Value Investing Insights: The Role of NAV Discounts in Outperforming Stocks

During their recent episode, Taylor, Carlisle, and Cunningham discussed Value Investing Insights: The Role of NAV Discounts in Outperforming Stocks, here’s an excerpt from the episode:

Jake: That’s interesting. [Tobias laughs] Toby, I think you did some research around this, didn’t you, on net-nets? Obviously, Vic’s talking a little bit more about, probably more going concern and a little higher quality business than a net-net. Didn’t you look Toby one time on the net-nets and actually like the money losing ones outperformed the ones that were not losing money?

Tobias: Well, there’s an Oppenheimer’s paper that came out in 1983 is that he identified that and he said the money loses outperform the moneymakers. And then among the moneymakers, the dividend payers underperform the dividend non payers. But what drives the returns is the discount to NAV, so the cheaper the better. To the extent that favoring a moneymaker over a discount to NAV, that leads you astray. So, the idea is that you should stick to the cheaper NAV.

And then we did some research. Oh, I think it came out in 2010. I think it was 25– Because he had looked at 25 years to 1983, so we looked at 25 years to whatever that was, 2008 or something like that and found exactly the same thing. There’d been no change over the following 25 years. I assume it’s still the same way.

Victor: Yeah. We’ll get involved with companies who are losing money, but the balance sheet’s got to be working. The balance sheet’s got to be tight. COVID was an excellent stress test where you just had to go through every security and make sure you knew when debt was coming due, because you just didn’t know what the financing markets were going to do. It’s a useful exercise, but we were lucky we went through that period and really our companies weren’t forced to do anything.

We had one company that locked in a bunch of fixed rate, low-cost debt, as you said, and a year or two later went and did an acquisition with it. That’s the kind of behavior that we want to see. But they were operating from position strain. So, we don’t really care about P/E or anything like that. So, again, if the company’s losing money, and especially if you need– We have a recent investment where the company wasn’t making that much money on an EPS basis, but they were generating $3 a share in depreciation over CapEx. [chuckles]

I think that’s one of the last free lunches still out there in the marketplace, because a lot of times, those companies get overlooked. But if you do the work, and especially in universes where we operate, where some of these companies have no coverage and barely– [crosstalk]

Jake: Yeah. Not part of indexes, so they just get sold off.

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