When we wrote to you last week, we mentioned an encouraging CPI report, but the market was waiting to see how Powell spoke the next day before showing any real rally. As has been the status quo for the year, Powell spoke very hawkishly despite the enormous evidence that inflation has peaked and the economy is weakening, which has rattled the markets, causing about a 7% pullback in the S&P 500 over the last 5 days or so. 2022 has been a year where little has come easy and many bubbles have burst wide open, which creates opportunities for the investor willing to actually “invest” over a 2-3 year period. Many market participants get caught up trying to predict short-term movements, wrongfully thinking they can do so accurately and consistently. This short-term thinking causes them to miss the much easier money in front of them, which is buying securities at deep discounts to intrinsic value, with the understanding that over a 3 or so year time horizons, the discounts tend to converge. This same thinking based on fundamental analysis is how we avoided buying these stocks or most others near their 52-week highs. In this article I wanted to show the prices of various securities and a few of the key data points. Mean reversion is a powerful force in investing and I think this is an extraordinary environment for finding attractive and quality investments trading at 40-50% discounts to intrinsic value:
GOOG closed on 12-20-2022 at $89.63, which is 41% off its 52-week high of $152.10. The stock trades at just 18.62x forward earnings, which is the cheapest in its history as a public company. Google has nearly $90B of net cash on the balance sheet and still generates returns on capital in the teens, which is excellent. This is one of the best businesses in the world with a massive platform for growth trading at a truly bargain value.
META closed on 12-20-2022 at $117.09, which is 8.5x 2021 earnings, although earnings are expected to decline in 2022 and 2023 on a weak advertising market. The company has $15B of net cash on the balance sheet and generates a return on capital in the high teens. The stock is down 65% YTD with a 52-week high of $352.71. In my career, I’ve rarely seen a business of this quality trading this cheaply, although clearly the company is hated for many reasons.
C closed on 12-20-2022 at $43.81, which is 6x forward earnings, and offers a 4.64% dividend yield. Tangible book value per share is around $80, which historically it has traded at a slight discount to. Earnings have been excellent and should continue to be strong even in a recession. The 52-week high is $69.11 and the stock traded above $80 in 2021. I believe it is headed to $80 again sooner than later.
LC closed at $8.65 on 12-20-2022, versus a 52-week high of $26.87. In 2021, the stock hit $45.96. Earnings have been exceptional, with the company expected to make $1.63 in 2023, which puts the forward P/E at 5.3. This is a stock that could triple or even quintuple as it has a huge platform for growth over the next 5-10 years.
KMX is the leading used car retailer in the United States and the stock closed at $57.76 on 12-20-2022. The 52-week high was $139.80 and the company trades at 15x earnings. While the short-term is likely to be a challenge with a likely recession and declining used car prices, Carmax is poised to pick up market share from struggling Carvana and other weaker competitors. This is a chance to buy a quality and growing auto retailer at a bargain price, with the potential to double over the next 3 years, which still would be a discount to the 52-week high.
RDN is one of the leading mortgage insurance companies in the United States, closing on 12-20-2022 at $18.55, down from its 52-week high of $24.84. The company trades at 4x forward earnings and pays a 4.31% dividend. The mortgage insurance industry has dramatically improved its underwriting and reduced risk through an aggressive reinsurance program. RDN generates a mid-teen return on equity and should stay profitable even in a recession. The stock has at least 50% upside from current levels and has a strong margin of safety trading at a substantial discount to a growing book value.
This is just a handful of examples of the opportunities that we have currently. These are quality companies with strong and durable franchises. Investors were bidding these stocks up to very high levels 12-18 months ago, but now fear is keeping many on the sidelines, despite the dramatically reduced valuations. I get it. Everyone thinks that when the 50% declines come, they will be ready to buy hand over fist, but when they are actually in the midst of a major bear market, fear and short-term thinking paralyze them. Sentiment can change on a dime. Often when things look bleakest, the market turns for reasons that aren’t always obvious, or even in the news. This has been a year where we’ve avoided the worst of the carnage but just as importantly, we’ve planted the seeds for the next wave of explosive returns as we come out of this abyss of negativity. When people look back 3 years from now, they will say, why didn’t everyone buy these stocks when they traded at these absurd prices? Remember the answer, which is fear and short-term thinking. Everyone thinks they can time a bottom, despite the evidence that nobody can do anything like that with any consistency whatsoever, and trying to is immensely harmful to investment returns, as you miss the biggest up days. We won’t make that mistake at T&T Capital Management. Many of the same people that are the biggest bears on Wall Street, were the biggest cheerleaders for the speculative bubble that has now burst. Let’s keep our eye on fundamentals and utilize discipline and proven strategies to protect and grow our capital. In a few years we can sell the stocks we are buying now to market participants that want to chase things on the way up when everyone seems to have a cheery consensus.