Bargains Are Few and Far Between
02/23/2007 12:00 am EST
Robert Wyckoff of noted value manager Tweedy Browne says it's harder to find undervalued opportunities in a world that's "not cheap," but he likes Home Depot and uniform-rental company G&K Services...
Robert Wyckoff's 2007 Predictions:
|2007 High||2007 Low||2007 Close|
|Dow Jones Industrial Average||13,650||12,000||13,650|
From the "Name That Stock" Lunch Panel at the World Money Show Orlando 2007:
To us, success in the investment business is based on valuation, and cheapness equates with potential return. We are not in a cheap world today. The world's been awash in liquidity, everything over the last four years is up and valuations are full and in some instances overdone.
There's been over $300 billion raised in private equity over the last two years. That money gets leveraged five or six to one, so you have well over $2 trillion of potential buying power out there. In the near term that's a plus for valuations because these private equity guys are falling all over each other to buy companies all over the globe, and stock markets are benefiting from that. The question is, how long can that go on?
The US stock market has probably been the most anemic around the world: It's compounded at an annualized 15% over the last four years, still a pretty phenomenal number. The EAFE index has compounded at a little over 24% over the last four years. If you've been a participant in the emerging markets you've been very lucky: The index of the BRIC countries (Brazil, Russia, India, and China) is up 315% over the last four years; it has compounded at a 43% annualized rate. I assure you that will not go on indefinitely.
So for us it's a time of caution. We are still uncovering undervalued opportunities around the globe, but they are few and far between today.
Home Depot (HD) is the world's largest residential home renovator and we like it because it's cheap. It's suffering now because of the housing downturn and obviously you've been reading about the management changes, but when we started buying the stock it was trading at about 8x [earnings before interest and taxes] and about 12x earnings. It has some competition from Lowe's and the risk of course is the housing market, but we think that stock is cheap and should do well over time.
G&K Services (GKSR) is a uniform-rental company and what a fantastic business [it is]: 90% of the income is recurring, there are five-year contracts and this company happens to be cheap. We started buying it at 7.5x [earnings before interest, taxes, depreciation, and amortization] and 15x earnings. Deals in the uniform sector typically are done at nine to 11x EBITDA, so we think it's cheap. There's also been some buyout activity in the sector recently with Aramark, which was a management buyout.