by William McInnes.
The best investment decisions can often feel the most uncomfortable, but those choices have paid off more often than not for Blake Henricks.
The Firetrail Investments portfolio manager is a firm believer that every company has its price. Henricks isn’t afraid to be counter-consensus, backing stocks many others in the market aren’t so happy to touch.
“We don’t say, ‘We want to invest in this, this or this’. But what we will look for, over a five-year period, is times when the market de-rates the earnings for whatever reason,” he says.
He applies the same approach to a market darling or a more polarising opportunity, such as Domino’s Pizza.
“Domino’s was trading at a 100 per cent premium and now it’s at about a 20 per cent premium,” says Henricks.
“The market’s basically saying that they’re really concerned about Europe, they don’t think it’s the growth story it was and they’ve got concerns about the Australian franchisee business. That’s the opportunity for us to go in there and think ‘Does the market have this right?’
“Every company has a price and I think it’s cheap enough now, but we still feel that Europe just needs a sense of stabilisation. So it’s something we’re definitely looking at and we’ve done a lot to work on but it’s just not quite there.”
Counter consensus
Liking out-of-favour companies is nothing new for Henricks, who believes his best stock calls were the ones that made him uncomfortable at the time.
“Qantas is around $5.50 now but when it was $1.50 – when we entered the position – we were nervous and the market was saying this business is broken,” he says. “Everyone in hindsight says Qantas at $1 was obvious.
“But Metcash is similar, Flight Centre and BlueScope. They all have one thread: they became undervalued because the market became too pessimistic on the outlook and that was the opportunity.
“The only reason we exist is because we believe the market can be inefficient. It’s not always inefficient, but it can be inefficient – and that’s the opportunity to invest when companies are undervalued.”
Agnostic investing
Firetrail’s process is not set on either growth or value stocks: it believes making money is the key consideration.
“We are sort of agnostic around style, we just want to buy undervalued companies,” the fund manager says.
“Whether they’re value companies or growth companies, we’re indifferent and we’ll typically have a mix over time as well.”
As for value and growth: “Well, they’re cycles. If you’re too beholden to one type of stock, you can have a very volatile period for something out of your control,” he says.
While he doesn’t own it, Henricks says Seek is a “terrific” stock he’d love to have in his portfolio if it were cheap enough.
“What a business. They’ve just done such a great job of telling the market how we’re going to run the business,” he says. “Andrew Bassat, the CEO, owns 4.5 per cent of the business. He says, ‘I’m in bed with you guys and this is how we’re doing things, period.’
“It’s a competitive market. It’s not a time to expand margins, it’s a time to grow and reap the rewards over time, and shareholders have.”
Hard lessons
Picking winners has not come without some hard lessons. Henricks recalls Origin’s Energy’s slump during 2015 as an education of sorts.
“It was a big position for us and Origin was spending a lot of money,” he says “We became valuation-focused and thought even if the costs blow out on Australia Pacific LNG, running 15 per cent cost over, it’s still incredibly undervalued.
“There was just multiple lessons there about balance sheets and expectations. We were lucky to move on there without too much loss, but we did lose quite a bit of money. We went from $17 to $11 when we sold it, but it went a lot lower from there. Companies undertaking massive investment will be a lesson that lasts with me. Companies undertaking massive changes … be very careful.”
Henricks says he’s become better at losing over time, but it is a skill he attributes to his love of board games, not investing.
“What drives me is winning and being competitive and it’s true of that team as well, we’re quite competitive,” he says. “We love investing but what drives us is an intrinsic motivation around that.
“But that’s why I like board games, because of the competition.”
With more than 100 in his collection already, Henricks’ wife has banned him buying any more.
Journey to Firetrail
Henricks, the son of journalist and broadcaster Greg Henricks, grew up in Heathcote in Sydney’s Sutherland shire, finishing school in 1999 with ambitions of becoming a maths teacher.
After university, he was rejected by most of the big investment banks, but landed a job in the Commonwealth Bank’s graduate program. He joined Macquarie Group in 2006.
“Macquarie was flying at the time,” says Henricks. “I helped write performance reports for some of the fund managers and then got an opportunity to do it [myself] and the rest is history. I was there for 12 years.”
The departure of Patrick Hodgens, James Miller, Henricks and several other members of the equities team was noteworthy because of their stellar performance managing the Macquarie High Conviction Fund, the best-performing Australian equities fund over 10 years.
“The reason was for team stability. Some of our staff at the time were getting offers [to leave],” he says. “I still really like Macquarie – we’re a big client of theirs, so I don’t have anything bad to say. It wasn’t a really bad break-up.”
Firetrail was founded on February 26, 2018, Henricks’ birthday and also the day his dog was born. The business is 23.5 per cent owned by Pinnacle Investment Management but majority owned by the firm’s 11 staff members.
“The ownership is absolutely different, but Macquarie were very good and very transparent,” he says. “You are as close to owning a business as you can be without owning it. You’re responsible for revenue, the costs, and it’s a profit-sharing system.
“You don’t just get profit share for being a good worker, you’ve got to maintain a profitable business. So the stresses of running a business are very similar to where we are here.”
On the day Henricks sat down with The Australian Financial Review, Telstra boss Andy Penn warned in an interview that investors should not expect quick results from the telco’s restructure.
Henricks says he has developed an insight into the shorthand that businesses rely on to manage market expectations.
“‘We’re very confident in the long term’: that doesn’t mean it’s a sell, but that is code for ‘Things are not going well right now’,” he says.
An investor can’t meet with a chief executive once and determine whether they are a good or bad boss, he emphasises.
“You need to benchmark what kind of CEO they are,” he cautions. “Are they an under-promiser or an over-deliverer? Or are they an inspirational leader who’s going to set out massive goals and potentially under-deliver over time?”
