. So you have to glean really and sort of get a sense for who they really are as individuals I think, and what qualities do they would really embrace and want to express. And that's a very important part and you don't always get a ride, but you try your best.

Michael Sipe (17:08):

All right. So as you said, there, unforeseen circumstances that come up with any business and there's always setbacks. How true is it that those management teams that you've talked about that have those additional qualities, those almost spiritual qualities in a lot of instances, how true is it that they're able to withstand that downturn or those bumps along the way, and still come out ahead in the long run for sure they are far better equipped. Do you have any examples,

Chris Towle (17:39):

One company that we've been a long time shareholder and is called Meritor? The symbol is N T O R. And if we were to highlight a particular team that has been exceptional for us, and we've been able to observe for many, many years, it's the team at Meritor and the CEO, the CFO, the chief operating officer, the president, we've met with them multiple times up in Detroit, where their headquarters are, and they are just, they're managing a cyclical business. It's a business that basically makes drive trainings for off-road and on-road every trucks and brake systems. And that sort of thing, the understructure of the chassis, their customers would be like a Volvo or a Dahmer Christ, you know, a Navistar or a Pacar, which is the, make the big class eight trucks. And these guys seem to be extremely cohesive, very, very thoughtful, very respectful for each other's accomplishments and what contributions each member of the team megs.

Chris Towle (18:44):

And they really seem to have a sense of humility around the competitive landscape, where they are in that landscape and where they want to be. So they have a vision and they have this dedication to execute on that vision on a daily basis. There's a quiet, confident, but it's interesting because it's kind of built around humility and understanding what it takes to really be great at what they're doing in a business. That frankly is a very cyclical business. That's very global in nature and with competitors, not only in the us, but also throughout Europe and Asia. So it's been really fun to watch them grow and execute and exceed their plans year after year.

Michael Sipe (19:35):

Yeah, that's phenomenal actually. And it's run. So almost counter-culture to some of the mindsets out there about business and that business is competitive. It's cutthroat. You gotta, you know, pull the rug out from the other guy. We got to look for ways to win. Anytime it strikes me as interesting that one you're investing in a company that does that opposite approach of like, Hey, it's a quiet humility. It's an inner strength that they know that they're providing a good product and that they're valuing their employees. And the second aspect of that is by that value and by that understanding of what they are providing that they're able to then innovate and create and look for opportunities that they might've missed. Had they been so focused on the competition are so focused on other things that would be distracting from running the business in the way that they truly envisioned,

Chris Towle (20:31):

Oh, the way I say their heads on a swivel, they're trying to appear around the corner and see what's coming and understanding how to innovate and invest. And they're very well prepared for the electrification, right? Seeing that's coming, not only obviously to light vehicles, to cars that you and I might drive, but it's coming full steam ahead to delivery trucks and heavy duty trucks and class eight trucks. And they're, they're right in the thick of it and leading the way. And I think it has a lot to do with those inner qualities that you just mentioned.

Michael Sipe (21:03):

What's the impact on the approach that you all take to investing either with your client, your customer base or with your employees?

Chris Towle (21:12):

Yeah, well, it's really hard. Like if you're a mutual fund, right. That the total deal value fund, which is probably the easiest way to sort of access our strategy, the ticker symbols, TD VFX. And if you just look at a fund right on paper documents, or you're trying to buy it through Schwab or van card or fidelity, one of the big platforms, which you don't get to see, he is really how the inner workings of the investment process come together. Right. And I think one really interesting approach that we've taken that I think some of our clients have in large investors has been, I find them taking notes when we share with them how we've approached it. A lot of mutual funds or asset management firms are built around a single portfolio manager, one individual. And the challenge with that is a single individual has natural biases, right?

Chris Towle (22:07):

Or blind spots or anchorings that can trip somebody up. When you bring together a collection of individuals who are all invested in our strategy as our team is, but they all come at it from a very different lens. I mean, we have one guy who came from the private equity fund business. We have another guy who came from the credit business, another one who came from the business valuation M and a advisory world. And then my father's his corporate strategy. And my background is an operations guy at a subsidiary of Berkshire Hathaway. None of us come at it through the traditional security analysis lens or asset manager, lads, we're coming at it from these different windows on the world. And it creates this beautiful sort of interplay of cognitive diversity, where we're all invested in the fund. And in the strategy personally, we try to put away our biases, shine, a bright light on the different blind spots that our team has, and really strive for the best idea to win right across all of us.

Chris Towle (23:14):

And that is a different approach. It takes a lot of trust. It takes a lot of humility. You have to be able to back your ideas and your perspective with facts. And it creates though this sort of deep appreciation for individual perspectives and a deep appreciation for getting to that sense of oneness around. Yep. This is what we want to invest in, and this is the right price. And we all agree and it's becomes a unanimous sort of beautiful coming together. And I think all the time never deviating from your base principles right around the process. And that's key really, really key. So I think that discipline combined with our team approach has impacted, I think, how others think about other teams that they're on or how to maybe roll within their own families even. And I know it's had an impact on our employees too. Yeah, for sure.

Michael Sipe (24:07):

Yeah. Great. The one theme I keep hearing from you is in addition to the discipline aspect of it is the collaboration. So you're looking for those perspectives and coming to it, unanimous decision or unanimous choice about where and how to invest. And that's, that's a great skill set to have as a group, as a team, right? So while you're doing that yourself, looking at these companies to invest in, you're practicing it at home within your own firm, and that's obviously attractive to these institutional funds that would want to go and invest with you, or even the individuals who wants to put their own money into the mutual fund. So great. Okay. So one of the questions that always comes up for investing is, Hey, the stock market goes down. And as we know this particular week was bit of a doozy here in October in terms of sell off in the markets. And we know collectively that a lot of that is based on fear. How does your firm approach fear and dealing with those aspects?

Chris Towle (25:17):

Yeah. I mean, what we are in some of the most volatile securities in the public equity world, and because we are what I call a pro cyclical investor, we typically buy more economically sensitive businesses. And that's, if you're a true value person or firm, that's typically you have quite a bit of exposure to economically sensitive industries and companies. And of course, when there are fears going on regarding economic slowdowns or recession, or what have you, that you end up seeing pricing pressure and de-risking activity going on in the stock market that can have a disproportionate impact on economically sensitive companies. Like the ones that we invest in when you go through these periods of I'll say disruption or dislocation, it really helps to have a long-term view. As we do every investment we make, we're looking at it through a three-year lens, and that gives these management teams opportunities to improve and execute on their plans.

Chris Towle (26:24):

And if you have a valuation discipline, as we do these points in time that we're in, we may be entering one right now as we come up on this presidential election. And we have some uncertainty around Congress and stimulus package, and obviously the pandemic that is weighing on investor psychology and an outlook it's how do you capitalize on these moments in time? And that's really when we've done our best work, frankly, and have been able to create value during those moments of just of market dislocation, broad-based dislocation, where the opportunities that we're looking for in the deep value space tend to expand by many multiples in terms of the sheer number of securities equities that began to hit our radar and qualify for as a candidate for the portfolio. So we saw it during the great recession, 2008, 2009, we saw during the oil sell off in 2015, 2016, we saw during the taper tantrum of the fourth quarter, 2018.

Chris Towle (27:32):

And then of course we saw during the most recently here in 2020 with the pandemic and for us, it's again, clinging to the belief that sir, the progress is a certainty and that the human spirit is a powerful force. You probably don't want to bet against it. And it's taking advantage of, it's not taking advantage of it's capitalizing on a market on these market behaviors that are truly inefficient, and that's how opportunities come forward and staying in your seat and having the discipline to take advantage of that is really the key as a developer investor.

Michael Sipe (28:06):

That answers the question very well in the sense that it fear tends to drive sort of an emotional response. And so if you are disciplined, like you said, and then approaching it from the opposite of fear of one of unconditional love, where are these companies, what is their value and how can we take advantage of those opportunities in a crisis space does serve you well, what's your outlook on the future?

Chris Towle (28:34):

So just from a macro perspective, I would say our palace view is that we're going to, we have a healthcare challenge that needs a solution, and it's going to have to be balanced with fiscal and federal stimulus, kind of looking out over the next few quarters. And once you get some healthcare solution and as we continue to get better, sort of managing this public healthcare threat as a society and having frankly more discipline, more honesty and embracing the idea of public good, rather than individual entitlement, we're going to get through it. And it's going to be glorious. There's going to be right in the middle of it all as we are today. There's tremendous innovation going on. There's wonderful. I think, reflection going on on the part of individuals, households, businesses, and a reprioritization people are reprioritizing, what really matters. And so I think I always tell my kids when they're challenged by something that these things aren't happening to you, they're happening for you. And I think in some way, the crisis that we're in the middle of right now is if you want to call it sort of chemical visitation or an unearthing, it's kind of, I believe result in a better foundation, looking out without a question. I think we're going to get there. It's a little painful in the process, but I think it's an awakening and it's going to lead to them.

Michael Sipe (30:10):

Yeah, I think you're spot on. I think there is that reflection and moving forward in a slightly different way with a little different priorities and where my previous talks, they talked about how emotional intelligence is now gravitated to the top power skill or tough, soft skill that management teams are using. And that's post COVID post post crisis kind of period mentality. So you just touched on that. That's great to hear that insight from you. So Chris I've really enjoyed our discussion today. Is there anything that your company is doing or offering that listeners might be interested in and how can they reach you?

Chris Towle (30:47):

Yeah, well, the best way to reach us, and you can always send an email to [email protected]. That's T O w L E C o.com. We have a website www.towleco.com the mutual fund has its own website, towlefund.com. And I think that one of the most fascinating aspects today, really, and I will say, we don't have anything new to offer. We run this single strategy. We're heavily invested in it, the owners and the employees of Towle and company, and we would be delighted for you to consider investing alongside us. And that's really what it is if we view it as a partnership, an exercise in trust. But what's really amazing right now is this bifurcation between growth and value securities. That's it really at historic levels on multiple metrics and in some ways it's beyond even a two standard deviation. So it's very, very statistically significant.

Chris Towle (31:43):

And I think folks should contemplate rebalancing investment portfolios into the value realm. However you want to express that because once we get through this crisis, the COVID crisis and we have a healthcare solution, it's likely that we're going to be back onto an economic growth trajectory for the U S economy and probably for the globe. And that will bode very well for economically sensitive industrial stocks and procyclical security. So I don't have anything to offer other than that perspective. And, uh, and hopefully that generates some contemplation on the part of your listeners is something to think about and look into.

Michael Sipe (32:23):

Yeah, absolutely. Chris that's great insight and that perspective of where things might be going and then the value versus the growth and the standard deviations is truly interesting. I appreciate the partnership that you and I have had and talking a little bit about the investment world and how spirituality and unconditional love play my heart large part in your work. So thanks for being on the show today, I've enjoyed it very much. Thanks for the opportunity.

Michael Sipe (32:53):

This podcast is provided for informational purposes only, and is not advice or recommendation to invest in any products offered by toll and company toll or to buy, hold, or sell any security. The views expressed are the subjective views and opinions of the speakers. As of the date, the podcast was recorded and should not be considered a forecast of future events or a guarantee of future results. Certain information contained in this podcast may constitute forward looking statements, including statements regarding tools, intent, belief, or current expectations, which may or may not come to fruition. Listeners are cautioned not to place undue reliance on these statements. Any company identified and described in this podcast is intended to illustrate certain concepts employed by toll and does not represent all of the securities purchased, sold, or recommended for client accounts. The listener should not assume that an investment in any security identified was or will be profit.

Michael Sipe (33:57):

Hey listeners, thanks for listening to the show. As some of you may know, I'm an executive coach specializing in helping company leadership boost the company's vitality by creating an enthusiastic engaged and profitable workforce. Since it's the month of Thanksgiving, I have good reason to be thankful in part because of you, the audience for listening to the show, as an expression of my gratitude, I'm offering a pretty darn good deal to senior managers and executives. It's a free energy leadership index assessment, which is one of Forbes, top five industry assessments. We've got plenty of research to show that an energy leadership assessment not only strengthens your awareness of your leadership capabilities, it also improves life satisfaction, be one of the first five to sign up and receive a complimentary energy leadership assessment. As an added bonus, I'll toss in a copy of my best seller book out of dad's box, which teaches in simple steps, how to shift away from a controlling parents, limiting belief state, and instead execute your own style of positive leadership. So hit the register button in the show notes. I firmly believe you'll be glad you did have a great day.Business with Universal Love - Deep Value