Cheap Company Buy-Backs | The Acquirer's Multiple®

In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Cheap Company Buy-Backs. Here’s an excerpt from the episode:

Bill: Man, I’m telling you, like, Gabelli value with a catalyst thing is the framework that I try to look at. I don’t like a cheap value play. When I got interested in Kyle’s companies, was when assets started to get sold, and 8Ks started to get rolled out and it’s like, “Okay, you can see the change going on under here, if you’re paying attention.” With Qurate, it was when that capital allocation decision was changed. I like that stuff. For some reason, I can’t get down with buybacks on cheap companies.

Tobias: Yeah, I love them.

Bill: I just loving the idea– Well, okay, you say that, I think maybe this is the distinction. You tend to look for companies that are still growing, though, right?

Tobias: Not necessarily.

Bill: No? I don’t like the idea of buying back more and more of a shrinking ice cube. I’d rather get my cash out once the ice cube starts to shrink.

Tobias: Yeah, I just think that most instances, there’s a lot more cyclical than there is secular. When you see something shrinking, it’s often–

Bill: Yeah, it’s like a function of what’s going on.

Jake: Shrinking for now.

Tobias: I think Intel’s a good example of something like that. I don’t know the answer on Intel. I just think that it’s still got very fat margins, it’s still got very high returns on invested capital. Intel, it’s forecasted to keep on growing. But I don’t know what the outcome is. I don’t know if it’s going to lose out to the others or not. I just think that you’re getting the right price, I don’t know where it is now, necessarily, but you were getting this extreme price to have that to take that position. I know all of the bear arguments on it. I’m nervous about it as well. I don’t see how it’s going to work necessarily, but I just think that you put in enough of those positions, and they do as a portfolio that work out.

Bill: Yeah, that makes sense.

Tobias: It’s been interesting to see a little resurgence in the deep value stuff with Roaring Kitty and with what Mike Mitchell is doing, and a few other guys like that. The DNA might not have all gone. Maybe–

Jake: [crosstalk] -extinct the whole species yet.

Tobias: Then, maybe by virtue of the fact that there are books people go back and read, old books, and say this trick that– people do something, everybody starts doing it, the trick disappears, that alpha from the strategy disappears, and then people don’t do it anymore. Then, when people stop doing it, then maybe sometimes it comes back.

Bill: Yeah, I think Mike would also say that the liquidation strategy, you can only do it a small scale in the way that he was playing it, so I don’t know.

Tobias: Yeah. Might not be an institutional–

Bill: [crosstalk] -too. One of the things that’s hard when you’re talking to other people in the industry, is I think there’s this natural filter, and, Jake, this goes back to what you’ve said a lot about the edge of the small investor, and it’s what Ian says, but a lot of people filter out like, “Yeah, that’s too small. I can’t do it, I don’t want to look at it, it’s just not worth my time.” You can understand that, but that doesn’t mean you can’t make money doing it. You’re just playing a fundamentally different game. It’s hard to then talk about the game that you’re playing to people that are playing a completely different game and expect them to understand it. It’s not even the same stuff.

Jake: Price volatility down in the micro-cap world will churn you up–

Tobias: Bid and ask. Just whether it’s on the bid or ask makes a big difference.

Jake: Yeah, you really have to take it with a grain of salt and understand that Mr. Market down there, he’s a little more woolly and wild. When he’s up at Apple levels, okay, he’s probably pretty close to right most of the time, and occasionally he’ll be off. He’ll occasionally do it. Once a decade, he’ll forget that, “Oh, shoot, that’s still pretty good business.” Down in the lower reaches, it can– If you are worried about a rough ride getting there, then that’s probably not the right place for you. You look at it [crosstalk] every day.

Tobias: You’ve got to know what you hold. You’ve got to not be worried about where the marks are because you got a better idea than anybody else who’s in it, mostly because it really simple businesses.

Bill: Yeah.

Tobias: I used to have guys– when I was running Greenbackd, that was all I was doing. I talked to guys and I said, “Do you have any ideas that I can use in the in the fund?” The minimum is $500 million. I was like, “No, $500 million, it’s like five times bigger than my biggest idea.” [laughs]

Bill: How are your results back then? Were you happy with the outcome of what you were doing?

Tobias: I started it in late 2008, that strategy and it ran through until mid-2010. The whole portfolio, the whole opportunity set, massively popped off. It was less than what I was doing and more where it was.

Bill: Yeah, well, fishing in the right pond is a pretty good thing to do.

Tobias: Yeah. If you can get that right.

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