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Contrarian Investor Scott Barbee: His Fund Was Greatest


Scott Barbee, supervisor of $258.3 million Aegis Value Fund (AVALX), deserves two labels. One is “contrarian investor.” The different is “top outperformer.”




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Both labels stem from Barbee’s talent at avoiding operating with the herd.

After all, operating with the herd means you might be doing what everybody else is doing. That’s the definition of mediocrity, not outperformance. Odds are, it means you are shopping for shares different buyers have pushed up in worth.

In distinction, Barbee is a professional in figuring out find out how to zig when so many different buyers zag.

Contrarian Investor’s Approach

Under-followed shares are the one sort he buys.

Unlike many progress managers’ follow-the-leader love affair with megacap know-how shares, Aegis Value held 0.00% in tech shares as of Dec. 31, based on Morningstar Direct. He additionally owned zero client defensive shares, well being care, communications providers and actual property.

He held negligible stakes in utilities, client cyclicals and industrials. Less than 4% of his shareholders’ cash was at work in financials.

His two severe areas of publicity have been in fundamental supplies, at 71%, and vitality, at 23%.

Aegis’ don’t-follow-the-crowd path paid off on this yr’s first quarter. The fund’s 18.05% acquire made it the highest performing U.S. diversified inventory fund. The S&P 500 misplaced 4.6%. Aegis’ small-cap worth direct rivals tracked by Morningstar Direct misplaced 2.01% on common.

Barbee’s refusal to play observe the chief has paid off over the long term too. Take the current bull markets. One ran from March 2009 by way of Feb. 19, 2020. Another, nonetheless underway, started March 23, 2020.

Many buyers assume bull markets are quicksand for worth managers. But they weren’t for Barbee.

His fund topped the S&P 500 index in 2009, 2010, 2011, 2012, 2016, 2020 and 2021.

Barbee, 50, talked with IBD about his funding strategy from his McLean, Va., workplace.

What Makes Barbee Contrarian

IBD: Is it correct to name you a contrarian investor?

Scott Barbee: I’d say we’re contrarian.

IBD: How so?

Barbee: It’s within the DNA of the agency to essentially strive to take a look at locations persons are avoiding. We like locations which are unpopular. When we’re encompass by many buyers and many firm, we get uncomfortable.

IBD: That makes it sound straightforward.

Barbee: It is not. Sometimes, the gang might be right.

Barbee Thinks Ahead

IBD: Please describe your total funding technique, Scott.

Barbee: We’re within the worth camp when it comes to our intensive give attention to pressured or distressed shares which are unfairly tarnished, in our eyes. We’re balance-sheet centered in the way in which we take a look at firms. We have an eye fixed on efficiency, not within the subsequent quarter however a lot additional forward to a possible restoration.

IBD: Why would you like distressed firms?

Barbee: It all depends upon our perception that markets typically are likely to overreact to (short-term unhealthy information about) fundamentals. That can result in pricing disparities and inefficiencies that may be exploited by strong fundamentals analysis. Other buyers typically react to occasions with an extra of human emotion.

IBD: How lengthy do you maintain some positions earlier than they begin to repay?

Barbee: We take into consideration potential earnings of firms and what they’ll do two, three years out. We take into consideration future money circulate three years out.

IBD: I can see out of your 0.00% tech weighting that you just’re not an enormous FAANG shares (Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Google-parent Alphabet (GOOGL)) man.

Barbee: The final couple of years, typical buyers turned very centered on large-cap shares and progress elements of the market. They centered on FAANGs perched atop the S&P 500. Those investments delivered robust efficiency with a dearth of volatility.

Because they didn’t see the recency bias in that strategy, they ignored the a number of growth in these shares.

Barbee Owns Materials, Commodities, Energy

IBD: Meanwhile, what have been you eying years again?

Barbee: Materials, commodities, vitality. We discovered a number of shares there, buying and selling inexpensively primarily based on normalized money flows and guide values.

IBD: Precious metals too?

Barbee: Precious metals producers additionally supplied attention-grabbing alternatives for diligent basic buyers to take good stakes and supply their portfolios with some diversification, given the uncorrelated nature of these belongings. They might additionally ship robust returns ought to inflation improve.

IBD: Do treasured metals nonetheless have room to run?

Barbee: Precious metals had a reasonably unimpressive yr during the last 12 months. In our personal portfolio, the place we had about one-fourth in treasured metals, these securities have not pushed returns very strongly in that interval. But we expect they’re effectively positioned given the present scenario.

IBD: Does that depend upon an increase in costs of treasured metals themselves? Your holdings embrace exploration and mining firm Equinox Gold (EQX) and mine developer Iamgold (IAG).

Barbee: The ranges have been so undervalued given lack of investor curiosity that enchancment in metals pricing isn’t a requirement for a strong return for a lot of names we maintain.

This Contrarian Investor’s Hands-On Experience

IBD: Looks like you may have vitality providers shares Valaris (VAL) and Tidewater (TDW). And I see Exterran (EXTN), which gives pure gasoline compression, manufacturing and processing gear. You like that house?

Barbee: I’ve been personally inquisitive about vitality for a very long time. I grew up in Saudi Arabia. My dad labored for Aramco (the largely state-owned, world’s largest oil producer) years in the past. I went to (what was then) Simmons & Company International after going to highschool at Rice to review mechanical engineering and economics. When I labored at Chevron (CVX) two summers, I flew out to platforms within the Gulf of Mexico. So I’ve received an oil background. Now I’ve tracked the oil service enterprise for many years.

Those firms, Valaris and Tidewater, had huge downturns when the shale growth occurred and the value of oil dropped. Exploration tasks have been shelved or delayed. Those firms had constructed up fleets of offshore drilling rigs and provide boats. Now they’ve emerged on the opposite facet. So we purchased a few of these.

With vitality costs up, there’s beginning to be a resumption of exploration and growth. It hasn’t pushed day charges (for renting rigs and boats) all the way in which again up. But they’re rising.

IBD: Adams Resources & Energy (AE) markets crude oil, pure gasoline and liquid chemical merchandise. Its earnings per share progress — which isn’t a key metric for you — has declined previously two quarters. Why do you assume share worth is uptrending?

Barbee: The firm has a major amount of money. When you worth the corporate internet of money, it trades at a reasonable a number of of the money circulate it generates.

Management is engaged on an growth of the enterprise by way of some bolt-on acquisitions in trucking and pipelines. They’ve executed a pleasant job of shopping for some acquisitions which are more likely to show useful to shareholders.

Contrarian Play On Supply, Demand

IBD: Mercer International (MERC) makes paper that is used for printing, writing and tissue. Why do you count on it to renew the uptrend that stopped a couple of yr in the past?

Barbee: Their paper has skeletal tissues required for paper and tissue. We assume that globally there’s a restricted quantity of such fiber paper. The solely extra forestry that hasn’t been tapped could be in Russia and Siberia. (Which quickly will not be accessible to producers exterior Russia.)

On the demand facet, there’s large enchancment as China and India be a part of developed nations.

Mercer has well-managed and maintained crops to make this sort of paper. Also, they’re increasing into lumber in Europe. And it’s buying and selling at a reasonable a number of.

IBD: More than 1 / 4 of your shareholders’ cash is at work in your prime three holdings. Those are Amerigo Resources, a Canadian copper producer. The second is Interfor, a Vancouver lumber producer. The third is Kenmare Resources, whose mines produce paints, pigments and plastics. Why do you want them?

Barbee: They’re every low-cost on guide worth and on present ranges of money circulate era. Whereas the general S&P 500 is valued at practically 14 occasions EBITDA. These firms (Amerigo, Interfor and Kenmare) are valued at two to 4 occasions.

Also, every has zero or simply slight debt.

In lumber manufacturing, there’s been a number of consolidation. There are a number of provide constraints. Meanwhile, there’s been an amazing lack of house constructing, and a number of pent-up demand for properties. And rates of interest are nonetheless low. So it is an ideal storm.

Company With ‘Bolt-On Transactions’

IBD: How does attire maker Delta Apparel (DLA) suit your total contrarian technique?

Barbee: I’ve owned it fairly a while. We’ve lowered our place over time. But we nonetheless personal it.

They’ve executed a incredible job of entering into adjoining companies that had nice returns.

They’ve gone by way of challenges. And they’ve at all times come by way of. They interact in efficient bolt-on merger and acquisition transactions. They purchased (way of life model) Salt Life (in 2013).

They’ve additionally gotten right into a enterprise the place they use an artwork gun to do specialty one-off attire printing that may be designed on-line. A big portion of what they promote is produced in Honduras and Mexico. The firm is rising. It has glorious banking relationships. It has sizable debt however manageable phrases. They ship robust earnings.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips on retirement planning and actively run portfolios that persistently outperform and rank among the many finest mutual funds.

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