C.T. Fitzpatrick has ranked in the top 1% of value managers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-stricken market - and rattles off 6 companies that will benefit from the fallout.

Advertisement
C.T. Fitzpatrick has ranked in the top 1% of value managers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-stricken market - and rattles off 6 companies that will benefit from the fallout.
C.T. Fitzpatrick

Youtube/C.T. Fitzpatrick

Advertisement
  • C.T. Fitzpatrick - founder, CEO, and chief investment officer at Vulcan Value Partners - approaches value investing differently than most by not exclusively focusing on cheap stocks.
  • In today's coronavirus-stricken market, he's relying on time, strong balance sheets with net cash, free-cash-flow yield, concentration, and highly sustainable margins of safety in order to navigate and benefit from heightened volatility.
  • Fitzpatrick relays seven companies which he says will benefit from the impending economic fallout and an accelerated move from physical to digital.
  • Click here for more BI Prime stories.

C.T. Fitzpatrick, founder, CEO, and chief investment officer at Vulcan Value Partners, doesn't fit nicely into the traditional value-investor mold.

"As our name would suggest, we're value investors at Vulcan Value Partners, but we do not look for cheap stocks," he said on the "Value Investing with Legends" podcast. "Instead, we put all of our energy into finding business with inherently stable values."

Before starting Vulcan Value Partners in 2007, Fitzpatrick enjoyed 17 years of double-digit returns as a portfolio manager by relying heavily on his differentiated, stability-focused way of viewing the world. Since then, he's ranked in the top 1% of value managers.

Today, he's taking full advantage of the volatility that's been prevalent in the market.

Advertisement

"This is more than 3 standard deviations away from the mean," he said. "This is an extraordinary event, and I think it's really important to make sure you're doing thorough analysis."

A recipe for success in today's environment

"Our goal in managing the portfolios is to drive our weighted average price-to-value ratio as low as we can," he said.

But before we dive into the specifics of his investment approach, it's important to note how Fitzpatrick is thinking the current coronavirus-driven stock selloff.

"If you look out five years from now - while this current situation is terrible ... we certainly will not have forgotten it - we will be back to normal," he said. "Companies earnings should be growing very nicely, we should be back to full employment, everything should be - not that this never happened - but things should be back to normal."

These views inform Fitzpatrick's four-part checklist for achieving outsized returns - one he's using to take advantage of a market destabilized by the coronavirus. Each element is highlighted in bold.

Advertisement

At the heart of Fitzpatrick's investment strategy is a long-term time horizon. Every potential investment is viewed through the lens of at least a five year holding period. This way, he's able to ride out bouts of unruly market volatility without undermining his original thesis.

"We were buying companies that had net cash on their balance sheet during the financial crisis - and they were really, really discounted. We're doing the same thing today; right now," he said. "Our companies have double-digit free cash flow yield, with net cash on the balance sheet - and that free cash flow yield is going to grow over time."

With an emphasis on stable values, long-termism, free cash flow yields, and strong balance sheets with net cash, Fitzpatrick is also leveraging concentration (currently 22 positions) in this market to take advantage of juicy opportunities.

"When you get into periods like this and periods like the Financial Crisis, we tend to become more concentrated," he said. "When this started, we were selling 80 cent dollars and buying 60-cent dollars - and as it progressed, we've been selling 60-cent dollars to buy 40-cent dollars."

By employing this methodology, Fitzpatrick says that his portfolios look almost nothing like the market. Buried within the indexes are companies and industries he says have taken on more leverage than they can handle - and he has no interest in owning them.

Advertisement

"What we love to see is seeing what a company is supposed to do, and that is: Invest for the long term, strengthen their competitive position - and maybe miss earnings for a year or so, or more because they're doing the right things to strengthen the business," he said. "We're giving you points for that; We're very supportive of that."

As you would expect, most investors would probably view prolonged earnings misses as a sign to vacate their position, but not Fitzpatrick. In fact, he says "we find a lot of opportunities like that."

Who's going to benefit?

Against that backdrop, Fitzpatrick is quick to relay a swath of companies he says should benefit from the economic fallout resulting from the crisis.

"In the long run, someone like Facebook is a real beneficiary of this," he said. "Alphabet, with YouTube, is a big beneficiary of this. Their cloud business is a big beneficiary."

In addition to Facebook and Alphabet, Fitzpatrick's names NVIDIA, Visa, Mastercard, and American Express as companies that should reap the rewards of an accelerated move from physical to digital.

Advertisement

Do you have a personal experience with the coronavirus you'd like to share? Or a tip on how your town or community is handling the pandemic? Please email covidtips@businessinsider.com and tell us your story.

And get the latest coronavirus analysis and research from Business Insider Intelligence on how COVID-19 is impacting businesses.

NOW WATCH: 3.3 million Americans filed for unemployment - and an economist predicts it could be far worse than the Great Recession

{{}}