Silver Arrow’s Secret Sauce: An Investment Thesis Approach
Let’s suppose a delightful situation. One way or another (maybe through inheritance, or you got a bonus, or you sold your company) you have some money available to invest.
It’s a responsibility. What’s your best strategy for investing it wisely?
Gary Brode from Silver Arrow Investment Management has some suggestions for you. The suggestions happen to be a nice combination of innovative and practical. However, they do take effort; and also patience.
The approach you’re about to read is the reason his company has returned 206% on long investments since 2012. For comparison S&P 500 has returned only 120%.
“Look for an investment thesis,” he begins, “the kind where you know the company so well, you can take advantage of volatility and not worry about short-term market fluctuations.”
He gives as an example his company’s investment in Anthem (ANTM), one of the five largest health insurance companies. “We were buying it heavily after the stock fell to $120 from $145. At that point it was exceedingly cheap.”
His research showed him that there were good reasons for this precipitous decline. Anthem faced uncertainty about whether its merger with Cigna would be approved, or denied due to antitrust regulations.
But that wasn’t the end of why Anthem’s stock was declining and investors were fleeing the company. There was also the discouraging fact that Anthem was losing money in the Obamacare exchanges.
And possibly most unnerving of all, with other insurers exiting the exchanges, Anthem might be acquiring a large amount of unprofitable business. Anthem might be locked into paying for health care for new patients that the company might not be able to afford.
It seemed to the general investor that Anthem was a stock to exit as fast as possible. However, not in Brode’s view. Anthem was exactly the kind of investment that Brode loves because he could see that a market misperception was causing what he thought was an error in pricing.
With so much going against Anthem, why would he want to buy it? “First,” he explains, “the stock was trading at a level that assumed the merger would not go through. This problem was already priced in. If the merger didn’t go through, we wouldn’t have lost anything.”
He goes on to say, “Next, when the press and the analysts were focusing on Anthem losing money on the exchanges, most failed to realize that Anthem was only committing to a year of coverage going forward. If they couldn’t make money in the exchanges, they’d be losing money for a year, but they could then exit the exchange. They weren’t locked in.”
As Brode points out, the market had priced Anthem as if the losses would be continuous going forward and not time-limited. In short, Silver Arrow calculated that the market had accounted for the downside fears but mispriced the upside opportunities.
“Acting on this investment thesis,” Brode says, “allowed us to make very large profits.”
Getting to the point where he and his partner, Raji Khabbaz, could take advantage of the opportunities embodied in Anthem required a deep knowledge of what was going on in the Department of Justice, the direction of health care legislation, and the nature of the insurance market.
“We don’t follow everyone else,” he summarizes. “We don’t do guesswork, and because we specialize in in-depth knowledge, our book is only 20 or 30 positions that we know very well.”
If you’d like more information on Silver Arrow Investment Management LL, contact Gary Brode at GB@silverarrowcap.com or call him at (917) 546-6821.