Finding Diamonds in the Rough

April 29, 2020 10:18:41 AM

Many of us have used this ubiquitous phrase when describing a situation where we found something good hidden amongst many things that appear on the surface to be bad. The Merriam-Webster online dictionary defines “a diamond in the rough” as “One having exceptional qualities or potential but lacking refinement or polish.” Unlike many investment pundits, we see major market declines as opportunities to find companies selling at discounts to their fair value. Will the recent COVID-19 Crash be one of those? We can’t be certain until this time in history passes. Instead of interpreting what is likely to be some of the worst economic data on record and using that as an investment decision-making tool, we believe it better to focus on the perceived intrinsic value of individual companies rather than the collective whole of the Economy in determining how one ultimately invests. We invite you to check-out our investment process by asking the following:

  1. Do we believe that assets of any type have a Fair Value?
  2. We believe the answer to be in a most ardent and forceful way as YES.
  3. If we believe this to be true, we must logically follow its pathway to the next question.
  4. Based on the recent stock market sell-off that drove prices of nearly every publicly traded business down between 25-35%, we were compelled to analyze each company and determine whether it to be over or undervalued.
  5. In doing so we found a dozen or so that we deemed to be selling at deep discounts and looked to be “diamonds in the rough.”
  6. Yes, their price per share may drop at first, and we expected that to happen, but let’s ask ourselves a question of greater magnitude.
  7. Has this Virus and the fears surrounding it put the proverbial “death knell” to Capitalism and business ownership as we know it?
  8. This Crisis may derail the Economy for six months to one year, but, in answering that question over a complete market, we would answer a profound NO to that question.
  9. If we then believe that premise to be true, then we must take the action of purchasing assets as we see on sale and vs. dumping perfectly sound companies at a discount and selling them to someone else.
  10. In response to our original question that we posed…yes, we firmly believe every asset has a fair value. Furthermore, we believe that the price of several assets sold-off simply due to fear and not sound analysis.

These are very tough times indeed. Moreover, in rough times it becomes very difficult to distance ourselves from using emotions in the decision-making process. We would be remiss not to worry about the most vulnerable of our society being stricken with Coronavirus, and that is a concern. All that being said, you pay us not to use emotion but rationale and logical thought when deciding on what assets to own. By walking through the 10-Step Process above, we must conclude that there remain several businesses today that are underpriced vs. their intrinsic value and are worthy of owning at this point in time. Yes, several diamonds in the rough can be found if one looks hard enough!

Chuck Etzweiler

Chuck Etzweiler

MBA, CIMA®, CFP®, CMT, Chief Research Officer & Senior Vice President

With more than twenty-five years of investment industry experience, Chuck directs the on-going research efforts of the firm, much of which help both advisors and clients understand the philosophy and strategy of Nepsis, Inc. in a deeper manner. A high percentage of the focus of the research is centered around money manager pitfalls, investor short-comings and repetitive behavioral biases that detract clients from earning optimal returns.

Prior to joining Nepsis, Chuck worked as Chief Market Strategist for True North Global Research and as a Securities Analyst with both Wells Fargo and the Bank of Hawaii. Additionally, Chuck has earned the CFP designation and is a Chartered Market Technician. Chuck is a graduate of Syracuse University and also has earned his MBA in Finance.

Chuck is an active member of the CFA Society of Minnesota, the Market Technician’s Association and the Investment Management Consultants Association.

Chuck was raised in Allentown, PA and now lives in California with his wife and two sons.



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