in Apple, Constellation Software, John Huber, Mark Leonard, value investing


Finding things that are consistently under-rated is a great thing.

Under-rating things is a function of two variables:

  • Degree to which others don’t rate it at all (i.e. out of mind)
  • Degree to which what rating it really should have is significantly higher than it is

Hiding in plain sight.

John Huber, of Saber Capital Management, said this best when talking about how some of the biggest tech names in the past decade were at times significantly under-rated even though they were very strong consumer franchises and networked companies. The best example (he gave) was Apple in the early 2010s when the outlook for the company was perceived to be dim and the stock’s P/E ratio was low.

So there’s really a few ways (I can think of) that makes investments significantly under-rated:

  1. Excellence, misconstrued
  2. Adequate, overlooked
  3. “Hot Potato”, not the case

I guess all these require contratrian views with conviction to some degree. Of course part of the challenge is that even though something may be under-rated, it might still not make it a great investment.

If I were to guess though, I would think that ‘Excellence, misconstrued’ probably has a slight edge over the others today. It’s hard to find something that’s overlooked now with the advances of technology and its reach. It’s tougher for the average investor to have conviction on “turn-arounds” that might not actually do so. I think excellence is still something easier to spot, identify and one just needs to be patient to find the right entry point. A tall order, though.

One thing that might help with spotting the excellence is actually inverting it and by understanding the concept of reversion to the mean.

While, we might not all appreciate the concept as a statistical and/or a sociological phenomena, I think we all intuitively feel to some degree that winning streaks don’t last forever.

This is par for the course for the majority of companies but those rare, exceptional entities that truly possess excellence are exempt from this.

Perhaps what I’m characterizing is what people call growth stocks but I tend to think that these are actually companies that are continually under-rated (and undervalued) or overlooked (year after year) because people assume it’s going to revert to the mean in some way and soon.

So there is a special 4th category (I think), that goes something like this:

4. >>Excellence, not believed.

Mark Leonard, the President and CEO of Constellation Software characterizes this fourth category the best:

“A very special case of value investing, is the example of a company that is growing quickly, that the market expects to stop growing within the next 5-7 years, but that actually keeps growing quickly for much longer. If you can spot one of those, it may appear expensive on a PE basis, but actually be an attractive long- term investment on a “value investing” basis. Spotting this kind of investment requires the ability to foretell the distant future… which is extremely difficult to do with consistency.”

Shareholder Q&A Sept. 2018, Mark Leonard