As we’ve been discussing, we have been in a very difficult market environment for value stocks, similar to what we saw in the late 1990’s. While most value investors trailed the indices during those bubble days, many ended up making fortunes the following years as the bubble collapsed, but value stocks rose dramatically.
At T&T Capital Management, we are seeing a lot of signs of irrational exuberance in the market. You can look at the massive declines in speculations such as the cryptocurrencies, which have been down 50-60% from their highs in just a few weeks, to get a look at what happens when these bubbles burst. The problem with speculating is that it is not based on fundamental principles such as intrinsic values. Basically, you are just predicting short-term market movements. When the movements go against you, one doesn’t know whether to sell or buy more, as there isn’t that foundation of value to lean on to guide the decision making.
This is why we are staying so disciplined in our investments and are focusing on deeply undervalued companies that often trade at discounts to liquidation value, which we believe to have 50-75% upside potential. For example, we have been harvesting tremendous multi-year profits on the big banks such as Bank of America, Citigroup, and Morgan Stanley. We bought many of these companies at .5 to .6 times tangible book value, and now several of them trade at 2 times tangible book value. The actual earnings power of the companies isn’t much different from when we first bought them, but once out of favor stocks have now become popular. We have been reinvesting that cash in other undervalued opportunities such as Assured Guaranty, which trades at .6 times tangible book value and that likely should trade at around $55 per share from its current price of $34. In addition, we have really increased our investments in high dividend stocks, which should generate considerable income, while still offering strong upside potential such as Kennedy-Wilson (KW) and Washington Prime Group (WPG).
These companies are out of favor in this growth-heavy environment, but by taking a longer-term approach, we are able to let the fundamentals play out, and when they once again become more popular we can make the big profits. On the other side of things, remember that these glamour stocks can fall back to earth with a thud. I like the banks and most of the companies in the Dow are good businesses. The reality though, is that the vast majority of these stocks no longer offer any margin of safety whatsoever. When the tides change, a lot of people are going to be found swimming naked, since they are paying too rich of prices for these securities. I’m confident we can avoid those mistakes, but it does take being willing to go against the herd. Below is the article, which I hope that you will enjoy