Where Value Investors Are Finding Opportunity Today

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed Where Value Investors Are Finding Opportunity Today. Here’s an excerpt from the episode:

[Tim] Absolutely, Toby. And we didn’t mention this when we were talking before this presentation, but there was another transaction. Berkshire acquired the whole company of Taylor Morrison, the home builder.

And I thought that was a really interesting transaction. I know that we’ve invested in that space. I believe both of us have in the past.

And they had a huge run, the home builders did, as there were supply shortages and interest rates were low. And the houses were selling as soon as they could make them. The margins were really high.

But now with interest rates as high as they are, it’s been a lot more challenging. And so a lot of these home builders are trading at book value, at discounts to book value. And so it was interesting because I believe Taylor Morrison was trading at maybe a slight discount to book prior.

And I think Berkshire ended up paying like a 25% premium to the closing share price on Friday. And so on vol, on the valueoptionsletter.com, we have made some recommendations on some of these home builders that are actually trading at pretty steep discounts to book value, despite having really solid balance sheets, capital structures, that whole thing. So I think that it’s good when we’re seeing value, where some of the smarter investors are seeing it, some of these out of favour industries.

And the other cool thing is, not just do you get the undervalued stock, but often when stocks have a lot of movement, a lot of volatility, the options pricing is indicative of the market thinking there’s more risk than there really is in the underlying business. So as you and I were talking about earlier today, some of these software names, ServiceNow, Workday, Salesforce.com, I would throw Microsoft into there. They had substantial decline, Adobe, they had substantial declines and the cash flows are still growing, right?

The balance sheets are really solid. They’re trading at very low multiples relative to their historical averages. You got to work through the stock-based compensation and things like that.

So it takes a little extra granularity in the analysis. But the volatility, the implied volatility was very high. And so on the value options letter, we took advantage of that.

And so we sold puts on ServiceNow, we sold puts on Workday, we sold puts on Salesforce.com. Those puts are performing really, really well. And that’s one of the benefits.

Being in this business, being in the money management business for 25 years, almost every quarter, I’d say, I’ll talk to a client or a prospective client and they’ll say, Tim, I think the market’s going to collapse. Not as much right now. People are pretty optimistic right now.

But over the course of my career, that’s pretty common. So when you think that there could be a lot of downside, it’s tough to dip your toe in the water. Even if you like a stock, you always think it’s going to go down.

The options are a great way where it’s like heads, we make a great double-digit return and we don’t even end up owning the stock. Tails, we ended up buying it at a discount. What everyone says they want to do, buy when there’s blood in the streets.

That’s what we’re doing.