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Archive for the ‘Strategy’ Category

Millennial Investor Patrick O’Shaughnessy has a great post on searching for deep value stocks, which discusses the opportunities I canvass in my new book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance).

Deep value investing is a powerful way to beat the market, but deep value stocks are an endangered species in the U.S.

I was recently talking with Tobias Carlisle, author of Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, about what constitutes a deep value stock. To find these stocks, Tobias prefers to use the “takeover” multiple. One version of the takeover multiple is the ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to enterprise value (market value of equity plus book value of debt minus cash).

This is a great multiple for stock selection. Like to price-to-earnings ratio, it helps you find unloved companies, but it also penalizes stocks for having too much debt (more debt = worse ratio, ceteris paribus). If all you did was buy the 10% of stocks with the cheapest EBITDA/EV ratios on an annual basis, you’d have outperformed the market by more than 5% annually over the past five decades.

I asked Tobias what he considers a very cheap multiple EV/EBITDA multiple, and we agreed that somewhere below 5x indicates a cheap stock, while a multiple of less than 3x indicates very deep value. So here is the problem: today, we face what is perhaps the most difficult environment for deep value investing in history.  Just 3.2% of non-financial, U.S. companies with a market cap of at least $200MM trade at an EV/EBITDA multiple below 5x.  That is just off June’s all-time low of 2.9%.

Read Patrick’s excellent Searching for deep value stocks.

You can also pre-order his book Millennial Money: How Young Investors Can Build a Fortune (Hardcover), which is out on October 14, 2014. I’m excited to read it.

 

“Here’s your book for the fall if you’re on global Wall Street,” says Bloomberg’s Tom Keene, “It’s an incredibly smart, dense, 213 pages. It’s your Autumn smart read.”

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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This is one of the most interesting interviews I’ve done. We discuss behavioral errors, the market level, and finding deep value.

My interview begins at 31:35 (the first part is cut off and the podcast makes it sound like I cut off the President, which obviously didn’t happen):

“Here’s your book for the fall if you’re on global Wall Street,” says Bloomberg’s Tom Keene, “It’s an incredibly smart, dense, 213 pages. It’s your Autumn smart read.”

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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Bottom-up scrounging to find stocks that have dipped and praying for volatility:

http://finance.yahoo.com/video/expensive-market-doesn-t-mean-203251056.html

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

 

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“Here’s your book for the fall if you’re on global Wall Street,” says Bloomberg’s Tom Keene, “It’s an incredibly smart, dense, 213 pages. It’s your Autumn smart read.”

http://www.bloomberg.com/video/activists-target-undervalued-cash-rich-companies-AAX6SC_BRbKBcvQMatbkew.html

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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Now that I’m back from New York I’m going to post a few of the interviews I did over the last few days. First cab off the rank is my The Street.com interview with Gregg Greenberg:

http://www.thestreet.com/video/12871104/buffetts-berkshire-still-nimble-despite-size-says-deep-value-author.html

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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I recorded an interview yesterday afternoon with WFAE 90.7 (“Charlotte’s NPR News Source”) about the strategy behind Carl Icahn’s exit from Family Dollar Stores Inc. (FDO:NYSE) and Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance). Here is Icahn Exits, Family Dollar Considers Rival Bids:

The future of Family Dollar is uncertain—it’s in the midst of a bidding war as its board of directors decides whether to sell the company to Dollar Tree or Dollar General. But this much is certain: The billionaire investor who helped spur this pending ownership change is now cashing in.

Rewind to June: Family Dollar’s earnings are sluggish, stock is stagnant, and competitors are pulling away. Carl Icahn thunders in; the 78-year-old activist investor buys more than $150 million of the company’s stock and options, demands a change in leadership, and threatens to attempt a hostile takeover.

Fast forward to present: Family Dollar is trading at an all-time high, $80 per share, and fielding offers from its two chief rivals. And Icahn is out.

“This is classic Carl Icahn—[find a] deeply undervalued company with an ugly looking business that he can buy and create an event. And that event was the sale,” says Tobias Carlisle, managing director of Eyquem Investment Management and the author of “Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations.”

Read the rest of Icahn Exits, Family Dollar Considers Rival Bids here.

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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Reading the Markets’ Brenda Jubin reviewed my new book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) in her post Carlisle, Deep Value:

Tobias E. Carlisle, co-author of a book I put on investors’ “must read” list—Quantitative Value, is back with another compelling volume, Deep Value: Why Activist Investors and Other Contrarians Battle for Control of “Losing” Corporations (Wiley, 2014).

The most public face of deep value investing is Carl Icahn, known for his “battering-ram personality,” who has had a long, storied career as a discount options broker, arbitrageur and liquidator of closed-end mutual funds, corporate raider, and activist investor. In 1976 he wrote a memorandum, which his biographer dubbed the “Icahn Manifesto,” in which he stated: “It is our contention that sizeable profits can be earned by taking large positions in ‘undervalued’ stocks and then attempting to control the destinies of the companies in question by: a) trying to convince management to liquidate or sell the company to a ‘white knight’; b) waging a proxy contest; c) making a tender offer and/or; d) selling back our position to the company.” (p. 4) By the way, the last option, known as greenmail, in which the company in effect pays a ransom by buying back the raider’s stock at a premium to the market price, is now illegal.

Few people have the qualities necessary to be the next Carl Icahn. But they can still profit from the well tested principles of deep value investing.

Carlisle traces out the evolution of deep value investing, beginning with Benjamin Graham’s notion of net nets, companies whose “market capitalization was net of the net current asset value.” That is, these companies had a surplus of current assets (cash, receivables, and inventory) over all liabilities (current and long term) and had market capitalizations no higher than two-thirds of their net current asset value.

Warren Buffett viewed the acquisition of net nets as foolish “unless you are a liquidator.” He essentially rejected deep value investing with its strictly quantitative metrics and its cigar butt investment philosophy. He incorporated qualitative considerations into his company analyses and famously said that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Read the rest of Brenda’s review here.

Buy Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Deep Value, or connect with me on TwitterLinkedIn or Facebook.

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