Looking For Value In An Overbought Market?
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Exor SpA (EXORF.PK)
The cheapest stock I know. Exor has a net asset value of better than €8 Billion yet trades for less than €3.5 Billion. The company owns 30% of Fiat (FIATY.PK) and Fiat Industrials (FNDSF.PK). Those shares alone are worth more than €4 Billion in the open market. Think that's good. It gets better. Exor's American depository receipts (ADRs) trade at $23.55 while its Italian counterparts trade at €21. The exchange rate is €1 equals $1.30, so the ADRs ought to trade at $27. You get the assets at a discount plus the currency arbitrage.
Summation
The search for yield and a flight to safety have left the consumer defense sector, and most of the market, overbought. But opportunity remains for those willing to look for value in unloved sectors of the market like European conglomerates. I think the companies that I highlighted above are excellent places to start looking for investment opportunities. Just remember, price is what you pay, value is what you get. Even the blue-ist of the blue chips will underperform if you overpay.
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Looking For Value In An Overbought Market? Try These Hated Conglomerates
Apr 16 2013, 13:22 | 10 comments | includes: BAM, BTI, EXORF.PK, FIATY.PK, FNDSF.PK, HSY, KO, L, LUK, MO, PG, REVNF.PK, VIVHY.PK
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Consumer Staples Are Overbought
The market as a whole is showing signs of being overbought. Specifically, dividend-paying consumer defensive names like Altria (MO) and Proctor & Gamble (PG) are priced for growth that simply isn't there. Part of this overvaluation likely lies with the current ultra-low interest rate environment, which has investors chasing after yield. And of course, part of this overvaluation likely lies with a psychological flight to safety after the great recession. After all, these are superior companies that can act as a safe haven in tough economic times.
Don't get me wrong. I'm not talking about shorting the most dependable dividend-paying stalwarts of all time. There is a huge difference between not buying Hershey (HSY) at close to 30 times earnings and actually selling a proven wide moat name like Coke-Cola (KO) at 21 times earnings. I think it makes perfect sense to hold most of these overbought companies trading at better than 20 times earnings simply because of tax implications and the fact that these are truly great companies worth holding for the long haul.
But I simply can't imagine putting new money to work in any of the above mentioned names at today's prices. Reversion to the mean, meaning market multiples in the range of 15 to 16 times earnings, will diminish future returns for investors who choose to pay up for these currently favored names.
Buy What Is Cheap Instead
I know my comfort zone when it comes to investing, which sounds nicer when you call it a circle of competence. I like to invest in conglomerates and investment holdings corporations that own stakes in other publicly traded securities. As I will highlight below, there are many instances where one can purchase these entire companies for less than the cost of just their publicly listed investments. Thus guaranteeing you a margin of safety.
What is the likely cause of this breakdown in the efficient market hypothesis? The most likely culprit is the equity yield curve, created by market participants who place a premium on near-term results over long-term performance. Many investment holding companies are owner operator businesses, such as Leucadia National (LUK), and the owners are really only interested in long-term results. While they have a history of shareholder friendly transactions like asset sales, spin-offs, and share repurchases to monetize the value of their investments, these transactions happen over very long periods of time. As such, there is no identifiable catalyst for share appreciation. And no near-term catalyst means no investment interest.
This lack of buying interest from the near-term obsessed investment community certainly helps to contribute to price mis-valuations. A second likely contributor is the burgeoning popularity of ETFs. Due to their multi-sector operations and sometimes limited liquidity, conglomerates and investment holdings companies are unlikely to be included in many of the ETFs that currently slice and dice the market into more and more focused sub-sectors. It is for these reasons that holding corporations can supply us with such obvious value stocks.
Specific Investment Ideas
Loews (L)
I've recommended Loews before. The company currently trades at a discount to just the value of its publicly traded investments plus cash. In addition to buying these assets at a discount, you also get the company's namesake hotel franchise and other investments for free. Not to mention a world-class management team to make future investments for you.
Brookfield Asset Management (BAM)
I like Brookfield so much I've written about it twice. At current prices, you can buy Brookfield for the value of just its investments and get a world-class asset management firm for free.
Vivendi (VIVHY.PK)
To give credit where credit is due, fellow SeekingAlpha contributor Ben Strubel did a better job of explaining this one than I can. Vivendi is a European media conglomerate that trades at an appealing discount to its sum of parts valuation.
Reinet SCA (REVNF.PK)
This company owns about 84 million shares of British American Tobacco (BTI), and a private equity firm that we used to know as Lehman Brothers, but now has a new name. It currently trades at a discount of about 15% to tangible book value.
Exor SpA (EXORF.PK)
The cheapest stock I know. Exor has a net asset value of better than €8 Billion yet trades for less than €3.5 Billion. The company owns 30% of Fiat (FIATY.PK) and Fiat Industrials (FNDSF.PK). Those shares alone are worth more than €4 Billion in the open market. Think that's good. It gets better. Exor's American depository receipts (ADRs) trade at $23.55 while its Italian counterparts trade at €21. The exchange rate is €1 equals $1.30, so the ADRs ought to trade at $27. You get the assets at a discount plus the currency arbitrage.
Summation
The search for yield and a flight to safety have left the consumer defense sector, and most of the market, overbought. But opportunity remains for those willing to look for value in unloved sectors of the market like European conglomerates. I think the companies that I highlighted above are excellent places to start looking for investment opportunities. Just remember, price is what you pay, value is what you get. Even the blue-ist of the blue chips will underperform if you overpay.
