John Thompson grew a pair of investing funds by nearly 20,000%. He shares his one stock pick that could triple in the next few years - and explains why it's his largest holding.
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- John Thompson, founder and CEO at Vilas Capital Management, grew up in a family that lived and breathed investing.
- Early in his career, Thompson grew two separate funds at an exponential rate.
- He's a purebred value investor, focusing on metrics like price-to-book, price-to-earnings, return-on-equity, and price-to-free-cash flow in order to analyze issues.
- Thompson thinks his biggest stock pick has the "potential to get acquired for a huge premium," but will still perform well if that thesis doesn't come to fruition.
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John Thompson, founder and CEO at Vilas Capital Management, grew up around investing.
"My father, specifically, ran an investment division for a bank that is now part of US Bank," he said on "ValueWalk," an investment podcast. "As a young kid, we used to go on vacations - and we tended to go where he had conferences."
Thompson attended conference meetings as an adolescent, and got to see big name CEOs up close and personal. Eventually, he wound up working with his father in the mutual fund business.
"Relatively quickly - after I joined him in '93 - he asked me to help improve the performance of the fund," he said. "I started working on this equity fund and bond fund simultaneously for about 15, 16 years - and both of them ended up becoming pretty big funds."
He continued: "They were - I think - under $20 million combined when I started working on them - and by the time we sold the business, the equity fund got up to over $1.5 billion and the bond fund got over $3 billion in size."
On a percentage basis, that's more than a 20,000% combined increase.
Thompson employs a value-driven approach to investing. He says this strategy is more predictable and less risky than a growth-oriented proposition.
In order to find new opportunities, he scours the 52-week low list - a list comprised of issues trading near their one-year low - while keeping a keen eye on the price-to-book, price-to-earnings, and price-to-free-cash-flow ratios to ensure he's not overpaying. He also puts an emphasis on return-on-equity and prefers companies that tend to be in growth businesses.
He says that financial services, healthcare, and media all fall under that umbrella of growth.
Thompson's top stock pick
"The consumption of media has grown very rapidly - and one of our bigger holdings is in the media space, or our biggest holding is," he said. "And they're in the business of creating content - and I think that that's a good spot to be."
That biggest holding is ViacomCBS (VIAC)- and Thompson thinks it could triple over the next four to five years.
Thompson notes that the re-merger between Viacom and CBS should cut an estimated $500 million in annual overhead costs - and that combined, the companies have a hold on 22% share of primetime viewership.
To Thompson, the large share of viewership that ViacomCBS attracts gives them a leg up during negotiations with cable providers.
"I think combined they'll have a lot more ability to get a good return on their content dollars," he said.
In addition to being in a growing industry, wielding pricing power, and maintaining solid viewership Thompson relays a slew of other features that make the company look like an enticing purchase.
"It's trading at roughly six-times earnings. I believe they're going to earn in the $6.50 range in the next 12 months, and the stock is trading under $40 today," he said. "It's got a - I believe - a 2.4, 2.5% dividend. They're paying off debt very rapidly and I think they're going to start a stock buyback program pretty quickly here."
To expound on his point even further, Thompson draws parallels to similar deals of the past.
"If you look at what AT&T paid for Time Warner, I believe it was 20 or 21 times earnings at the time," he said. "Disney just paid roughly 20 or 21 times earnings for Fox's assets when they bought those - and here's Viacom trading at six-times earnings who arguably has as good or better businesses than Fox or Time Warner did."
For that reason, he thinks that ViacomCBS has the "potential to get acquired for a huge premium."
Still, if that thesis doesn't come to fruition, Thompson isn't going to fret.
"We'll see significant P/E expansion from let's say six to 12 times earnings, and I think their earnings are going to go up - over the next 3, 4 years - 30 or 40%. And if you run the math, I mean the stock could triple over 4, 5 years," he concluded. "So we're very bullish on Viacom[CBS]."
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