In the latest episode of the Acquirers Podcast, Vincent Daniel, Porter Collins, and Tobias Carlisle discuss Invest Where The Puck Is Going. Here’s an excerpt from the episode:
Tobias: What about on the long side? What are you looking for in terms of relative strength or momentum when you’re buying?
Vincent: A big thing for us is against stock momentum, but we’re really fundamental momentum-oriented investors. And so, what we want is a fundamental backdrop, where it’s not necessarily might be showing up in the numbers yet, but it’s based upon our “where the puck is going” theory of that eventually we’re going to see an inflection. We love investing at the bottom of inflections, where the perfect marriage is where you see the economic or the fundamental backtrack of the sector is about to go up, the stocks are trying to bottom, but they’re bouncing off the bottom and the multiples are extremely low. When you have those three in tandem, then we like to invest in size and really take a large, concentrated position in a certain theme. So, those are the three things that really fit.
Whereas valuation alone, the builders are probably a great example right now. The valuation is there, we think it could get cheaper. But we think it’s going to get a little bit worse over the next six months. So, maybe we’re being a little bit too cute, but we’re hoping for an even better price.
And then coming out of the winter months, at least I know I have a cyclical aspect of the summer that might push up, maybe we have a cyclical aspect of prices have come down enough, where you might start getting that cohort of young people who are moving into homes, and then from there, then the margin of safety is so much lower that you can invest in it and probably even increase it in size given how low it is that you’re not worried anymore about that 30% drop, because the fundamentals aren’t quite there yet.
Tobias: I guess the difficulty with the homebuilders is that’s a very strange time to go through. Everybody was home, spending a whole lot of money at home, presumably expanding their houses, and doing that sort of stuff. Then, there’s been this kind of mania, I guess, in house buying that’s now maybe that’s tipped over a little bit. So, it’s a little bit hard to tell we were on the cycle here. How long do down cycles in housing seem to last for long periods of time? 2008 to 2012 or 2007 to 2012. 1990 was comparably– [crosstalk] Yeah, years.
Porter: This I the last– [crosstalk]
Vincent: The good thing is– [crosstalk]
Porter: You can’t buy a house right now.
Porter: You can’t do it. The prices aren’t down enough.
Vincent: Yeah. The good news is that this time, at least the housing market is not systemic. The banks are fine. What we really need is home prices to go down 10%, 15%. And this time, they will not crush the world and it actually will increase demand at some point. That’s a function of seeing the builders, the value of their lands come down, their gross margins come down, continue to come down, they have been. And then hopefully, we can get a nice place where supply does meet demand at reasonable margins and these are going to be great stocks at some point.
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