The Dynamics of Value Investing in a Frothy Market

In this episode of Value After Hours, Tobias Carlisle and Jake Taylor are joined by special guest Tim Travis to discuss the current state of the stock market, value investing opportunities, and economic indicators.

Market Overview and Valuations

Tim Travis shares his perspective on the current market conditions:

"Valuations were obviously really stretched. A lot of indicators were closest to 2000 in many different respects and indications. I thought it was really helpful to see the bear market that we did see and it's so interesting. It really does echo 2020 a lot where the market recovered so rapidly once again."

He notes that while there was a bear market with a 21% drawdown, the subsequent rally has brought valuations back to stretched levels:

"Now once again valuations are a lot more stretched once again and it's tough to find good value out there in my opinion. There's certain pockets I think where there's really good opportunity - stuff that's been impacted by higher rates or lower energy prices perhaps. But in general, I think the market's kind of gotten a little bit ahead of itself again."

Speculative Activity and Crypto

The discussion touches on signs of speculative activity returning to the markets:

• Pomp launching a SPAC
• Chamath back with new investment opportunities
• Increased interest in yield plays around stocks like MicroStrategy

On crypto, Tim notes:

"I'm not a big crypto guy. I've never bought any myself, but when the United States government is kind of putting some impetus behind it, I think it does add more legitimacy than it did prior."

Bank Valuations and European Banks

Tim discusses selling down some bank holdings earlier in the year as valuations became stretched:

"We finally were able to cash in on some of our European banks. So like BNP Paribas, Deutsche Bank, Barclays, you know, they had really good runs. I still like a lot of those. I think the fundamental outlook's pretty good, but the valuations finally caught up to kind of our estimate of intrinsic value."

On Citigroup specifically:

"I think intrinsic value is probably close to maybe a slight discount to tangible book which is around 90. We sold in the 80s probably high 70s to 80s just because that stock whenever something happens it gets clobbered."

Real Estate Investment Trusts (REITs)

Tim sees opportunities in certain REITs:

"I think there's pockets of opportunity. So one area that I like is real estate investment trusts right here. They have lease escalations where you're getting 2-3% increases in revenues each year."

He highlights Avichi Properties as an example:

"Something like Avichi Properties where you got 5.6-5.7% dividend yield and 100% occupancy, 100% collections and they're growing at a reasonable rate - high single digits, low double digits type returns moving forward."

Alexandria Real Estate Equities (ARE)

Tim believes Alexandria Real Estate Equities is significantly undervalued:

"Alexandria Real Estate is a life science and technology REIT. They house a lot of the Modernas, a lot of these really high-tech biotech type companies. This is a stock that used to trade at like 16 times cash flow up to 36 times cash flow. The stock was over 200 just a couple years ago. It hasn't been this cheap in over a decade. Right now, it's trading at about a little over 9 times cash flows. It has a dividend yield of 7.8%."

He sees potential for the stock to double while providing a high dividend yield.

Business Development Companies (BDCs)

Tim finds opportunities in certain BDCs trading at discounts to net asset value:

"One area that we targeted especially in the dislocations during the bear market was some of these business development companies like Blue Owl Capital (OBDC). When they trade at reasonable discounts to their net asset value, you're getting a 10-11% type dividend and then you're getting it at a discount to their net asset value."

He cautions that credit quality is important to watch with BDCs, especially if a recession occurs.

Office REITs

On the office REIT sector, Tim notes there was opportunity during peak work-from-home fears, but much of that has dissipated:

"We did some distressed preferred stock plays, bond plays on like Vornado. That was one of them and SL Green Realty but this was a couple years ago when office was kind of peak work from home and people were really questioning the viability of a lot of those companies. We bought some of those at double digit yield to maturities. But now the stocks have rallied a lot, the preferreds have rallied, the bonds have rallied and so there's less opportunity there in my opinion."

Energy Stocks

Tim sees opportunity in select energy stocks that have sold off:

"I think there's opportunity there. You look at like a Devon Energy trading around 30 again. And I mean, that's a big discount to its net asset value when you look at the properties and the cash flows and really solid management team there."

He notes implied volatility is high in energy stocks, creating opportunities to sell cash-secured puts:

"We sold some puts for instance today on Devon Energy. I think we sold them at like 27 and a half or something like that for January. And it was low to mid-teens annualized returns and then your break even's probably around 25 something like that."

Housing Market

Tim expresses concern about the housing market:

"The housing market's had a material change. Houses are staying on the market a lot longer. Finally, people are kind of feeling like they have to make a change. There's more supply coming on board, but the houses are sitting a lot longer and price reductions are occurring a lot more rapidly than they were before."

He cites high mortgage rates as a key issue:

"A lot of real estate agents or mortgage brokers will tell you the mortgage rates being above seven, that's highly problematic to getting those deals done and affordability is just still so terrible."

Auto Loans and Student Loans

Tim notes rising delinquencies in auto loans:

"Auto loan delinquencies are very high for the industry in general. Not necessarily for Ally Financial particularly by any means but for the industry itself that's high."

On student loans, he mentions many borrowers are taking advantage of deferment programs and potential forgiveness:

"A lot of these student loan deferment programs - I was talking to one of my neighbors and he's a doctor and he's telling me that he hasn't paid any of his loans off. He has all the money saved up in a high yield savings account, but there's some program where he's probably waiting for potential forgiveness."

Market Outlook

Tim expresses caution about the current market environment:

"I'm not as bearish as a lot of people are of the economy. I think that the tariff situation is going to work itself out one way or the other. I don't think it's a winner take all type thing that people were worried about on the day of the announcement. They're obviously compromising and wanting to do deals."

However, he notes several risk factors:

• Geopolitical tensions, especially around Russia
• High valuations across many sectors
• Potential for volatility to increase

He concludes:

"We're right there again, just waiting for that spark to ignite the next selloff in my opinion."

Conclusion

The discussion provides valuable insights into current market dynamics, potential value opportunities, and economic indicators to watch. While pockets of value exist in areas like select REITs, energy stocks, and BDCs, overall market valuations appear stretched. Investors should remain cautious and focus on fundamental analysis to navigate the current environment.

Article created from: https://www.youtube.com/watch?v=mr8g-llJewU