Romain Ruffenach analyzes stocks — and manages a portfolio — for a European equities fund at SMA Gestion: Bati Actions Investissement 1. He started with that firm in 2013 — in the previous 5 years he worked at KPMG in the TMT sector. Romain studied at Audencia Nantes and Max Fisher College of Business and he holds a Masters in Corporate Finance.
He sent me a message on LinkedIn that he’d noticed a few intriguing publicly traded companies in Japan, some of which he considered as possible value stock material. I had an opportunity to ask him questions about his work and what he was seeing — here’s how it went:
John Navin: When you use the term “value,” Romain, what do you mean, exactly?
Romain Ruffenach: A simple definition of value is to buy a company at a market price below the intrinsic value. The simple concept is whether you buy socks or stocks you are looking for merchandise on discount. It is not just an investment style but a concept of everyday life. The greater the difference is between price and intrinsic value the greater my margin of safety is.
To quote Buffett “Price is what you pay; value is what you get”. So when you regard yourself as a value investor, you consider that the financial markets are not always efficient: they give you sometimes good merchandise at bargain prices.
Obviously, the difficulty here is to put a fair price tag on the intrinsic value of a company by estimating the main drivers of value creation, which translate into profitability (return on capital employed), organic growth, tax rates and the required rate of return. All companies are not easy to value.
Companies with competitive advantages like scale effect or switching costs just to name a few enjoy better visibility than weak companies. A better visibility gives you higher confidence on the company but also higher accuracy in terms of valuation.
Moreover, companies with high portion of debt reduce your confidence on the equity side valuation. If a company has an enterprise value of 10 billion $ with 8 billion $ of debt a mistake in your initial estimation of 10% on the enterprise value could mark down your equity investment by 50%.