GVC 2Q2016 Newsletter(1)Granite Value Capital’s investment strategy looks to own 35 to 40 of the most attractive companies regardless of company size or domicile (located in the U.S. or outside the U.S.). We like to say the “world is our oyster” for selecting investments. With the U.S. stock market, as measured by the S&P 500 Index, selling at a P/E ratio of 19.8 and about a 30 percent premium to non-U.S. stocks, non-U.S. stocks as a whole look more attractive. During the second quarter we established a position in Sanofi—a leading French based healthcare company that we think is undervalued.

Sanofi has a wide ranging portfolio of drugs, vaccines and consumer products that focuses on oncology, diabetes and cardiovascular disease. They have an attractive pipeline and an above average business. As a result, we believe Sanofi is worth 20 times cash earnings or about $56 per share. We bought the company in both of our equity investment strategies on May 12th for $39.36—at 70.4 percent of our estimated intrinsic value. The above chart compares our estimated intrinsic value versus its stock price since 2005—when they merged with Aventis. We think there is a good chance Sanofi’s stock price and estimated intrinsic value will converge over the next few years and we will be rewarded with an attractive return.

We think long-term investment success is achieved by following a disciplined value based investment process. We also think the odds of investment success increases when you select investments from a broader universe that includes non-U.S companies. We currently have about 13 percent of our equity holdings in non-U.S. companies. Given the extreme valuation differential between U.S. and non-U.S. companies, do not be surprised if over the next few quarters we increase our holdings in non-U.S. companies like Sanofi.

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The above post has been excerpted from a recent letter of Granite Value Capital.

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