Scott Barbee had been planning for the market this year his entire life. Manager of the Aegis Value Fund, Scott Barbee has an extensive oil background. He spent part of his childhood living in Saudi Arabia. While studying mechanical engineering at Rice University of Houston, he worked for Chevron during summers. Having worked at energy-focused Simmons & Co. after college, Barbee moved to the buy side and has been running the Aegis fund since 1998. Those early experiences in the oil fields have been invaluable. Aegis Value Fund consistently beats its peers in small-cap value. Morningstar gives the fund a 5-star rating and states that it is in the top five per centile in its category for 2022. This includes the last three, five, 10 and 15 year periods. This fund includes both U.S. and international stocks. It has increased more than 6 percent year-to-date, partly due to its investment in energy stocks. These stocks have surged since the oil price soared past $100 per barrel. Tidewater, an offshore drilling company, has nearly doubled its shares this year. Barbee stated that part of Barbee’s success is due to his willingness to purchase and hold businesses during economic downturns, and then wait for the cash-rich recovery. Stable cash flow is clearly a benefit. It should be valued higher if there is certainty about cash flow. Barbee stated that even volatile cash flows should be valued. Aegis funds are filled with stocks from industries that have experienced a rebound over the last two years. Barbee screens for companies with low price-to-tangible-book or low price-to-cash values, or ideally both, to find new names for the portfolio. Barbee explained that they are experts at identifying companies with low prices and high valuations. This can lead to stocks in one industry appearing on the screen at once. Barbee stated that it was important to distinguish the cheap stocks and the ones with big upside potential. You have to be careful about what you get out of that situation. “Discount to books” can lead to big turnarounds. Barbee stated that you are looking for cyclical turnarounds. Lumber companies such as Resolute Forest Products, are another example of a portfolio area where cash flow may be slow. Lumber was just one of the many commodities to see a dramatic rise between 2021 and this year. Barbee stated that lumber prices were not correctly priced in the wider market, which allowed companies to make tons of cash while paying down debts or buying back shares. We found it fascinating that prices started to rise and were being seen as temporary. Barbee explained that these companies weren’t producing anything, but they did generate a year’s worth earnings each month. It was more likely that this would continue than the market assumed. Resolute’s shares have fallen less than those in the wider market since 2022. They also increased more than twice over the 2021 start. Time to Sell. Betting on small-cap stocks is risky. Aegis funds tilt towards certain sectors can also pose a danger. A high cost ratio of 1.5% reflects the difficulty in picking those stocks. Barbee explained that the key to limiting the negative effects is finding low-cost stocks with solid fundamentals. Our focus on risk management revolves around purchasing things at a very low price. Barbee explained that falling from the basement window is not an easy way to cause injury. Aegis has its own sell discipline, which is another part of their risk management strategy. Barbee, when he makes a buy, will attach an intrinsic value to the stock, and then exit the situation if it rises to this level. This may require cash holding for a time. Barbee explained that the largest risk to this industry is owning stocks that have experienced multiple expansion at an unsustainable level. Recent Market declines Despite its performance for the year the Aegis Fund has been unable to keep up with the wider market selling pressures. Barbee stated that he is still confident in the sector, especially in light of current global supply problems. Barbee also said that he’s taking a close look at steel stocks, and is still bullish about precious metals mining. Aegis owns positions in Equinox and other gold miners. Barbee stated that these companies can thrive even if the gold price rises.
On March 13, 2022, drilling rigs were left untouched on an Odessa company lot in the Permian basin area. United States President Joe Biden imposed a ban on Russian oil, the world’s third-largest oil producer, which may mean that oil producers in the Permian Basin will need to pump more oil to meet demand.
Getty Images News – Getty Images| Getty Images News | Getty Images
Scott Barbee had been planning for the market this year his entire life.