A New Fund With Deep Roots
Roumell Opportunistic Value Fund is a fairly young fund. Roumell and co-manager Ted Crawford, however, apply the same approach that Roumell has been using in his asset management business since 1998.
For starters, the duo only invest when they see opportunity. They are more than happy to sit on cash. Second, their approach can, and usually does, take them anywhere along the market cap and asset class spectrums.
More Than Just Ideas
Perhaps most important, however, is the penchant for looking where others aren’t. It’s an eclectic approach, to some degree, but one that unearths unique investment opportunities. However, just finding an idea doesn’t get a company in the portfolio.
Roumell and Crawford scour a company’s balance sheet, examine industry and company dynamics, and pay a visit to management. If everything checks out and there is a compelling reason to believe the security will appreciate, then it gets added.
Some examples will help explain the approach:
Ultra Petroleum
Watching the steep decline in natural gas prices, Roumell started to examine the sector. At first he bought the deeply discounted debt of gas companies, profitable trades that he has been closing out. However, he also rooted through the equity side of the industry, too, in search of a well capitalized, low-cost producer.
He found that gem in Ultra Petroleum Corp. (NYSE:UPL). Roumell likes the company because it has a long reserve life and boasts exceptionally low costs. In fact, the manager believes that Ultra can profitably drill for gas at price levels as low as around $3 per thousand cubic feet (Mcf). Natural gas recently traded above that level, but below the industry average cost of over $6 per Mcf.
While it’s nice that the company can make money even when others can’t, Roumell’s long-term conviction is backed by the out-of-favor nature of natural gas, too. For example, with gas at historic lows in the United States, utilities have been switching from coal to gas. Moreover, he sees a budding export industry on the horizon. These factors, among others, should help boost natural gas prices and support higher prices for Ultra’s shares.
Aeropostale
Crawford found Aeropostale, Inc. (NYSE:ARO) after a successful investment in competitor Abercrombie & Fitch Co. (NYSE:ANF). With that trade he noted that the industry space in which the company operated was dominated by just a few names. Moreover, investors tended to get carried away by both good results and bad, sending stock prices to extremes on both sides.
When Crawford saw that Abercrombie competitor Aeropostale was putting up weak same store sales numbers, he took a look at the shares. They were being punished. Meanwhile, Crawford notes that the company has no debt, has been buying back shares, and has had positive cash flow for the last decade. In other words, it has plenty of money to implement a turnaround.
To that end, Aeropostale, Inc. (NYSE:ARO) has been closing underperforming stores and investing in its supply chain. Both should help turn sales trends in a more positive direction. Additionally, the company has been investing in a children’s version of its stores that it expects to start positively contributing this year. And it is using licensing to profitably expand overseas.
Sandstorm Metals & Energy
The best way to explain Sandstorm Metals & Energy is to start with Silver Wheaton Corp. (NYSE:SLW). The CEO of Sandstorm, Nolan Watson, was the CFO at Wheaton and helped create that company’s business model. Essentially, Silver Wheaton Corp. (NYSE:SLW) buys interests in the output of silver mines. This gives mining companies the money needed to fund their explorations and locks in a revenue stream for Wheaton, usually at relatively low cost.
The arrangement works because it’s often hard for silver miners to get money from traditional sources. Since leaving Wheaton, Watson used the same model to build Sandstorm Gold. Roumell notes that these are good businesses, but they don’t interest him. The problem is that they are both one-trick ponies. So no matter how well run Silver Wheaton Corp. (NYSE:SLW) or Sandstorm Gold may be, their value is tied to the price of often volatile silver and gold.
This is why he and Crawford like Sandstorm Metals & Energy. This company is diversified across commodities, including natural gas, copper, and palladium, among others. Few in the investment community follow it. And, it has the ability to get opportunistic prices on the deals it enters into because the small companies it finances have limited access to capital. The co-managers believe the shares could have notable upside potential over the long term as its business expands.
Looking Where Others Don’t
Roumell specializes in looking where others aren’t. That makes his fund a great option for contrarian types. While his stock ideas may not be appropriate for everyone, the above companies represent unique and compelling opportunities.
The article Out of Favor, Overlooked, and Misunderstood Gems originally appeared on Fool.com.
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