AL GUENTHNER '66

It's All In The Algorithm

Al Guenthner ’66 Develops Process to Tap into Top Market Performers

It’s all in the algorithm for Al Guenthner. As an investment manager, he has devised a process for selecting stocks that, with fine-tuning through the years, has paid off for his clients and landed him among the best in his field.

“The key to my investment success, I believe, has been to apply a disciplined valuation model to individual stock selection,” he says explaining how he winnows out businesses in search of superior companies. To learn more about his process, please see the accompanying sidebar.

Guenthner considers his ability to choose top performing stocks a highlight in his nearly 50-year career. “Regarding my chief business accomplishment, it consists of my portfolio of stocks performing well for ten years and extremely well for the five year period ending in 2018,” he says.

Al currently works for Novant Health in Winston-Salem, N.C. “I manage some of their ‘Capital Reserve Fund’ whose ultimate purpose is to fund future hospital expansion,” he says.

Alfred R. Guenthner was born on Sept 12, 1943 in Pforzheim, Germany. “I am an immigrant from Germany arriving in 1952 with my family when I was nine. I became a naturalized citizen just before arriving at Concord,” Al says.

In 1962 he graduated from Middletown Township High School in New Jersey. A guidance counselor at his school recommended Concord to him. “A good friend of mine and I drove to visit it during the summer of ’62 and I very much liked what I saw,” he recalls. “As importantly, I could afford it. Back then, for out-of- state students, the all in cost was about $1,300. I was able to earn about 70 percent during the summer and I borrowed the rest.”

Al graduated from Concord in 1966 with a Bachelor of Science in Business Administration degree.

“My favorite classes were in economics,” he says. “One professor who stood out was Dr. Tom Pendleton, a recently newly minted Ph.D. from the University of Tennessee. He was marvelous. He was known for writing with one hand on the blackboard and erasing with the other as he sped along sharing insights as to what made the world function. As I recall, I took all the classes he taught.

“Even though I was a Business major specializing in Personnel, I took the Graduate Record Exam (GRE) in Economics and scored in the 88th percentile,” he goes on to say. “I shared that news with Dr. Pendleton and as I remember it, he responded by saying that there were many graduate students at UT that would not have scored as well.” »

As a recently naturalized citizen in college, Al points out “the importance of being accepted at Concord.”

“I felt nothing but friendship and a level of comradery from fellow Concordians,” he says.

“I joined the fraternity Phi Sigma Epsilon as soon as I was eligible and the friendships formed there have lasted a lifetime,” he said. “We have reunions every few years and some (kind) of get-together annually.”

During his first three years at Concord, Al was a starting member of the Mountain Lions baseball team. He said this was “a wonderful experience traveling with the team and Coach Kyle.”

“It provided companionship and allowed me to visit many campuses across the state. As I remember, the baseball team won the conference title the year before I played (’61) and the year I stopped playing (’66). Is there a correlation?” he wonders.

While baseball and fraternity activities were a big part of his college years, Al says his favorite memory from “The Campus Beautiful” is meeting his wife, Nancy Harmon. They met in Al’s first year English class.

“She was a freshman from St. Albans, W.Va. who would not go out with me on my first try,” he says. “Things improved as time went on.”

Al and Nancy were married in St. Albans on Dec. 16, 1966. Nancy graduated from Concord in 1967. One especially notable accomplishment from her career in education was being the first white teacher to teach black students in Monroe, Ga.

The Guenthners’ first son, Jay, was born in 1970. Today, he works for Jones Day, a large law firm in Washington, D.C. The family added a new member when David arrived in 1972.

David’s career has taken him to Charlotte, N.C. where he works for Microsoft.

Sadly, Nancy passed away last year. “We were married for 53 years until she passed away in January 2019,” Al says.

After graduating from Concord, Al began working on a doctorate. “Concord gave me the opportunity to grow,” he said, noting his alma mater’s “nurturing environment.”

“I was literally a straight C student my freshman year,” he recalls. “My grades improved each year and with the GRE results, I received a teaching fellowship at the University of Georgia where I studied for a Ph.D. in economics.”

“While teaching one class each semester at UGA, I took two classes. This went on for five years (1966-1971) at which time I took the Ph.D. written and verbal exam. I passed both. The written exam consisted of five areas, and I was given a High Pass in

Al and Nancy Guenthner celebrate their 50th wedding anniversary. three of the five sections,” he says.

Thanks to an Academic Exchange Program, Al and Nancy then spent a year in Germany while he conducted research at the University of Bonn for a Ph.D. dissertation focused on post -WWI hyperinflation.

“That topic proved too unwieldy for me and I did not complete the dissertation,” he says. “I like to think that the investment results produced while working for Novant might, in a certain way, be considered my dissertation completion.”

Although he came back to the United States without completing his dissertation, Guenthner did have an interesting career opportunity come his way. “I was offered a job as an analyst at the Central Intelligence Agency upon my return from Germany. I have always considered that an honor,” he says.

Turning down the CIA offer, Guenthner joined the Wachovia Bank Trust Department in the fall of 1972 as its economist. Noting some of the highlights on his career timeline, he explains that he began working on fixed income markets to find absolute and relative value in 1978 and in 1982 he began working on equity stock selection to find absolute and relative value.

A promotion in the mid-1980s saw him appointed Research Director for the Trust Department. In 1985 he and his associates developed a Private Market Value Model which proved to be very successful in stock selection during the 1980s.

Guenthner explains that in 1989 the Private Market Value Model “evolved” to a Public Market Value Model, making it “more useful as an analytical framework for stock selection.”

He took on another responsibility

Al Guenthner Explains His Stock Selection Algorithm

“The key to my investment success, I believe, has been to apply a disciplined valuation model to individual stock selection.

Using consensus information, the process consists of estimating normal earnings per share for each firm and applying an appropriate multiple, or capitalization rate.

The appropriate multiple consists of using: normal interest rates, company specific risk measure, normalized dividend payout ratio, expected growth of earnings over the next five years as well as normal tax rate. Using this process resulted in portfolio returns that were acceptable, but not exceptional, until I introduced an innovation seven years ago. This change in the algorithm reflects a specific additional ‘hidden’ value not taken into account by the earlier items mentioned. That hidden value may be contained in companies with excess capital on their balance sheet.

The well known investor, Warren Buffett, of whom I have been an admirer and constant attendee at his annual meeting for more than three decades, has always advised investors to buy superior businesses. There are a variety of reasons for this suggestion, but the question is, how does one know whether a business is superior and if it is, how does one arrive at a valuation adequately reflecting that superiority?

During the mid-1980s, I was the Research Director for the Wachovia Trust Department. At that time, my associates and I constructed a Private Market Value Model, which was quite successful in selecting stocks during much of the 1980s. The key to that model was

when he became sector analyst for the Trust Department in 1999. However, the next year, Guenthner’s run with the financial institution would take a downward turn.

After nearly 30 years with Wachovia, Guenthner was among 10 percent of the company’s employees who were terminated in 2000 during what he explains as “a change in management and a change in direction of the Trust Department.”

The situation would, however, turn into an opportunity for

him.

”Within a year several of the senior people working in the Trust Department also left and we formed a new company, Tanglewood Asset Management,” he says. “We managed mainly bonds and I was asked to start an equity product.

“Our group, Tanglewood, was purchased by Novant Health, Inc. to manage and monitor financial assets owned by Novant’s Foundation. I was asked to manage a small portion as an equity portfolio using techniques I developed while Research Director at Wachovia,” he says.

Novant Asset Management was formed in 2007 and Guenthner has managed the Novant Opportunistic Equity Fund since 2008. “The portfolio I manage is fairly concentrated in that it holds about 25 individual securities. This is considerably fewer than held by most managers and is practiced by those who believe they know something about how to value companies,” Guenthner explains. “Over the past 10 years, the portfolio, despite fewer stock holdings than most, has had better returns than the market with lower risk as measured by a host of standard measures. One is not supposed to be able to accomplish this, and it is certainly better than I expected.”

“A fellow I used to work for used to say, in jest, I think, to ‘Pitch low and behind them, but don’t put them on first’. Exceeding the market’s return for many years while having less risk is comparable to achieving the goal of ‘Pitch low and behind them, but don’t put them on first’. So, it apparently was possible,” he says.

“Can I repeat the accomplishment?” he wonders. “I am trying. Check back with me in 10 years.

DISCLAIMER “I have been working ½ time for the past 12 years with little outside assistance with the exception of a wonderful colleague, Stan King, with whom I worked for many years at Wachovia. Finally, I need to mention my reliance on one Wall Street firm, Sanford Bernstein.” Al Guenthner

Al Guenthner and his family

to estimate the borrowing capacity of a firm and contrast that value to the stock valuation in the market at the time. The point of this bit of history is that it showed me the importance of considering borrowing capacity and its importance in valuing a company.

As it turns out, superior companies, companies not subject to excessive competition, often produce earnings in excess of their capacity to reinvest the funds in their business.

The last observation of note is that the substitution of debt for equity increases the value of the firm up to some point. I believe that point is equivalent to the debt level carried by firms rated as Single A. Raising debt levels above that level is thought to increase risk to the firm that outweighs any benefit.

The nature of the benefit is the recognition that equity capital generally is much more expensive than debt capital.

To summarize, it has been quite useful to capture the ‘hidden’ value of very good businesses by optimizing the balance sheet. It allowed me to reflect in my algorithm the proper P/E ratio a firm should command in the market. Buying very good businesses in a disciplined manner was made possible by capturing the value imbedded in the balance sheet of superior businesses. Over time, the market is likely to adopt a similar process and I will need to discover another way to differentiate myself in the future.”

Al Guenthner