- Introduction: Financially Defective Narratives
- The Value Giant: Not Dead, Just Sleeping
- Why Spreads Will Reverse: The Resurrection of Value Investing
Introduction: Financially Defective Narratives
In our last piece, Value Investing & Manias, Kailash used a very simple set of historical data to put proof to the idea that Value investing would inevitably be a profitable strategy. The piece led with two assertions. First, that buying low and selling high is out of favor and, second, that buying high and selling higher was the flavor of the day. One reader noted that many of the stocks being purchased in droves by retail were not just high-priced stocks, but also included many low-priced stocks in dollar terms, particularly those suffering post the pandemic.
For posterity, let the record show that Kailash views the term “buying low” or “buying high” to reference the price paid for an asset relative to its likely future stream of cash flows. We apologize for the confusion and hope this paper clarifies our thoughts on the issue. Kailash realizes the discrepancy in our thinking vs. the market may be due to our propensity to incorporate numbers in our analysis.
Reading an unambiguously bullish article on a used car retailer’s stock that purportedly offered “100%+ Upside Potential” was informative in this regard.1 The article left the “math” to the very end. We have reproduced it here for our readers’ review: “Huge unit growth…[generating]…1,000% sales growth…by 2030…” which, if an investor applied “…management’s long-term profit margin targets…on that sales base…based on a 20-times forward earnings multiple…” on 2029 numbers, one gets a hypothetical price that is 100% higher.
The author of the bullish note above concedes that competition may enter the space but not enough to deter possible investors. Kailash found this interesting in light of the recent IPO of competitor Vroom. The firm had substantial private backers and came to market seeking a valuation of ~$2bn only to see the market send its market cap soaring to nearly $7bn. We find this interesting as the firm’s financial defects can be found even within the narrative that follows.
Possible investors in Vroom need not examine complicated financial models to find a reason for pause. An erudite article examining the IPO by TechCrunch hypothesized that motivation for the IPO was that “Sometimes private investors tire of tipping lorries2 of cash into burning bins and decide, instead, to ask public investors to start footing the bill for their portfolio company’s losses.”3 Similarly, in their filing with the SEC, Vroom deserves credit for its transparency as they stated in plain English that their auditors have disclosed “…there is a substantial doubt about our ability to continue as a going concern over the next twelve months.”4
Kailash believes the items above point to an immensely speculative market environment that will end badly for the majority of those playing in the casino that is today’s capital markets. In our view, investors that ignore all the financial demerits in many of today’s most glamourous companies will suffer mightily. As this paper documents, firms with dubious to non-existent business models commanding implausible valuations are merely history rhyming with past cycles.
What follows is a note written primarily by the academic partner at Kailash (read “the intelligent partner”). Recognizing that math currently has no meaning, the piece seeks to bring substantial potency to our assertion that Value Investing is not dead without our typical cascade of charts and numbers. Kailash seeks to provide a narrative explanation of today’s folly predicated on the lessons of nearly 100 years of history.