The media and the talking heads love to say that value investing is dead. But that is just the biggest crock of you-know-what in the history of investing.
The truth is that traditional value investing, as practiced by Warren Buffett and as he was taught by Benjamin Graham, has never stopped working. However, it only works in the modern world for individual investors who are not trying to put billions of dollars to work.
It does work for some small value funds, until they start to get too big, and then the returns start to taper off. The biggest funds on Wall Street aren’t going to be able to use this strategy. It just doesn’t work as well when you try to do it with too much money.
I’ve always been a fan of asset-based investing, and what I’m going to teach you today is exactly how Buffett got rich and originally bought his shares of Berkshire Hathaway. Basically, he bought them at bargain prices and eventually converted it into a holding company. A lot of folks learned this technique from Graham, and almost all of them got really rich!
Now, we’ve talked about my rational liquidation value strategy before, and that’s worked really well. But the original strategy that Graham taught Buffett was to take all of the things that can be turned into cash in six months or less, including cash, securities, inventory and accounts receivable, add all of that up and then subtract out all of the liabilities and preferred issues.
If you can buy the stock for less than that, it’s a bargain buy and something you want to do. It’s called cigar-butt investing, and I’m constantly told it doesn’t work anymore. But the fact is that’s just wrong!
If you just bought companies with market-caps of $100 million or more at less than their net current asset value and held them, the total return over the last five years would have been 270% versus the 118% return of the S&P 500 and the 229% return for the Nasdaq. The net current asset value strategy averaged 29.91% a year over that time.
But it does have one problem, which is that there are never a lot of stocks that fall into this category at any period of time, unless there’s a really bad market. So, my suggestion is if you’re going to be an asset-based investor, you should build a portfolio using a combination of net current asset value, rational liquidation value as well as small banks trading well below book or asset value.
That will compound your money at ridiculously high rates compared to what institutional money managers, mutual funds and even most hedge funds are going to give you.
So, I made a list to see what is trading below net current asset value today, and there were a couple great stocks that I found.
Seven Hills Realty Trust
Seven Hills Realty Trust (SEVN) is a newly formed mortgage real estate investment trust (REIT) that makes mortgage loans. It’s trading at 80% of net current assets and about 60% of the actually tangible book value, including things that cannot be converted to cash in six months or less.
The company has a loan portfolio of 22 loans worth $509 million, with an average loan value of $21 million and an average maturity of about 3.2 years, and the loan to value ratio here is just 66%.
So, these properties could go down quite a bit and Seven Hills would have plenty of cushion. The shares also pay a 5.6% dividend yield, and when anything good happens to this stock, it’s going to move higher like a rocket, and you’ll be able to sell it for way over liquidation value.
Tutor Perini Corporation
Tutor Perini Corporation (TPC), which we’ve talked about before, is the next stock on the list. They build roads, highways, bridges, airports and other big construction projects, and they’re going to see a flood of cash from infrastructure spending when Congress finally gets its act together.
There are portions of the current bill that desperately need to be passed and funded because the infrastructure needs to be fixed. And TPC is involved in all of it, including water systems and electrical grid construction, and they’re going to collect a lot of cash from this infrastructure bill and build a huge backlog of projects.
The stock is wildly out of favor right now and is trading at 94% of net current assets value and just 52% of tangible book value. This is also a takeover candidate, as it’s a good, profitable business trading at just six times earnings.
Before the pandemic, Apollo Global Management, Inc. (APO), the big private equity company, had made a bid for TPC at a price about 50% higher than the current stock price. That fell through during the uncertainty of the pandemic, but there’s going to be another buyer eventually. And if we can buy the shares below net current asset value, a takeover would make us a lot of money.
My cheap assets strategy can make you a fortune, and it’s a game that the big Wall Street firms simply can’t play. It’s a playing field that you and I will have to ourselves, and we can make an enormous amount of money.
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