Hedge fund manager Joe Feshbach looks for value in crisis. The manager of Joe Feshbach Partners seeks out companies that are in trouble, anything from accounting scandals to criminal investigations to management turmoil. In short, Feshbach likes to buy when everyone is selling. In an interview with
, he describes his contrarian style and some of his picks. As always, the positions mentioned are subject to change without notice.
Your portfolio is very concentrated. Why?
Concentrated investing has been advocated and practiced by many legends of the equity markets, including Warren Buffett, Carl Icahn, Joel Greenblatt and others since time immemorial. We hold six positions today, because we believe that by investing very selectively in very few situations where we have developed specialized expertise, we can significantly outperform over a three- to five-year horizon. By diversifying beyond 10 stocks, academics have demonstrated that it is highly likely that your returns will closely mirror the market.
Talk to us about investing in companies under government investigation.
became subject to a formal order of investigation from the
regarding certain accounting matters in the summer of 2004. This kicked off a panic selloff followed by a relatively protracted period of stock underperformance. We got involved in July of 2005, when the chief financial officer was fired for failing to cooperate in an audit committee investigation tied to the SEC inquiry. Our theory was that the issues in question were from periods several years back, and investors were missing the strong business performance of the company. The stock has appreciated about 70% from our cost, as the investigation turned up little of concern and their business remains healthy.
What about accounting scandals or restatements?
One of our largest positions today is
, which has been in the midst of an accounting flap including accusations of impropriety by the company's former CFO, an SEC inquiry, a multiyear restatement, delayed SEC filings and violations of loan covenants. The stock has declined from $28 at its peak in 2004 to just $8 or so today, and slightly above our average cost. We believe that the scandal has disguised a strong business, which, while having a few issues around the edges, may be as much as 60% undervalued today. Our intensive grass-roots research and financial analysis skills (honed during our years on the short side) have given us great confidence in this situation.
Management turmoil offers good opportunities. Give us an example.
In the spring of 2003, prior to the launch of my fund, I bought
after the shares plummeted over 20% in one day. The CEO of only four months suddenly left without explanation. Analyst downgrades ensued, along with panic-selling on the theory that more bad news would eventually follow. In contrast, we quickly determined that the stock was very cheap. The founder and longtime CEO had returned to the helm, the company had produced very strong financial performance historically, reaffirmed guidance for the quarter and the year, and shortly thereafter announced a significant stock buyback. A year later we were selling stock up over 100%
Talk about intellectual-litigation opportunities.
We have recently built a position in
, a medical-device company embroiled in patent litigation with an upstart competitor. The stock is down by more than 50% and sports a market-value loss of about $3 billion from its peak. We think that the odds that KCI prevails in litigation are high. They have won five similar suits in the past few years in the United States and recently successfully defended their patent estate in Europe.
The shares can be had for about 14 times what we believe the company will earn in 2006, and, looking further out, roughly 10 times 2008 earnings power. We expect that the company will prevail in court, but on the odd chance it doesn't, we like its international patent protection, its dominant industry leadership position and the large additional market opportunity ahead of it.
You don't do distressed turnaround. Why?
One of our driving principles is to buy growth stocks at deep value prices. We take advantage of a crisis to in order to take advantage of what we believe is a significant disparity between price and value. It is also our belief that growth is necessary to offset potential deterioration from the impact of the crisis.
Are you an activist?
Of our six positions, four have controlling positions held by private equity firms. Two of our stocks have undertaken significant buybacks, and a third has put itself up for sale on its own initiative after our investment was made. We expect like action in the months ahead from the remainder. In effect, these companies already have stewardship that is incented to realize value.
I have done activist investing in the past, though my QuadraMed board seat was a result of an invitation from the company. It is a personal belief of mine that psychiatry is a pseudoscience, and when the company began targeting its marketing towards psychiatric hospitals for its software, it violated my moral standards, and I resigned.