Robert Maltbie, CFA, Managing Director of Singular Research, talks with the Opportunist’s Managing Editor Leslie Stone about why he prefers under-covered companies, the Facebook IPO and what he believes might accelerate America’s economic rebound.
Robert Maltbie’s passion is unearthing under-covered companies before the rest of the investment world knows they exist. His California-based firm, Singular Research, provides initiation reports and quarterly updates for approximately 40 micro- to small-cap companies. “I have a passion to unplug the background cacophony of the market and the trade du jour, the scam du jour and the headline du jour and find investment opportunities that are below the radar screen and yet investable, high quality and independent,” he says.
Opportunist: How did you break in to the investment business?
Robert: After graduating from UCLA with a political science degree, I was headed to law school—until the reality of three more years of abject poverty was staring me in the face. [Laughs] Back at the frat house, I had noticed a couple of my buddies were leaving very early in the morning and coming back very early in the afternoon. They would have the rest of the day to go to the beach. That piqued my interest and I wanted in. I discovered they were working as Merrill Lynch interns. I thought well, let me see if I can get in. So, I dressed in preppy clothes and walked into their office in Westwood at about 1:30 p.m. Pacific Time—having no idea whatsoever about the market except that I was kind of interested and sure could use some money. [Laughs] The office was deserted. When they said they weren’t hiring, I questioned all the empty desks. What I didn’t realize was that the market closed at 1 o’clock on the West Coast. [Laughs] More importantly, to date myself, this was 1982 and no one was hiring because the market was bad. Lo and behold, the market eventually exploded and I got in on the ground floor at Dean Witter as a retail stockbroker. I’ve been at it ever since. I am the principal of Millennium Asset Management as well. Millennium is the first company that I formed when I left the Street. I launched that company on 9/9/99—doing it to the nines, so to speak. [Laughs] Millennium is the company that invested in and launched Singular Research.
Opportunist: What made you decide to start your own firm?
Robert: I was trained by some of the best in the business, and I had an opportunity to look at the many facets of the industry. That experience, combined with a desire and a plan to try to do something different, inspired me to open my own companies.
We were on a calculated mission to try to add value, and we launched Singular Research in the wake of WorldCom and the Sarbanes-Oxley Act. It was a bear market where there was a lot of pulling back of resources for coverage. We hired a couple of analysts and, eventually, a third. They were experiencing similar difficulties doing research on small caps, so we thought: Well, let’s start a company here. We tested our concept for market interest and for performance and we knew that it would probably work based on positioning of the historicals in the market. Within a month of researching the institutions, we believed we had a strong enough foundation and we gained a few of our institutional clients. We thought wow if they like us, we must be doing something right. It’s sort of like that good golf swing that keeps coming back. [Laughs]
Opportunist: What attributes do you look for in the independent analysts with whom your company works?
Robert: MBA or CFA. Through trial by fire, so to speak, we have established some very certain characteristics that we look for. First would be passion and independent thinking. Second would be pedigree in small-cap land. In addition to those criteria, we want individuals who are discerning about what they like and what they don’t like. In our model, they are free to say no a lot. They get to say, “Well, that’s not a stock that I like” instead of having to say yes. We call our analysts the “gang of the grumpy old folks.” [Laughs] They are grumpy, but not that old.
Opportunist: How did you hold your own with so many bigger firms out there?
Robert: With our limited resources, we asked ourselves what our most intelligent move should be to add some value as an independent research firm. We felt there was a need for coverage. Many firms were gobbled up or folded up in the past 20 years. Even the regional firms had pulled back due to market and regulatory circumstances. The conflicts of interests of Sarbanes-Oxley were so widely apparent. The need for non-bank-driven research seemed to be so necessary. Those elements converged to turn on a light bulb that made us consider pursuing those companies that had been abandoned or were just too small for coverage.
Opportunist: How do you go about finding undervalued securities, especially those that are not covered by any other firms?
Robert: We have a proprietary methodology. Half of what we cover is from our screens. The other half is from human instinct or past coverage. Our analysts are very seasoned and have a passion for what they do. They bring up their own ideas. We have an open platform and that’s why people love to work with us. There are no exclusive mandates. We look to capture various phenomena that we think is noteworthy and timely, such as return on equity and return on assets and improvements on tech behavior evidenced by higher volume and price. We go for the down-and-out and out of favor companies. We have to make sure there’s no coverage.
Opportunist: What is Singular Research’s target market?
Robert: According to our research, domestically there are about 4,000 money managers or independent units that we consider our target market.
Opportunist: You are on TV frequently. What is your most memorable appearance?
Robert: Actually, there are two. First, is a financial show called "FORBES ON FOX" with Steve Forbes. It was my first time on and, honestly, I was a little bit nervous. They had a living room setting in the studio with comfortable lounge chairs and studio lights. Someone asked me to move, but I didn't see the light cable and almost knocked the big crane down on top of Steve Forbes. Fortunately, he moved right before it crash landed. The other memorable appearance was when I forgot to turn off my cell phone in preparation for Neil Cavuto's show. We were in the middle of our broadcast when my cell started going off. My ring tone was a Rock "n" Roll oldies song. [Laughs] I don't know if anyone knew it.
Opportunist: What are your thoughts on financial news coverage in the media?
Robert: I dislike the journalist who is in love with the sound of his or her own voice or pits their intellect versus yours. They bring you on to comment and then promptly answer all the questions they ask. [Laughs] That’s not my style. A couple of interviewers are outstanding in their depth and understanding of finance. Maria Bartiromo is good. She lets you talk and get your point across but will step in and manage the agenda pretty well. Erin Burnett is good at that as well. One pet peeve of mine is where, in a competitive world, everybody is vying for eyeballs and attention and the hyperbole and the drone gets to a level of near insanity. It’s hard for viewers to distinguish the difference between fact and spin, and I think it does a disservice to investors.
Opportunist: Who is the most impressive person you've met during your career?
Robert: I really struggle with this; it's like asking a parent to pick a favorite child. I have met many impressive people. I have enjoyed spending time with and getting to know CEOs of small publicly traded companies who are passionate and are trying to build long-term value for shareholders. Their focus and ability to balance the nuts and bolts with strategic vision and charisma is just incredible. That's my world.
Opportunist: What does the future hold for Singular Research?
Robert: Well, we think the future is very bright. We have built our brand and won some important awards for our research quality and accuracy. Further shaving back of coverage in the small-cap sector gives us more opportunities to pick up more companies and, at some point, we think that a couple of secular changes will take place. ETFs [exchange-traded funds] have really hurt the business. Those are basically baskets of stocks with no research. Mutual fund money is now going into ETFs, but we need to see ETFs that are accurately managed. They have hurt the mutual fund industry but have actually encouraged investors in a strange way. It’s an anomaly, with high volatility, so ETFs are not happy equations for investors. Consider two companies that are equally good. One has coverage and the other does not. There is a 25 percent stock price differential on average. We aim to take advantage of lack of investor interest and create opportunities to leverage with ETFs. We are looking to launch a fund based on our research and, hopefully, offer it to the public.
We are in this business to create wealth for ourselves and our employees and our analysts. It’s kind of like the movie “Field of Dreams.” If you do it fundamentally from the bottom up with the right objectives and values, they will come—and they are starting to.
Opportunist: What are some of the most promising companies you have come across?
Robert: The very first company that really made a difference was a company I have to take credit for discovering. I was in Las Vegas for a shoe conference. I went there to look at UGG very early on, actually, and I noticed the tram that connected the Las Vegas Strip to the Las Vegas Convention Center was painted like—depending on your artistic proclivities—a Picasso or a Van Gogh on fire. [Laughs] Turns out, it was the same design of the Monster Energy Drink by Hansen’s Natural Corp. I knew it from Southern California as a kind of sleepy not going anywhere too fast beverage company. As you know, these energy drinks became very big. Hansen’s wasn’t covered by anybody at the time. We launched coverage on it and it became a phenomenal returning stock. Its valuation was reasonable—maybe 12 to 18 times earnings. That’s the niche we try to serve: great companies that don’t need extreme money.
Opportunist: Where do you believe the market is headed?
Robert: We are working through this secular deleveraging and, thankfully, we are not where Europe is and there are lots of positives going on here. It reminds me a bit of when I got into the business in the early ‘80s after we’d been ripped by five years of runaway inflation and impeached political leaders. Japan was taking us to the cleaners and they were going to rule the world the same way China is now. Strong leadership and government and companies were unfettered to grow and I think right now you kind of see that in the capital markets. We will work through it.
Here’s something that says it all. People can draw their own conclusions, but from 2007 to 2011 corporate profits in America grew about 40 percent. Corporations are making a lot of money but they aren’t exactly sharing the wealth. They are merging and cutting costs. Adjustable income has not kept up.
Opportunist: What is your opinion of the Facebook IPO?
Robert: Well, this segues into our current thoughts about the market situation. It’s not likely to create great wealth for investors who buy during the IPO aftermarket movement. Rarely in the history of the market have you been able to make money a year or two years later in a company with a market valuation over $100 billion.
Opportunist: Do you believe the United States will overcome its economic woes?
Robert: I believe the economy will be on the upside of capped for the next couple of years. The United States is experiencing a 2 percent GDP growth scenario for the following reasons: excessive and onerous regulation, high debt levels that have to be worked through, as well as housing inventory and shadow inventory [homes with delinquent mortgage, homes in the throes of foreclosure or bank-owned homes not yet on market]. Heading into the last six months of the year, we should start to see the GDP picking up nicely above trend lines toward a 5 to 6 percent growth as we start breaking out of this malaise.
Opportunist: What do you believe can be done?
Robert: Retraining and re-educating of America and tapping into human capital again. People need to retool and retrain and dig in and get their confidence back. It looks like this high unemployment rate could be secular rather than cyclical, due in part to technology that has rendered positions obsolete. We need to figure out ways to be high tech and high service—to take advantage of the Internet rather than be a victim of it.
At some point, we’re going to have to start hiring again. We need employment to increase, and I think it will. I don’t want to get political here, but excessive regulation and the cost of hiring another person versus contracting the work out makes it difficult for companies. Companies are buying out other companies and cutting costs by letting people go. I outsource a lot myself, unfortunately, because of the additional cost of hiring. Instead of cutting taxes like in the early ‘80s, we need to cut regulations. Hopefully, things will change.
Opportunist: Do you have any advice for investors?
Robert: I would ask individual investors to turn down the volume and give the market a chance. Try to see beyond Europe and the day-to-day volatility and the hyperbole of financial news. There are signs that the economy is picking up, and there are some great investment opportunities out there. I hope people can become confident and more optimistic. Changing the conversation from Europe or Greece to Web 3.0 or new technology or the fact that there still is growth and opportunity out there is rekindling interest in IPOs and faith and hope for better things. Due to the turbulence of recent years, the market is going through a lack of confidence. We need to get confidence back. Companies like Facebook and Apple will hopefully get people more interested in believing again.
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.