Last month we had a chance to chat with the 2014 Ira Sohn Contest winner Michael Guichon, a Columbia University MBA student. His idea, Fiat, was selected by a panel of judges, including Joel Greenblatt, Bill Ackman, Seth Klarman, and Michael Price.
Tell me about your background and how you came to be interested in investing:
I grew up in Toronto was an undergrad at the University of Pennsylvania where I majored in mechanical engineering. At the time, I thought I wanted to be an engineer designing cars. But I graduated in 2007 and there weren’t many automotive engineering jobs available. I was able find a job at Morgan Stanley Investment Management. It was a great experience and I learned a lot watching the crisis unfold and market values change rapidly. I was doing general economic research, but the group next door was a U.S. mortgage group that unfortunately had a very large exposure to non-agency mortgages.
It was a very rough education the first couple of years, but that is what actually sparked my interest in investing. It was fascinating to see how quickly perception and market values changed. Someone recommended I read The Intelligent Investor and that book, while it doesn’t tell you much about how to invest, tells you how to think about the market in terms of underlying value and price. I then moved within Morgan Stanley to become an analyst focused on emerging market sovereign debt in 2010.
I enjoyed being an analyst and did that for three years, but knew I wanted to branch out and touch more asset classes than just sovereign debt. So business school seemed like the logical thing to do. Interestingly, the last bond that priced before I left was the Zambia 10-year which priced at 5 3/8th yield which was probably a good sign to get out of that market.
And then you went to Columbia Business School?
Yes, I came here for a number of reasons, but especially for the value investing program. The school puts in a lot of time and energy to give students the resources to learn the investing trade so it’s been great for me.
Have you been investing on your own?
I didn’t start investing in my personal account in a serious way until maybe 2011. After watching a bunch of securities crash in 2011, I thought it might be the time to start buying. These days I have been spending a lot of time managing a small friends and family account and Fiat is one of the big holdings in that account.
Tell me about your thesis for Fiat?
I’ve been following Fiat for over a year now and I’ve owned it since shortly after they announced the Chrysler acquisition. It’s been a name I’ve been slowly gathering more data points. It is still a misunderstood name. The overall earnings power of the business isn’t fully recognized and a bunch of temporary items like economic weakness in Europe obscure the value of the individual businesses (Chrysler, Maserati etc.)
There is a huge gap between the potential earnings of the business and what it is earning now. And at this point the stock only seems to trade off of what it is earning now rather than what the business could do if the weak trailing businesses start to perform and they are able to turn the operations around.
I realized, also, that the company has this bizarre capital structure that is a legacy from the Chrysler acquisition. Because the company didn’t fully own Chrysler, they weren’t able to access Chrysler’s cash. The overall company has an excessive amount of cash and an extremely low EBITDA multiple. But if you look at the business units individually, Chrysler, Ferrari and Maserati are performing very well. The weakness in Europe is mostly macro driven. It seems like a very compelling story to me with an extremely low multiple and an improving business.
When did you find out you were a finalist for the contest?
I submitted the idea early and the official due date came and went without hearing anything. Then I received an email saying that I was a semi-finalist, one of twelve. It also said that if I was one of the finalists, they would expect a slide-deck. Luckily I already had a deck for this idea because I had prepared it for the Pershing Square Challenge with two fellow group members, Sam White and Tom Schweitzer. We had agreed in advance that I would submit this write-up under my name since it was my idea originally, but a lot of the work came from them originally so they deserve credit too.
Did you guys win the Pershing Square Challenge too?
No, we actually didn’t even make it to the final. I think it is a lesson in how subjective grading of investment theses can be.
After you gave your presentation, did you get feedback from the judges or people who were at the conference?
I spoke with a couple of people who congratulated me, but in this format you don’t get much feedback from the judges. I did get to have a brief chat with Joel Greenblatt which was great since I’m hoping to take his class next year.
So you are a 2nd year at Columbia Business School. Do you have an internship lined up for the summer?
Yes, I’ll be working at Hermitage Capital headed up by Bill Browder. They have closed to outside investors and it’s just internal capital now. They are investing across all asset classes and countries. I’ll be focused on equities this summer.
Michael, thank you for your time.