Brandon Osten is an uncommon market animal – an analyst who has made a successful transition to money manager.
Contrary to popular belief, good analysts do not always make good money managers.
It is the same in the army – the best sharpshooters on the firing range may not be the best fighters in real combat, because the smoke, confusion and visceral emotions of battle usually get the blood flowing from the brain to other body parts, so even the best peacetime shooters can miss, or even freeze and not shoot at all.
The market is not much different (though thankfully without the gore): The actual doing is always harder than advising or commenting.
Yet Mr. Osten, who was one of my favourite analysts when he was still with Sprott, has transited well and is now successfully running his own money management firm, aptly named Venator – Latin for “hunter.” Judging by his results, he clearly can spot cheap stocks and hunt them down.
What's more, his monthly letters are pithy, his thinking original, and his temperament cool. How can he stay cool when the market gets hectic? Because he knows it's never really “different this time,” and so the market always regresses to the mean.
That's why Mr. Osten and his partner-hunter, Stephen Andersons, define themselves as “Goldilocks investors,” never believing that things are either as bad or as good as the consensus suggests. So they are always partly hedged – although, being optimistic, they always have a long bias (they have never been net short), being convinced that good companies will always trade (eventually) at more than 10 times earnings – so long as interest rates are below 10 per cent.
However, and this is key, Mr. Osten doesn't disdain consensus just for the sake of being contrarian. Such a stance is foolhardy, since consensus can often be right, although it's of course wrong at the extremes – which is when Mr. Osten exits. For example, at the peak of oil's madness, from $100 (U.S.) all the way to $140, Mr. Osten was adamantly one of the few who were bearish on oil – and acted on it. It was not different that time either, he told me then; and he was similarly bearish on the soaring mines at the time – and he was right again.
So what are his views now? Is the consensus right?
Nope. The consensus is dead wrong again, Mr. Osten said as we sat last week over sushi. First, he says, the consensus about “green shoots” signifying an economic revival is wrong. The awfulness is not over. We're merely seeing a deceleration of the downwards trend.
This green shoot thing, he says, is like a car driving into a wall at a slower 60 kilometres an hour instead of 100 km/h. It's still an impending wreck.
He also worries about too many stocks trading at a 52-week high when capacity utilization is low – and sales are falling – and yet companies keep pumping out record profit margins (which we usually see at peak cycles where capacity is fully utilized, not when competitors can lower prices to fill up their plant). This is clearly unsustainable, no matter the consensus.
What of oil? There's a disconnect here, too, he says, between the rising price of oil and the current oversupply – inventories are brimming, China's Strategic Petroleum Reserve is full, OPEC is producing only at 80-per-cent capacity, yet the price of oil is rising.
In short, Mr. Osten thinks oil is overpriced. My own view is that rising oil in the teeth of oversupply signals that the market smells coming disruption due to conflict and war – both unknowable. Perhaps that's why Mr. Osten simply chooses to avoid oil here, when such discrepancies appear.
A hunter doesn't have to shoot every target, nor a money manager play in every market. This, too, is a test of smarts – when to play and when not to play.
What of future views? Mr. Osten's outlook is for stable low growth, but with markets still able to go into manic depressive swings of plus or minus 40 per cent, which makes valuation of paramount importance – that, and hedging. So he is now largely in defensive stocks selling at cheap multiples, in paired trades (that is: long one stock, short another), and in some high-growth and turnaround situations. All in all, Venator's main fund is 105 per cent long and 45 per cent short, for a net 60 per cent exposure; the catalyst fund is 50 per cent long, 50 per cent cash (clearly, not enough catalysts); and the income fund, about 50/50 equity and bonds, fully invested.
When I pressed Mr. Osten for a sample of his picks, he gave me three: long Apple and Research In Motion v. the Nasdaq (i.e.: long the stock, short the market), and as for pure long, he likes Glentel, which he calls an indirect play on smart-phone adoption with high growth, yet trading only at seven times earnings.
And how has his fund done? Not too badly. Year to date, Venator is up 26.6 per cent, v. 15.4 per cent for the Toronto Stock Exchange composite index and 16.9 per cent for the S&P Toronto small cap index (and 0.5 per cent for the Russell 2000 index). Clearly, he's one sharpshooter who can hit targets both on the firing range and in real battle.
