Who is the best investor on SumZero? With the release of SumZero’s analyst rankings feature today, we now know. Jeffrey Meyers, founder and portfolio manager at Cobia Capital Management in New York topped SumZero Long-Only and Best All-Time rankings with an average return of 137%. Meyers has posted twenty-five ideas to SumZero since he joined the site in 2008, posting his latest idea on ALLT:US one week ago. We sat down with Mr. Meyers to discuss his philosophy on value investing which has served him so well over the years.
SumZero: How would you describe your investing style and process?
Jeff Meyers, Cobia Capital: We are value investors applying our skills and experience to the small-cap technology universe. We operate with a bottoms-up approach where we screen for companies that are inexpensive, usually on an Enterprise Value to Revenue basis, and then analyze them looking for growth drivers and operating leverage potential.
SumZero: Why do you focus on small-cap tech companies?
Jeff Meyers, Cobia Capital: We feel the small-cap tech universe is very inefficient both because larger funds cannot operate in this area and because the details of the technology keep many generalists away. There is also less analyst coverage of this space leading to an information edge based on our due diligence. We like technology specifically because companies frequently undergo product cycles giving them opportunity to gain market share or enter adjacent markets.
SumZero: Given often talked about overvaluation and hype in tech, how do you find undervalued companies?
Jeff Meyers, Cobia Capital: Technology stocks often fall out of favor by missing analyst revenue or earnings estimates which can present opportunities for us. Also, companies with low profitability and who haven’t grown appreciably in a while can get forgotten by the market and end up with low valuations. We look to the future to see what effect some business change, such as new management, new products, new technology partnerships, etc will have on revenue growth and profitability.
We also make money on the short side where we look for businesses that are expensive but have some flaw in the business that will lead to missing analyst estimates and consequently, multiple compression and a lower stock price.
SumZero: You seem to have almost uncanny timing for finding companies that will be acquired at a premium (CATT:US +42% return, TLGD:US +77% return, TTIL:US +377% return, IFV:FR +88% return, ACTI:US +24% return, UNCA:US +167% return, GND:CN +251% return). How do you do it?
Jeff Meyers, Cobia Capital: Our goal in looking for long investments is not to find companies that will be acquired but those that are making meaningful positive changes to improve their business on a standalone basis. Our average holding period on the long side is two to three years. That said, we are seeking companies with important and defensible technologies and these often prove attractive to financial and strategic buyers. We are often disappointed when our companies get taken over because we feel that they could have returned more on a standalone basis over time.
SumZero: Let’s talk about your most successful investment on SumZero, Silicom Ltd (SILC:US). You bought at the bottom in 2008 and sold four years later precisely at the stock’s all time high for over 1300% return. How did you identify Silicom and how did you time your trade so perfectly?
Jeff Meyers, Cobia Capital: Silicom was a company that I initially knew as a growth name in the 2007 time frame as it rode the success of its largest customer, Riverbed Technology, to great revenue and EPS growth. By the time I launched Cobia in 2008, Silicom had been humbled by a slowdown in Reverbed’s business and at the time traded at a value multiple. I analyzed the business and liked what I saw, with a strong competitive position, an expanding customer base, and a number of new products that were just starting to penetrate its customer base. I started buying the stock at $7 per share in the summer of 2008 and kept buying to a low of $3 in the fall of that year as the market crashed. For perspective, at that time Silicom had $4 per share in net cash and was profitable.
We have had a position in Silicom ever since then. The company has frequently blown out revenue and earnings numbers but almost never achieved a premium multiple that would force us to sell. The only real exception came in the spring of 2014 when after soundly beating its Q4 2013 numbers, the stock was “discovered” and traded up to $70 per share. The multiple was too high for us at that point so we sold the majority of our position. When the stock pulled back thereafter, we reinitiated a position in the shares.
SumZero: Even with investments that didn’t go your way, you seem to be very disciplined about limiting losses. How do you decide to close out a position when the stock price doesn’t go your way?
Jeff Meyers, Cobia Capital: We close out positions either when stocks hit our price targets or when our thesis for a company is no longer valid. We are constantly looking at news, talking to companies, and going to tradeshows to determine if our investment theses are still on track. If not, we are very quick to hit the eject button and limit our losses.
SumZero: Where do you see value in the market today?
Jeff Meyers, Cobia Capital: We currently see a lot of value in various technology subsectors. We have positions in hardware, software, semiconductor, and Internet names. Technology is fairly beaten down with the market’s downturn late last year and early this year. We are seeing valuations lower than they’ve been in a few years and our enthusiasm is reflected in our historically high gross exposure at this point.
SumZero: How has your approach evolved over the years?
Jeff Meyers, Cobia Capital: I have been investing in the small-cap technology space, long and short, for the past twenty years and while my approach has evolved slightly, the gist of what I do has remained largely the same. The one area that has changed is my need for excellent management teams at the companies I invest in. While I once believed that good technology could sell itself, experience has shown me that that is not the case.
SumZero: Tell me about your investing background and investing mentors and heroes.
Jeff Meyers, Cobia Capital: I actually came to the investing game relatively late in life. I have a Bachelor’s degree in Mechanical Engineering from Columbia and Master’s in Atmospheric Science from UCLA. My initial ambition was to research hurricanes, but I decided to move back to New York City twenty years ago and while here, became interested in the markets. I eventually found a job posting on the Columbia job board by a young hedge fund manager named Curtis Macnguyen, who let me intern for him for six months before bringing me on full time. Soon after, we merged into a fund called Siegler Collery and Company. Curtis decided we needed a full time tech analyst and since I had the most technical background, I was chosen for the job. It was a challenging mandate as Siegler Collery was a deep value shop so I had to find tech names that were also value names. I ended up finding most of them in the small-cap universe so this was the genesis of my investing style.
My two investment mentors would be Curtis, who I worked with for seven years and really taught me the basics of investing, and Peter Collery, who taught me the value of asking question after question to really gain an in-depth understanding of the business that you are looking at.
SumZero: What advice would you give to someone interested in pursuing investing?
Jeff Meyers, Cobia Capital: Find your own investment style and work hard to hone it every day.
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