Sahm Adrangi is an instructor at Wide-Moat Investing Summit 2016.
Sahm Adrangi, portfolio manager of Kerrisdale Capital Management, is a rising star of value investing. His fund, launched in July 2009, has trounced the S&P 500 Index since inception. Prior to founding Kerrisdale in 2009, Sahm Adrangi worked as investment analyst at distressed debt credit fund Longacre Fund Management. Prior to Longacre, he gained experience in the bankruptcy restructuring group at Chanin Capital Partners and the leveraged finance group of Deutsche Bank Securities. Adrangi holds a BA in Economics from Yale University.
How Sahm Adrangi Made a Fortune on the Short Side
Those familiar with Adrangi’s path will know that revelations about Chinese reverse-merger frauds have played a major part in generating Kerrisdale’s outperformance. In an insightful 2011 article, The Washington Post told the story of Adrangi’s research-intensive primary work in that previously obscure area of small-cap equities. Many investors jumped on the short-selling bandwagon as an increasing number of frauds were exposed. If you are looking to improve your idea generation process, consider how Sahm Adrangi first became intrigued by Chinese reverse mergers. In a July 2011 interview with The Manual of Ideas, he stated the following:
“In early 2010, when I was looking at this space, there were dozens of companies showing abnormally high margins and growth rates that were trading at unusually low valuations. This struck me as unsustainable. Either these companies were reporting accurate figures and their stock prices deserved to trade several times higher than their current market prices, or the companies were fabricating their financial statements and the managements needed to be investigated by the SEC. We decided to immerse ourselves in the sector to figure out what was going on and share our detailed granular research on whether these companies were severely undervalued (i.e., reporting real numbers) or severely overvalued (i.e., reporting fake numbers).”
“In terms of how we’ve separated the frauds from legitimate companies, we’ve relied on investigators, financial filings in China, and common sense. Some of these businesses are reporting irrationally high margins, growth rates and returns on capital despite operating commodity businesses. These too-good-to-be-true situations have led us to dig deeper on whether these companies are misrepresenting themselves in their filings.”
Many of us came across U.S.-listed Chinese companies in 2009 or 2010 as the group traded at low multiples of stated earnings. Most value-minded investors either invested in some of those companies, or they passed on them because “something” gave them reason for pause. Adrangi’s reasoning is insightful, because he immediately realized that an opportunity existed, either on the long side or the short side. With intense follow-up research, he correctly concluded that the opportunity was squarely on the short side.
How Sahm Adrangi Found Winning Long Investments
Less well known to the investing community may be Adrangi’s long investment strategy, although his fund has been mostly long since inception. Adrangi has sought out similarly eclectic ideas on the long side as on the short side. Here is how Adrangi described one source of Kerrisdale’s outperformance on the long side:
“We’ve made some of our best investments by becoming experts in weird and unusual areas of the public markets, and using that deep understanding to our advantage. For instance, we generated strong returns on SPAC [special purpose acquisition company] warrants in the second half of 2009, and accomplished that by becoming experts on how SPACs operated.”
Adrangi’s message is not so much to invest in SPACs. The latter were simply a vehicle that was misunderstood at one point in time. The true message is to comb the markets for areas that other investors might be ignoring. By doing our own fundamental work, we may occasionally stumble upon a goldmine. TARP warrants or certain residential real estate-related securities may have been other such areas in recent years.
Learning from Sahm Adrangi’s ValueConferences Presentations
Adrangi revealed one of his best ideas at Small-Cap Investing Summit 2013. He outlined his thesis on AMERCO (UHAL). With the stock trading at roughly $144 per share, Adrangi explained why the company had an “unassailable” competitive position, and why it was cheap. Five weeks later, the shares had risen to $177. We should not draw conclusions from the market’s swift agreement with Adrangi’s thesis, but rather from the way Adrangi thought about the opportunity.
We are pleased to share Adrangi’s full ValueConferences presentation on AMERCO here. You’ll undoubtedly detect a twin focus on the quality of the business and the price of the shares. Like many other great investors, Adrangi was not satisfied to find only one of the two attributes. This approach seems congruent with Joel Greenblatt’s focus on companies that are both good and cheap.
Sahm Adrangi and Jordon Giancoli, Director of Research at Kerrisdale, have presented a several ValueConferences events since 2013, highlighting Jones Lang LaSalle in 2014, Korn/Ferry in 2015, and Parexel in 2016. Those session replays and slide presentations are available for replay to members of The Manual of Ideas. Here are the point-in-time investment thesis summaries:
JONES LANG LASALLE (NYSE: JLL): Industry leader in real estate advisory services. Asset-lite, service-based business model (roughly 40% of revenue is recurring). Prestigious brand name with global footprint can attract and retain talent. Leading competitive position in an oligopoly industry (#1 market share in Europe and Asia). One of only two brokerages (C.B. Richard Ellis) with global scale and full product suite. Financial crisis has allowed JLL to consolidate weaker, regional brokerages. Ability to reinvest cash flows at attractive ROIs. Roll-up of boutiques provides for continued compounding (generally preferably to buybacks; pays 7–8x EBITDA for its deals, translating into immediate value creation ). Global commercial real estate transaction volume remains 35% below pre-recession levels. JLL’s 14.5x 2014 P/E multiple appears too cheap given its competitive position and projected earnings growth of 15%+ based on European real estate recovery, a strengthening U.S. economy, and emerging market growth. Even after deducting revenue contributed from acquisitions, JLL has grown at a 12% CAGR over the past seven years. Margin expansion opportunity as JLL’s EBITDA margin is ~300bps below CBRE and newly installed, GE-trained CFO may drive cost efficiencies. Advisory-focused investment banks (Lazard, Evercore, Greenhill) are a decent comparable and they trade at 22x 2014E P/E versus JLL at 15-16x. At a 22x 2014 P/E multiple, which, is warranted given JLL’s growth prospects, competitive position in a oligopoly market, and exposure to the emerging markets, JLL would be worth $155 per share, or a 50% increase from the recent share price. Adrangi’s discounted cash flow model yields a $150 per share fair value.
KORN FERRY (NYSE: KFY) is the world’s largest high-end executive recruiter (CEOs, Board Members, Executives with $250k+ salaries) with a 45-year old brand name, leading 5% market share in a fragmented industry, top-tier recruiters incentivized by KFY’s unique cross-selling opportunities, and pro-cyclical 5-10%+ organic growth. For a variety of reasons – sparse sellside coverage, a FQ4 2014 EBITDA miss, and 15% profit exposure to Europe – Korn Ferry trades for a remarkably cheap 12x ex-cash 2015E earnings, 14x LTM cash flow, 7x unlevered 2015E EV/EBITDA, and what we estimate to be a 10% NTM free cash flow yield. KFY’s below-market multiples should recede from view rate as Korn Ferry recruiters benefit from an improving U.S. employment backdrop and accelerating corporate investment. KFY is completely under-levered, with $0 debt and about $300m of cash on a $1.5bn market capitalization. In December management introduced a $150m share repurchase program and emphasized their appetite for accretive, high-return acquisitions. Combined, these could lead to incremental 10-20% earnings growth. Using conservative long-term DCF assumptions, we believe KFY is worth $40/share and would be valued upwards of $50/share were management to adeptly deploy the balance sheet.
PAREXEL (Nasdaq: PRXL) is a leading Clinical Research Organization (CRO), specializing in the outsourcing of drug trial design, patient recruitment, implementation, and result reporting. Founder/CEO Josef von Rickenbach launched the business in 1982; over the past decade, von Rickenbach grew revenue from $545 million to $2 billion and EPS from $0.36 to $2.70. Multi-year development cycles and two-year revenue backlog lead to recurring growth. Parexel is a premium, moderately levered business trading at 11x 2015E EV/EBITDA and 19x 2016E P/E. The company has a margin expansion opportunity; peers trade for 2.5-3.5x E/V revenue, compared to PRXL’s 1.9x. Trailing GAAP growth understates bookings growth and backlog. Free cash flow is temporarily depressed on growth and cost-cutting capex.
We look forward to having Adrangi and Giancoli as featured instructors at Wide-Moat Investing Summit on June 28-29.
Sahm Adrangi on His Path as an Investor
Now that you’ve gleaned an insight into Adrangi’s idea generation process on the short and long side, you may enjoy hearing about his background in his own words. In the following clip, Sahm Adrangi talks about his education, work experiences, favorite books, and more.