Unlike many of his peers, Barbee doesn't diversify his portfolio across a wide variety of sectors. Instead, his fund's holdings fall intothat he said are"undergoing stress or strain": materials, energy, industrials, financial services, and consumer cyclicals.
Within these unloved parts of the market, Barbee said he studies a company's normalized free cash flow in addition to valuation metrics likeAfter finding potential candidates for his fund, Barbee looks at a company's financial health by inspecting its balance sheet and capital structure to see how much debt it has and how it's organized. That's especially vital during downturns, the fund manager noted.
"When a company does have debt, one of the things we're looking at is the term and structure of that debt," Barbee said. He added that he wants to"make sure that it's not impeding the company in the near term and could allow the company to get through the dark tunnel that it's going through without having to hand the keys of the car over to the bond holders."
Lastly, Barbee confirms that his interests as an investor are aligned with those of management, meaning that they own plenty of shares of the company they run. If insiders are actively buying back more stock then that's an added bonus, Barbee said. Additionally, Barbee looks into management's past decisions about investments and capital allocation to make sure that they're competent — not just that they own a lot of stock.
Following these steps has brought Barbee robust returns over the long term, regardless of what stage of the economic cycle he's investing in. He said he usually holds stocks for three to four years, but added that he's kept some for a decade or longer if their investing thesis remains intact.
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