How This Value Investor Beats the Market with Low Risk
Jennifer Wallace’s approach to steady compounding + 2 of her current high-conviction ideas
This month on the podcast, my guest is Jennifer Wallace of Summit Street Capital Management. I have interviewed a number of people who describe themselves as value investors. It signifies a philosophy more than anything, as they all manage their portfolios and select stocks quite differently. What they often have in common is a willingness to underperform one year in three, an acceptance that they will not have the glamour of the growth investor in the boom years but will make up for it in the down years, and a universal focus on buying stocks cheaply, although definitions vary widely.
Jennifer is definitely a value investor. In our conversation, she explains her investment philosophy, which is buying high quality companies on the cheap, sometimes when things are going wrong. She finds these gems for her 30 stock portfolio by combing Value Line, just as she did when she trained under Bob Bruce. Her focus is on the numbers.
She talks about CEOs and IR heads being great sales people for their stocks; she therefore avoids the spin by keeping a focus on the numbers. She likes her portfolio to be net cash or with very low leverage, have returns on equity of over 30%, and to be on a free cash flow yield of 10%. She may buy stocks which are overlooked because they are not in passive indices, and where there are not enough active value managers to facilitate price discovery. But by requiring low cash flow multiples, she can rely on the cash flow to deliver the return. Either management will return cash to shareholders or about 25% of the time, she receives a bid, often from private equity, attracted by the cash generation and a starting conservative balance sheet.
Jennifer has delivered to her partners a 7.8x return since inception to end-2024, even while holding substantial cash balances. She presented two of her long standing holdings at the New York Value Investor Conference which I discuss below along with an idea from the Quality-Growth Conference.
The original Value Invest Conference in London is upcoming on 14th May. It features renowned Value Investors from the UK and around the world – including Dan O’Keefe, Alissa Corcoran, James Wilson, Sebastian Lyon, Richard Oldfield, Simon Adler, Sarah Ketterer, Alex Roepers, Freddie Lait and others – plus a special session on tariffs with Anthony Scaramucci.
If you’re interested in attending next month, you can visit the conference website by clicking the logo below and use the code “behindthebalancesheet25” for a large discount of £300 until May 5th. If you have not heard of the LVIC before, head to the homepage to watch the overview video of the 2024 event.
Jennifer’s two value ideas are not your normal deep value, low price: book type stocks. Instead, these are two companies which could well appear in the quality bucket, but Wallace believes in buying stocks which have a resilience and quality to them, but at the same time meet her criteria of offering value.
The quality stock has lived up to its moniker – it’s off just 2% since the conference at the end of March, way less than the market, in spite of a considerable exposure to China and tariffs, largely because of an indirect macro kicker, as I shall explain.
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