Greetings from Piney Point, MD. We rented a house down by the water, where our family took up residence for Christmas. Piney Point is near the mouth of the Potomac River and we have a great view from the house:
Christmas came early for me, as many of my favorite stocks have gone on sale. More about those in future posts.
For now, what follows are some notes – and investment ideas – from the Value Invest New York conference, held on December 4th, at the Metropolitan Club in New York City.
Is “value investing” dead?
At the conference, there was a sense that “value investing” has not performed well in recent years. And several speakers addressed, in one way or another, the question above.
The best answer came from Joel Greenblatt. He said, and I paraphrase, “tell me what value investing means to you and maybe I can answer the question. What Morningstar says value investing is, is not how we look at it. Besides, I don’t care that much.”
(Funny aside: Greenblatt is famous for, among other things, writing a classic investment book called You Can Be A Stock Market Genius. An attendee, before asking a question, told Greenblatt how much he admired the book. The attendee, though, mistakenly recalled the title as You Too Can Be A Stock Market Genius. Greenblatt corrected him, saying the addition of the “too” would’ve have been a conceit. Crowd laughter ensued.)
As Greenblatt pointed out, “value investing” doesn’t really mean anything. People have a tendency to throw the term around as if it refers to something real and readily identifiable, like a banana.
But “value investing” is a term of enormous elasticity. It stretches over such a variety of approaches as to render the term unusable. The only thing we can say for sure is that “value investing” is a phrase invented by humans.
However, if “value investing” means buying the least expensive stocks on the market, then value seems not to have suffered much at all.
Andrew Wellington of Lyrical Asset Management delivered this message. He used a simple forward price-earnings ratio to show this. Now, we know there are lots of flaws with the forward price-earnings ratio.
But even so, Wellington showed how the cheapest stocks, by this measure, have outperformed over the last 20 years. Here is a cut and paste of his slide – which you may not be able to see well, but the general pattern is clear:
However, 2018 seems to be an exception to the general pattern. In 2018, the most expensive stocks (by forward p/e) have gone up the most. And the cheapest stocks have gone down. (As of 10/31).
You can see the pattern here:
Weird how tidy it all is.
Wellington believes this is a pattern you find at the tail end of bull markets. He showed how in 1998-99, the most expensive stocks by decile beat the cheapest stocks – in the same neat pattern you see in that first chart. But in the 7-year post bubble years, it reversed. The most expensive stocks suffered crushing losses and the cheapest stocks doubled and tripled.
Take from that what you will. As for me, I’m with Greenblatt. I don’t care that much. I know from long experience that if you pay good prices for good assets things tend to work out for you. I don’t care what words people use to describe that practice.
Lots of Cheap Stocks
Wellington then showed us numerous stocks that look cheap. He did this in a simple way. For each stock he had three charts covering the last 15 years. One showed the stock price. One showed earnings per share. And the last showed the forward price-earnings ratio.
This method, too, has flaws. After all, companies and their competitive positions change over 15 years. But it does help you step back a bit and look at the bigger picture...
Take Crown Holdings (CCK). Looking at the chart, you see earnings per share have marched steadily up and to the right. You can’t find the 2008 crisis. You can’t find anything. There’s barely a ripple anywhere.
The stock price has more ups and downs than earnings per share. But clearly, the stock chart also tacks up and to the right. Just eyeballing it, CCK has been roughly a ten-bagger over the past 15 years.
The forward price-earnings ratio chart shows that the stock traded for an average of 13x forward earnings and had settled into a 10-15 range – except recently. At the time of Wellington’s presentation, the stock traded for 8x forward earnings. He called it “the biggest no-brainer” he’s seen in 20 years of investing.
“If 8x forward earnings is too high for you,” Wellington said, don’t worry. He had other ideas. How about Tech Data (TECD)? It traded for 7x forward earnings versus a 15-year average of 12. And it had the same long-term pattern, rising earnings and a rising stock price - until recently.
“If 7x forward earnings is still too high for you,” Wellington said, no problem. He could go still lower. How about Tenneco (TEN)? The earnings chart is a little messier here – there is a little crater around 2008. But the stock has been a big winner – again, until recently. It traded for just under 5x forward earnings at the time of Wellington’s talk.
A basket of these kinds of names seem to stand a good chance of delivering happy returns. (It'll be fun to look back in 3-5 years and see how they fared). And these are just a few of his ideas. Wellington’s horn of plenty showed that if you can’t find interesting bargains out there, you’re not looking hard enough.
Hidden Value, Too
Of course, sometimes value lies hidden and you have to dig a bit. My friend Jon Boyar of Boyar Value Group talked about a few hidden values. I’ve always like Boyar’s approach. And Mark Boyar, the founder of the firm, is an unappreciated Wall Street treasure, full of great stories and wisdom.
One of the stocks Jon Boyar talked about was Liberty Braves (BATRK), a tracking stock. It represents Liberty Media’s ownership of the Atlanta Braves and the SunTrust Park real estate development project. John Malone, through Liberty Media’s 48% interest, controls it. You could find worse guys to invest with. As Boyar pointed out, investors in Malone’s Liberty Media have enjoyed a 24% CAGR compared to just 6% for the S&P.
The Braves have a new stadium and this has led to higher revenues, more corporate sponsorships and more premium seating. Plus, there are a number of catalysts for further gains. One is a new TV deal. Major League Baseball just renegotiated their TV deal with Fox at a 35%-50% increase set to begin in 2022 and to extend through 2028. The Braves will get their share of this loot.
Another catalyst could be the sale of the team, which Boyar believes is “the likely end game.” Forbes values the team at $1.6 billion dollars. And the value tends to appreciate. Using Forbes’ estimates, the value of the team has increased at a 9% clip since 1998.
Besides that, Forbes estimates are usually low. Boyar’s research shows actual transactions of team sales exceed Forbes’ valuation by 43% on average since 2002 and 63% on average since 2009.
In addition to the baseball team, investors get exposure to a mixed-use real estate project slated to bring in $24 million in stabilized NOI.
Boyar assumes a 25% premium for the Braves in his valuation, which looks like this:
Liberty Braves Group: Estimate of Intrinsic Value ($MM)
Plenty of upside as the stock is ~$25. And lots of cushion should something be off a bit.
A similar idea Boyar talked about was Madison Square Garden (MSG), which owns the Knicks. “At current levels,” Boyar said, “an investor in MSG is acquiring the Knicks at a 33% premium to the current Forbes value (likely still below the team’s private market value) and receiving an additional ~$5 billion in value for free.”
MSG’s total current market cap is ~$6.2 billion. In addition to the Knicks, MSG owns the NHL Rangers, Madison Square Garden itself and other venues such as the LA Forum. On December 17, the stock rose as chairman Jim Dolan hinted to ESPN that’d he sell the Knicks. So, the value here could be unlocked soon.
Is value investing dead? Who cares! There are many cheap stocks out there if you know where to look. And cheap stocks tend to deliver big returns. Call it what you want.
In my next post: I recently had lunch with a money manager, now retired, who put up an enviable 21-year record. He had some great advice I’ll share, plus we’ll look at the idea of coffee can investing and stocks you might put in your own coffee can.
Until then, Happy New Year!
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Published: December 27, 2018
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Write me at: info [at] woodlockhousefamilycapital.com
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