Bob Desmond's hunt for 20% value gaps and two stocks that make the grade

The normalisation of interest rates has created a better environment for investors, believes Bob Desmond, Head of the Claremont Global Fund.

"Now at least investors have a proper cost of capital, with long bonds sitting somewhere around 4%.

"I think that's good because it stops the distortion of capital. We had a ridiculous bubble in Silicon Valley, and IPOs, and fintechs, and Bitcoin… and it just got really silly with that wrong cost of capital", says Desmond. 

Desmond paints himself as a value investor, with the question “Where is the value, relative to everything else?”, at the heart of the highly concentrated, Claremont Global Fund.

Whilst Desmond is a keen market observer, he eschews macro analysis and instead focuses on finding companies that have at least a 20% gap between what he thinks they are worth, and where the share price is.

The buying is the easy part, however, according to Desmond. Where it gets tricky is the exit decision.

"Selling, I think, is the toughest discipline in funds management".

When it comes to losers, the question is fairly straightforward – if Desmond wouldn’t add to that position, he will cut it.

As for winners, Desmond revisits the idea of value; “We manage to value… as the value gap closes (i.e. the stock price rallies towards Claremont’s target), we’ll be trimming”. That capital is then recycled into other opportunities where suitable valuation gaps exist.

So where is Desmond trimming and where has he been redeploying capital? In the following Views from the Top interview, he shares those insights and identifies two stocks that he likes, one of which he has been building a position in recently.

Desmond also shares a key tenet of his process, that has allowed him to maintain the requisite discipline to consistently employ the Claremont Global strategy, despite sometimes rapidly changing market conditions. 

Note: This interview was recorded on the 17th of January 2024 and first appeared on Livewire Markets.

Time codes

• 0:00 - Intro

• 0:17 – The impact of a changing operating environment

• 1:20 – Health of the consumer and tech layoffs

• 2:55 – Why a proper cost of capital matters

• 3:45 – Can you still find value after a big market rally?

• 5:00 – A concentrated portfolio and position sizing

• 6:20 – The selling discipline and why it is so important

• 8:00 - Managing to value and recycling capital

• 8:30 – From theory to practice and current opportunities

• 9:15 – The funding source for recent opportunities

• 9:35 – Nike and the case of the expanding margins

• 10:50 – Another consumer discretionary name

• 11:20 – Fleeing Tiger no cause for concern

• 11:45 – Controlling distribution is unlocking value

• 12:55 – Bob’s View from the Top