Pulling Value out of Obscurity

 | Nov 27, 2012 | 2:00 PM EST
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The investment world has been trained to focus on the biggest, most popular and most visible names across all categories. Stocks such as Apple (AAPL) and Facebook (FB) are always front and center, and investment titans such as Warren Buffett, Seth Klarman, Bill Gross and Laurence Fink are under constant watch. Amid the titans, however, remain wildly successful investors who have purposely decided to remain in relative obscurity in order to remain intensely focused on analyzing businesses. On such name is Frank Martin of Martin Capital Management, which is located in that hotbed of finance -- Elkhart, Ind. 

Martin is a value investor in the mold of Benjamin Graham and Buffett, but his results convincingly illustrate his status as a worthy investor in his own right. Martin works with approximately $200 million in capital, so he is hardly a big fish in today's investment world. But size is irrelevant in investing, and it can even potentially be a detriment. It's value that counts -- and, on that scorecard, Martin's results put him in an elite group. 

A $5 million investment with Martin Capital at the end of 1999, after all fees and expenses, was worth $9.5 million at the end of 2011. By comparison, had one made this investment in the S&P 500 over the same time period, the investment would have been worth $5.3 million at the end of last year.

So these numbers are impressive on a standalone basis -- but what they don't reveal is that, over this 12 year period, Martin was investing approximately 50% of the firm's capital. In other words, return on invested capital didn't double over that time period; it actually quadrupled. All the while, Martin was maintaining liquidity, with nearly 50% sitting in cash. Who says greater risk is required for greater reward? 

In my opinion, a quarterly review of Martin's 13-F filing with the SEC is a must. The most recent filing shows about $76 million invested across 19 equity positions, and the largest position is in home-improvement retailer Lowe's (LOW). Given the strong run-up in shares this year, it's not surprise that this is a significant holding. A new investment, and one that has become the second-largest position, is in Gentex (GNTX). This is a $2.5 billion manufacturer of electro-optical products for the automotive and aircraft industries. Gentex also sells fire-protection products to residential and commercial real estate customers. Shares trade at $17, down from a high of $34, and yield 3%. 

The next-largest holding is in Gildan Activewear (GIL), a maker of active apparel products. Shares in Gildan have more than doubled over the past year, and it's possible Martin is trimming the position. Other significant investments include Hewlett-Packard (HPQ), Abbott Labs (ABT) and Stryker (SYK). 

Any investor seeking high-quality investment ideas should look closer at all of Martin's positions. These stocks have been intensively researched and selected by a true investor in the every sense of the word. I should note that patience is a required prerequisite here. For instance, Martin was invested in Lowe's during the majority of housing crisis, and only recently is that investment reaping rewards. Interestingly enough, Martin Capital has actually underperformed the S&P in eight of the past 10 years. The total outperformance is a result of investing when market opportunities and valuation dictate investing as opposed to being fully invested at all times.

In an industry where money freely flows in and out of the best- and worst-performing vehicles, it's obvious why an investment firm in Middle America is resolved to obscurity. But for its investors, value creation here has been cream of the crop. Luckily, we are able to piggyback on ideas. 

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