At T&T Capital Management (TTCM), we put a tremendous amount of emphasis on research and analysis. Our goal is to find securities that trade at deep discounts to intrinsic value, thereby offering us the opportunity to make the greatest amount of money on the least amount of risk. Often this means buying stocks that are highly out of favor for a variety of reasons; and which, to be quite honest, are often at the center of controversy and pessimism in the media.
There were few greater examples of this than our large investments that we made in Hewlett-Packard (HPQ) stock over the last several years. In 2012, this investment started off quite poorly for us, despite the fact that the stock was trading at low single-digit price to earnings ratios on normalized earnings. While the business was struggling; it was quite obvious that the company was still generating huge free cash flows, which combined with the incredibly cheap price that we were paying for the stock, would clearly lead to a much higher price as the cash flows came through over the next several years. On November 21st 2012, I wrote this article describing our investment thesis on HPQ http://seekingalpha.com/article/1023261-hewlett-packard-distressed-investing-101.
The stock, which was trading at $11.71 at the time of that article and which we ended up building a very large position in in the low-teens, now trades at about $37 and we are still holding on, as the stock is still trading for less than 10 times free cash flow. Despite the equity markets being near all-time highs, just about all of our investments are similar caliber high quality opportunities. While we’ve made a lot of money on financials over the last few years, they are nowhere near where they should be in terms of valuation. We have very large positions in a variety of the most significant banks and insurance companies in the world, which still trade at large discounts to book value, and in some cases tangible book value. These stocks trade at mid-single digit mutliples on our estimates of normalized earnings and are likely to see strong earnings and dividend growth. I don’t predict a U.S. recession in the near-term. Our recovery, while somewhat long in the tooth, has also been so slow and weak that it will likely be one of the longest recoveries on record when it is all said and done, largely due to the huge decline where the recovery originated from.
These financial stocks are in most cases, overly capitalized and will be huge beneficiaries to interest rates rising. Whether that means the stocks will rally in the next quarter, I have no idea and would never even try and predict it, but the likelihood of 50-100% gains over the next 3-5 years seem quite high to me. Just as importantly, I can’t kill the investments despite my most draconian assumptions on global growth, which is highly indicative of a huge margin of safety.
I write this to you because we look at our clients as partners and we want you to be educated and informed on the opportunities as we see them. It seems quite likely to me that market returns will be subpar over the next 3-5 years, but I don’t expect subpar returns from our investments. I see huge opportunities that are quite obvious and the only things needed in my estimation are capital and time. There are huge costs to not being invested, as bank accounts are yielding very little and costs of living are clearly going up. As I personally accumulate more free cash, I’ve been aggressively adding to my personal accounts and am buying these same companies and plan on continuing to do so. The recent sell-off in energy stocks offers a huge opportunity as well but I do believe there is more uncertainty in that arena than there is in the financials. I have serious concerns about China and I do see that there is too much global supply of oil and things like iron ore than global demand deems necessary. This will impact various companies differently, but in that turmoil we are likely to plant the seeds for future high potential return opportunities. Thank you very much and feel free to give us a call if you have any questions or need anything at all!