Misunderstood
I think the word “misunderstood” plays an important part in explaining my investment strategy.
I will borrow this term from the well known hedge fund manager David Einhorn. Let’s climb down the Einhorn “rabbit hole” and see what we find.
I started to think about which industries I have not discussed in the last two years. One glaring omission has been homebuilding. These stocks continue to trade near their all-time highs, despite higher mortgage rates. Most have PE’s under 10x, but I cannot jump in until I see some problems. This is an important part of my value strategy. I believe in “buy low sell high”, not “buy high and sell higher”.
On another day I will write a long essay on momentum investing, but for today let’s stick to homebuilders. If you pointed a gun at me, (again, please stop doing that) and forced me to buy a homebuilder, I would choose Green Brick Partners - GRBK - $78 (which is not an MLP). GRBK is 23% owned by Einhorn, and also has a former Prudent Bear analyst as a director.
GRBK is more a land development company than a homebuilder. They pursue a unique strategy, because almost all the other homebuilders are now using a “land light” strategy. GRBK has by far the highest gross margins in the industry. Maybe if I owned a 50 stock value portfolio, I could justify owning a 2% position in a stock like GRBK. Take a listen to any quarterly call, they do a good job of explaining their strategy. The low Price/Book guys at Smith & Co. own Taylor-Morrison - TMHC and Pulte - PHC does a nice job with their Del Webb communities.
Einhorn has several good interviews on You Tube, that give a very detailed explanation of his investment process. Here are a few important takeaways:
Einhorn thinks the market is ‘fundamentally broken” and that value investors have been “eradicated”. I think that is a little dramatic. Let’s just say I refuse to be eradicated, and I will continue to teach value investing until “they” come and get me.
Einhorn says his best strategy over time has been spin-offs, where he claims a 50% return on investment.
Einhorn explained his strategy, “I don’t invest in companies that are growing the fastest, or are selling at the lowest valuations, I invest in companies that are misunderstood. I think that is an important word.
Several months ago I called my portfolio a group of “misfit toys”. I think “misunderstood” is a less colorful way of saying the same thing.
I guess that is why I instinctively shy away from stocks like Conagra Brands - CAG. CAG sells at only 11x earnings, has a 5% yield, and is hated by Wall Street, which seems like a perfect value stock. There is no misunderstanding CAG, they sell frozen dinners, Slim Jims, and popcorn. Maybe they can grow at 4%, but somehow the “dog always eats their homework”, and actual grow is slower. There is no misconception about CAG, and I sure Einhorn would not buy it here. That does not make CAG a bad idea. I think I can find 20 stocks that are more misunderstood than CAG.