Wayne Cooperman and Ricky Sandler formed Fusion Partners in December 1994 at the respective ages of 28 and 25
Wayne Cooperman and Ricky Sandler formed Fusion Partners in December 1994 at the respective ages of 28 and 25. Prior to that, they had worked together as research analysts at Mark Asset Management, the highly successful money management firm organized by Goldman Sachs' alumnus Morris Mark. The Goldman Sachs connection, where Wayne Cooperman worked briefly, started with their fathers, Leon Cooperman, the long-time Goldman strategist who formed his own hedge fund in 1991 and Harvey Sandler, a former Goldman media analyst who has been managing his own investment firm since 1980. After three years in which net returns to investors have ranged between 31% and 41% without one down quarter, Fusion Partners manages $270 million through a domestic partnership and an offshore fund started in January 1997. Wayne Cooperman and Ricky Sandler talked to HFN publisher, Antoine Bernheim, in late January.
Profile of Wayne M. Cooperman
Born: September 23, 1966
Education: BA, Stanford; MBA, Wharton; CFA
Family: Married to Jodi; two-week old daughter, Courtney
Last vacation: Scottsdale, last October
Last book read: The Angel of Darkness by Caleb Carr
Hobbies: Basketball and golf
Favorite quote: "The squeaky wheel gets oiled"
How he best describes himself: "A seeker of truth "
Profile of Ricky C. Sandler
Born: September 10, 1969
Education: BBA, University of Wisconsin; CFA
Family: Married to Mara; two dogs
Last vacation: Hawaii, January 1998
Last book read: "Into Thin Air" by Jon Krakauer
Hobbies: Tennis and golf
Favorite quote: "Cash is king"; "Hogs get fat and pigs
How he best describes himself: " Work hard and play hard"
Q. Could you describe your investment philosophy?
A. We like to call ourselves "quality value investors". We look for good quality companies with good cash flow, high returns on capital and shareholder-oriented management. We try to find these companies when they are trading at less than what we think the business is worth, given the quality of the business. Our approach is all bottom up, but we obviously pay attention to what is happening in the industry and the world.
Q. Could you describe your research process and the resources you use?
A. Our research process involves an in-depth analysis of both qualitative and quantitative factors. First, we usually try to get a really good understanding of the business, how the company makes money and what are the trends affecting the business. We read company material, trade publications and talk to sell-side analysts. Depending on what we are working on, we go to trade shows, conferences and the like. We also try to pursue "unbiased" sources, such as customers, suppliers and competitors to confirm our primary research and to provide new information. Finally, we try to get to know management because we are really putting our money with them and we want to make sure that they are working for us.
Q. Could you describe the criteria that may cause you to buy a stock or sell it short?
A. We analyze the business first and determine how strong the cash flows are and how good the returns on investment are. We come to our own conclusions as to what the multiples should be and where the stock is likely to be going over the next year. We also evaluate the downside as we best can. We like situations where we think the downside is 15% and the upside is 50% over a two year period. Some companies are worth twenty times earnings and some are only worth ten times and we could buy either kind if they were priced at a level that gives us the upside we want. On the short side, we look for situations where we can identify a fundamental flaw in the business longer-term. A company may be doing well today but be at the peak of a cycle or face new competition. We would look to short the stock if the market was pricing it based upon the current company's performance and we thought it was unsustainable over the next couple of years.
Q. How do you divide up the work and how do you interact in making investment decisions?
A. There are some industries that one of us may know better than the other, financial services or retailing for Wayne or gaming and lodging for Ricky, but we are both generalists. Usually one of us finds a particular idea and begins to do initial research. Along the way, we may seek the other's input but one of us usually does the bulk of the research. We have a rule that each one of us has the ability to take a 2% position without the other's consent. As a practical matter, we interact and converse before that time. We have to agree on any position above 2%.
Q. Could you give us a couple of examples of stocks you find attractive and why?
A. In the fourth quarter, our largest purchase was a company called Pierce Leahy which is an archive records and management company. They take companies' inactive records, store them and deliver the boxes when needed. They have 98% customer retention, very high cash flows and they also have a
lot of high return opportunities to grow the business. Currently, about 75% of the business is still done internally by companies managing their own archives and 25% is outsourced to companies like Pierce Leahy, hence the opportunity to grow. In addition, existing customers are probably growing at 6% or 7% a year as more paper gets created. When they bring on a new customer, they are earning approximately 25% on capital and when an existing customer grows, they are earning approximately 50% on capital. We bought the stock in December after they announced that estimates had to be reduced for 1998 since management was not going to be making as many acquisitions as they had promised. Basically they were getting a higher return on internal growth than on acquisitions as acquisition prices had increased. We looked at that as a shrewd decision by management while Wall Street took it as a reduction of estimates and killed the stock. Currently, the stock trades at twelve times discretionary free cash flow and we think they can grow that number at 30% plus over the next five years.
Another stock that we have actually owned since we started is NVR, a home builder based in Washington, DC. More than anything, it is a very cheap stock. They don't own land but buy it under option, so their return on capital is actually five times higher than the rest of the home building industry and they throw off a lot of free cash flow. Since we have owned the stock, they have repurchased 40% of their outstanding shares. The company still trades at about four times cash flow while many other home builders trade at more than eight times cash flow with lower returns on capital. Management has been very shareholder-oriented and they continue to buy back stock.
Q. What is the mix between trading and investing?
A. Most of our focus is on being long-term investors. We keep a pricing discipline and we sell stocks when they get to our target or above. Occasionally, when we see a stock down a lot and we think the market has made a mistake, we buy it as a trade.
Q. Could you describe the typical structure of your portfolio?
A. Since we started, we have been between 90% to 100% long and 15% to 25% short. We own 40 to 45 positions on the long side with the top 10 typically representing 45% of our total assets. On the short side, we usually have 15 to 20 positions, with an average of 1% of assets and our largest short up to 2%. We probably would never be net short. Our exposure is the result of our bottom up approach which tells us whether or not there are a lot of cheap stocks. As a result, our net exposure tends to move inversely with the market. We use very little leverage.
Q. How do you control risk and volatility in your portfolio and what is your approach to taking profits and cutting losses?
A. Our main approach to controlling risk is our research process. We do a lot of work on a company before we buy it and we try to buy when the downside is limited. We always have shorts and occasionally some puts. When a stock reaches our target, we start selling unless something has changed to cause us to raise our target. If a stock goes against us, we go back to our research to decide whether we made a mistake and whether we should sell or buy more.
Q. Where would you like to go in terms of capital under management, staffing and performance?
A. Given our style, we think we can manage up to $500 million and we will have to evaluate whether we should close the fund as we approach that level. In terms of staffing, we want to stay very close to the research process and not have several people running mini portfolios. Our return objectives are lower than our historic returns and we think it will be harder to repeat that kind of performance. We want to generate good long-term consistent performance while taking lower than average risk. If we are right all the time, we can make 25% a year. Sometimes we are right more quickly than we anticipate and that is how our returns have been higher. u