A Deep Value Investor in Cyclical Companies

staffimg_IbenDavid Iben is a deep value investor currently focused on highly cyclical industries like coal, uranium, and gold mining.  He has a mandate to go anywhere to invest in big or small companies. He seeks out value.   The world is now bifurcated between a highly valued U.S. stock market and the cheaper emerging markets.  Social media and Biotech stocks trade at rich valuations while depressed cyclical resource companies languish.


Value to us is a pre-requisite and thus we never pay more than a company’s estimated risk-adjusted intrinsic value. But, failing to think deeply and independently about what constitutes value and how best to derive it, can be harmful. Following in the footsteps of growth investors who had allowed themselves to become too formulaic or put in a box in the late 90s, some value investors were hurt by overly restrictive definitions of value in 2007 and 2008 (Price/Book and Price/Earnings, etc). We find it valuable to use many valuation metrics. Additionally, emphasis is placed on those metrics that are most appropriate to a certain industry. For example, asset heavy and/or cyclical companies often are tough to appraise using Price/Earnings or Price-to-Cash Flow. Price to book value, liquidation value, replacement value, land value, etc. usually prove helpful. These metrics often are not helpful for asset light companies, where Discounted Cash Flow scenario analysis is more useful. Applying these metrics across industries, countries, and regions helps illuminate mispricing. Looking at different industries through different lenses, through focused lenses, using industry appropriate metrics and qualitative factors is important. Barriers to entry are an important factor. Potential winners possess different key attributes. Supply and demand are extremely important detriments of margin sustainability. The investor herd has a strong tendency to use trend line analysis, assuming that past growth will lead to future growth. A more reasoned, independent assessment will often foretell margin collapses as industries overdo it, thereby sowing the seeds of their own self-destruction.

Currently, opportunities are being created when the establishment pays too little heed to supply growth. This fallacy extends to money. Many seem to believe that the Federal Reserve has succeeded in quintupling the supply of dollars without a loss of intrinsic value. That is impossible. Evidence of the loss of value is abundantly clear. Gold supply held by the U. S. Treasury has not increased. As economic theory would predict, the price of gold went up. Following 12 straight years of advance and apparently overshooting, the price has since corrected 40%. The trend followers have their rulers out again, confusing a correction in a supply/demand induced uptrend with a new counter-trend.

We view this as opportunity. At the same time, bonds are priced as if they were scarce rather than too abundant to be managed. It is no secret that this is due to open, market manipulation by the central banks. Intrinsic value must eventually be reflected in market prices. These are abnormally challenging times. Fortunately, we believe markets aren’t fully efficient.

If you listen to his conference calls and read his insights, you will have a great education in counter-cyclical investing. It is easy to know what to do but hard to do!

The Twilight Zone – Jan 2015

Value Investor Insight_3.31.14 Kopernik (Interview)

July 2014 The Contrarian Iben of Kopernik (Interview)

Kopernik Annual Report 10 31 14 – Web Ready

Kopernik Semi-Annual Report _4.30.2014_FINAL

When Doves Cry_Final

The Wizard of Oz Dec 2013


2014 – 4th Q Call with DI – Transcript FINAL

A tutorial of Deep Value Investing in Highly Cyclical Assets/Companies

The trials, tribulations, and need for consistent approach.



I will be asking for your suggestions for the deep value course. I am collating one reader’s suggestions which I will post next.  Some of you may be quite experienced and advanced investors who tire of the theoretical course materials as well as the mechanical aspect of quantitative investing. We will discuss this next………….Thanks for your patience.


10 responses to “A Deep Value Investor in Cyclical Companies

  1. I’m surprised there have been no comments on this great post by John. David Iben is in the real minority, a professional investor using deep value methods with a large asset base at his disposal. People often say deep value cannot be implemented with more than a few hundred million and here’s a guy who’s clearly proving you can. He does this through a go anywhere approach, global all cap. I also shared his pain last year in my personal investments, as I have a 25% holding in gold mining equities, the same weighting as his fund (coincidence rather than cloning!). I highly recommend reading the above. John, Iben mentions that he uses different valuation measures for different industries. Maybe that is something we can incorporate into the deep value course? To create a toolbox of valuation measures for specific industries could be very useful when students are analysing businesses.

  2. Great idea Tom. Valuation metrics per industry would be very helpful . I’ve been following David for years. Try to listen to his conference calls any chance I get.

  3. Off the top of my head, Damadoran (NYU) has a website with different industry metrics. Google him and look a his website–he has Excel spreadsheets on different industries. Also, go to Georgia Tech Accounting Lab (Prof. Mulford) and see his cash flow analysis on different industries. If you can’t find–post here in the comment section and I can find the links.

    • Hi John, I’ve struggled to locate this. I have found valuation data for sectors (e.g. EV/EBITDA) but nothing which lists specific metrics for specific industries. Would you be able to help please?

      • Go to value-line at a library and choose and industry and then go look at each company and see how they are valued.
        What does each business require in terms of maint. capex and investment per dollar of sales. For example, last time I looked Coke needed 15 cents investment for every dollar of revenue.

        What is your purpose.? NEVER use a regurgitated analyst report or study.

        Just pick and industry and go through the 10-Ks one-by-one.

        • I’m UK based and not sure if ValueLine is available here. My interest is in how industries should be valued differently. As David Iben alludes to, some businesses are best looking at from replacement value/tangible assets whereas others he looks at dcf/normalised earnings. Maybe going through the accounts of an industry would help but I’m wary of the fact that businesses may dress up their valuation in a way that would not be appropriate for my purposes as a value investor.

          • OK, fair enough. You as an investor have to ignore gaap and adjust for economic reality.

            Say a company has real estate on its book at cost from 1919–you have to adjust for replacement value.

            Same with depreciation. Therefore, pick an industry and read about its key metrics in industry reports, various 10-Ks, call up IR and ask for industry stats. etc., etc.

            Sure it takes work but focus on industries that you are interested in or are extremely out of favor–Coal, Materials, Mining, Infrastructure, etc.

            I don’t think you have any other choice–ask others on this board to chime in.

  4. Columbia Value Investor

    This is a great share. I would love to read more about mean-reversion investing. For example looking at depressed teen-retailers and how to determine the mean that they revert back to.

    Also it would be great to get analysis on how to short cyclical stocks. How does various investors think about timing these shorts (yes it is a matter of personal preference) and the data that they need?

    Thanks guys. This is awesome!

    • I don’t have much time these days, but to study mean reversion look at Andrei Shleifer’s Inefficient Markets and The New Finance by Robert Haugen

      Then Templeton’s Way with Money by Jonathan Davis and Alasdair Nairn. You have to estimate normalized earnings five years out. Not easy. An industry suffering low returns for years, then capital investment low and capacity shrinks then what will the company in the industry that reverts to the mean look like in terms of future book value, replacement value, earnings, etc. look at many different metrics.

      The KEY POINT is estimate AT LEAST FIVE years out NOT one or two!

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