Contrarian Investor Scott Barbee: His Fund Was Best

Scott Barbee, manager of $258.3 million Aegis Value Fund (AVALX), deserves two labels. One is “contrarian investor.” The other is “top outperformer.”

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Both labels stem from Barbee’s skill at avoiding running with the herd.

After all, running with the herd means you are doing what everyone else is doing. That’s the definition of mediocrity, not outperformance. Odds are, it means you’re buying stocks other investors have driven up in price.

In contrast, Barbee is a pro in knowing how to zig when so many other investors zag.

Contrarian Investor’s Approach

Under-followed stocks are the only kind he buys.

Unlike many growth managers’ follow-the-leader love affair with megacap technology stocks, Aegis Value held 0.00% in tech stocks as of Dec. 31, according to Morningstar Direct. He also owned zero consumer defensive stocks, health care, communications services and real estate.

He held negligible stakes in utilities, consumer cyclicals and industrials. Less than 4% of his shareholders’ money was at work in financials.

His two serious areas of exposure were in basic materials, at 71%, and energy, at 23%.

Aegis’ don’t-follow-the-crowd path paid off in this year’s first quarter. The fund’s 18.05% gain made it the top performing U.S. diversified stock fund. The S&P 500 lost 4.6%. Aegis’ small-cap value direct rivals tracked by Morningstar Direct lost 2.01% on average.

Barbee’s refusal to play follow the leader has paid off over the long run too. Take the recent bull markets. One ran from March 2009 through Feb. 19, 2020. Another, still underway, began March 23, 2020.

Many investors assume bull markets are quicksand for value managers. But they weren’t for Barbee.

His fund topped the S&P 500 index in 2009, 2010, 2011, 2012, 2016, 2020 and 2021.

Barbee, 50, talked with IBD about his investment approach from his McLean, Va., office.

What Makes Barbee Contrarian

IBD: Is it accurate to call you a contrarian investor?

Scott Barbee: I’d say we are contrarian.

IBD: How so?

Barbee: It’s in the DNA of the firm to really try to look at places people are avoiding. We like places that are unpopular. When we’re surround by many investors and lots of company, we get uncomfortable.

IBD: That makes it sound easy.

Barbee: It isn’t. Sometimes, the crowd can be correct.

Barbee Thinks Ahead

IBD: Please describe your overall investment strategy, Scott.

Barbee: We’re in the value camp in terms of our intensive focus on stressed or distressed stocks that are unfairly tarnished, in our eyes. We’re balance-sheet focused in the way we look at companies. We have an eye on performance, not in the next quarter but much further ahead to a potential recovery.

IBD: Why do you want distressed companies?

Barbee: It all depends on our belief that markets often tend to overreact to (temporary bad news about) fundamentals. That can lead to pricing disparities and inefficiencies that can be exploited by solid fundamentals research. Other investors often react to events with an excess of human emotion.

IBD: How long do you hold some positions before they start to pay off?

Barbee: We think about potential earnings of companies and what they can do two, three years out. We think about future cash flow three years out.

IBD: I can see from your 0.00% tech weighting that you’re not a big FAANG stocks (Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Google-parent Alphabet (GOOGL)) guy.

Barbee: The last couple of years, conventional investors became very focused on large-cap stocks and growth aspects of the market. They focused on FAANGs perched atop the S&P 500. Those investments delivered strong performance with a dearth of volatility.

Because they did not see the recency bias in that approach, they ignored the multiple expansion in those stocks.

Barbee Owns Materials, Commodities, Energy

IBD: Meanwhile, what were you eying years back?

Barbee: Materials, commodities, energy. We found a lot of stocks there, trading inexpensively based on normalized cash flows and book values.

IBD: Precious metals too?

Barbee: Precious metals producers also provided interesting opportunities for diligent fundamental investors to take nice stakes and provide their portfolios with some diversification, given the uncorrelated nature of those assets. They could also deliver strong returns should inflation increase.

IBD: Do precious metals still have room to run?

Barbee: Precious metals had a fairly unimpressive year over the last 12 months. In our own portfolio, where we had about one-fourth in precious metals, those securities haven’t driven returns very strongly in that period. But we think they’re well positioned given the current situation.

IBD: Does that depend on a rise in prices of precious metals themselves? Your holdings include exploration and mining company Equinox Gold (EQX) and mine developer Iamgold (IAG).

Barbee: The levels have been so undervalued given lack of investor interest that improvement in metals pricing is not a requirement for a robust return for many names we hold.

This Contrarian Investor’s Hands-On Experience

IBD: Looks like you have energy services stocks Valaris (VAL) and Tidewater (TDW). And I see Exterran (EXTN), which provides natural gas compression, production and processing equipment. You like that space?

Barbee: I’ve been personally interested in energy for a long time. I grew up in Saudi Arabia. My dad worked for Aramco (the largely state-owned, world’s largest oil producer) years ago. I went to (what was then) Simmons & Company International after going to school at Rice to study mechanical engineering and economics. When I worked at Chevron (CVX) two summers, I flew out to platforms in the Gulf of Mexico. So I’ve got an oil background. Now I’ve tracked the oil service business for decades.

Those companies, Valaris and Tidewater, had big downturns when the shale boom occurred and the price of oil dropped. Exploration projects were shelved or delayed. Those companies had built up fleets of offshore drilling rigs and supply boats. Now they’ve emerged on the other side. So we bought some of those.

With energy prices up, there’s starting to be a resumption of exploration and development. It hasn’t driven day rates (for renting rigs and boats) all the way back up. But they’re rising.

IBD: Adams Resources & Energy (AE) markets crude oil, natural gas and liquid chemical products. Its earnings per share growth — which is not a key metric for you — has declined in the past two quarters. Why do you think share price is uptrending?

Barbee: The company has a significant amount of cash. When you value the company net of cash, it trades at an inexpensive multiple of the cash flow it generates.

Management is working on an expansion of the business through some bolt-on acquisitions in trucking and pipelines. They’ve done a nice job of buying some acquisitions that are likely to prove beneficial to shareholders.

Contrarian Play On Supply, Demand

IBD: Mercer International (MERC) makes paper that’s used for printing, writing and tissue. Why do you expect it to resume the uptrend that stopped about a year ago?

Barbee: Their paper has skeletal tissues required for paper and tissue. We think that globally there is a limited amount of such fiber paper. The only additional forestry that hasn’t been tapped might be in Russia and Siberia. (Which soon may not be accessible to producers outside Russia.)

On the demand side, there is tremendous improvement as China and India join developed nations.

Mercer has well-managed and maintained plants to make this type of paper. Also, they’re expanding into lumber in Europe. And it is trading at an inexpensive multiple.

IBD: More than a quarter of your shareholders’ money is at work in your top three holdings. Those are Amerigo Resources, a Canadian copper producer. The second is Interfor, a Vancouver lumber producer. The third is Kenmare Resources, whose mines produce paints, pigments and plastics. Why do you like them?

Barbee: They’re each cheap on book value and on current levels of cash flow generation. Whereas the overall S&P 500 is valued at nearly 14 times EBITDA. These companies (Amerigo, Interfor and Kenmare) are valued at two to four times.

Also, each has zero or just slight debt.

In lumber production, there’s been a lot of consolidation. There are a lot of supply constraints. Meanwhile, there’s been a tremendous lack of home building, and a lot of pent-up demand for homes. And interest rates are still low. So it’s a perfect storm.

Company With ‘Bolt-On Transactions’

IBD: How does apparel maker Delta Apparel (DLA) fit your overall contrarian strategy?

Barbee: I’ve owned it quite some time. We’ve lowered our position over time. But we still own it.

They’ve done a fantastic job of getting into adjacent businesses that had great returns.

They’ve gone through challenges. And they’ve always come through. They engage in effective bolt-on merger and acquisition transactions. They bought (lifestyle brand) Salt Life (in 2013).

They’ve also gotten into a business where they use an art gun to do specialty one-off apparel printing that can be designed online. A large portion of what they sell is produced in Honduras and Mexico. The company is growing. It has excellent banking relationships. It has sizable debt but manageable terms. They deliver strong earnings.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.

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