#36 – The Runner
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John Huber is an investor with a small fund managing his family assets and outside capital in a concentrated portfolio. John has written an excellent blog, Base Hit Investing, for many years, explaining his investing principles. We discuss these in this episode, including what John looks for in an investment, why he emphasises capital allocation even more today, where he sees the sweet spot in revenue growth, why he likes Alphabet, why he is focused in North American stocks but is now looking at Japan and US small caps and why Floor & Décor is one of his major positions.
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GETTING INTO INVESTINGJohn started out in real estate, profiting from dislocations in residential markets in the global financial crisis. That allowed him to accumulate the capital he needed to embark on his true love, investing and to set up a fund modelled on the Buffett Partnership.
Some takeawaysWhat John Looks forHuber looks for 4 things in an investment:
a durable business that passes what Buffett would call the 10-year test. You can close your eyes and look out 10 years and understand what the company’s doing or visualize what the company’s doing.a company that’s producing high returns on capitalgood capital allocation, sort of a management test.John now places a greater emphasis on the third criteria of capital allocation. He noticed from some of the investments that have worked often have to do with management doing rational things with the capital. Notably, share buybacks.
Growth Traps
John has written in the past about there being three drivers to make money from an investment
– growth in the business
– change in the valuation
– and the change in the number of shares.
He refers to this framework as the 3 Engines. And people over-emphasise the first part, the growth. Some of the best stocks of all time have not been fast growers. I mean, there are a few like Amazon and Netflix and others, but a lot of them have been just “steady eddie”, six, eight, 10% growers, like in O’Reilly Auto Parts, that uses its free cash flow to buy back shares.
You get say 8% from growth, you might benefit from a valuation increase, but you don’t even need that much because the secret sauce is if a stock trades at 10 times earnings, they can buy back a lot of their shares over time.
John cites Peter Lynch who felt that 20% revenue growth was a ceiling when it came to what companies could manage and he cites John Neff who also looked for lower growth rates. Huber believes his sweet spot is companies growing revenues between 6% and 12%.
Alphabet
Huber has a significant position in the stock in his fund. After doing a talk at Google in 2018, he remarked that “the culture (and more specifically, the incredible talent) of these firms is somewhat under appreciated, … Google has an unusually large number of employees who are not just super smart, but also very humble. There is an introspective focus on continuous improvement and long-term thinking that is very palpable there.”
He also remarked that “Culture, employee talent, and workplace satisfaction are three things that don’t show up in the numbers, ..but they are extremely important to the long-term earning power of the company..”
He still admires Google and thinks it’s a phenomenal company. The culture was undervalued in 2018 and still is today. He thinks one thing that has changed in the ensuing six years is some of those factors have become more appreciated in the market, I think. In 2014- 2016, Google and Apple, where Google traded under 15 times earnings, Apple traded at eight times free cash flow, net of cash which were incredible valuations for these companies. He felt that the culture, the human capital component to these companies, doesn’t show up in the numbers, but has an incredible amount of value. And he thinks that’s still obviously the case, although more of that value has now been recognised.
Overseas Investing
John visited ChHina pre-Covid with his friends Connor Leonard and Jake Rosser (two investors Steve greatly admires). One takeaway was that venture capitalists there rivalled Silicon Valley. It was ultra competitive, with everyone starting a new business, a new venture. One of the things he learned on that trip was that China was going to be a difficult place to invest in.
His next trip will likely be to Japan where he likes the changes happening with the authorities encouraging buybacks. He thinks that trapped capital there has stifled economic growth and this will now be released. A number of our recent podcasts have talked about Japan:
#29 with James Aitken; #30 with Grant Williams; and #32 with Jonathan Ruffer.
Small Caps
John believes that there’s a dichotomy between large stocks and small stocks in valuation. So he has been looking a lot more at small stocks because he finds them to be attractively priced. And those companies are more willing to meet and he finds that valuable and useful.
Floor & Décor
This is one of John’s largest positions and he is attracted to it because he sees a a significant contribution from the growth engine – close to 20%. It dominates a very fragmented space. They’re the biggest player in retail flooring., with probably 13,000 mom and pop shops around the United States – a very fragmented group of small competitors that can’t compete with Floor & Decor because they don’t have the same scale. And the industry backdrop of housing has gone through ups and downs but over the long term, he thinks that business is positioned to do well with a really strong moat.
And here is the latest Floor & Decor valuation snapshot per Sentieo, priced at $119.81:
John runs 50 miles a week and thinks investing and running share long feedback loops – it takes a long time for compounding to work in investing and in health.
John’s Portfolio
Here is John’s portfolio as per his last 13-F at the time we published on 20 June, positions as of March 31 – these have been independently sourced and not verified. These certainly are not investment recommendations – always do your own research.
ABOUT JOHN HUBER
John Huber is the Managing Partner of Saber Capital Management, LLC whose partnership is modelled after the original Buffett Partnership fee structure, with no management fees, and a performance fee above a 6%pa threshold.
The goal is to invest in a collection of durable businesses that can compound value at double digit rates of return over the long run. Prior to forming Saber in 2013, John spent nearly a decade investing in real estate.
You can find John on Twitter, read his Substack and follow Saber Capital Management.
John recommended 3 books. Built from Scratch is the story of Home Depot, which John sees as the model for his second largest holding, Floor & Decor.
Buy on amazon.com Buy on amazon.co.UK
Peter Cundill, There’s Always Something to Do has been previously recommended.
Buy on amazon.com Buy on amazon.co.UK He also recommended Neff on Investing which is a book Steve rates highly:
Buy on amazon.com Buy on amazon.co.UK HOW STEVE KNOWS THE GUESTSteve has followed John’s blog Base Hit Investing for many years and one reason for doing the podcast was to enable conversations with investors whose writing he enjoyed. Chris Pavese (#12) was another investor with a small fund (or in Chris’ case family office) whose writing Steve liked and who turned out to be a fantastic podcast guest. Similarly with Richard Oldfield (#13) who is a brilliant writer and was another super guest. If you enjoy the conversation with John, check out those two also.
Chapters
Transcript
PrevE3 – Carine Smith Ihenacho
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