One of my favorite blogs, Value and Opportunity, recently did a post about how the best value stocks are often those that are not cheap by the most obvious numbers (P/E, P/B, etc.).
The post is entitled “Value Investing Strategy: Cheap for a Reason”. The basic argument of the post is that:
“…Especially in a market environment like now, cheap stocks are cheap for a reason.It is very unlikely that ‘you’ are the first and only one who knows how to run a screener and by chance you are the only one who can buy this great company at 3 times earnings which will quadruple within 6 months…The most important thing is to be really awarewhat the real problem is. If you don’t find the problem, then the chance is very high that you are missing something.”
This is not at all how I look at stocks.
I usually don’t know why a stock I’m buying is cheap. And I’m not sure I spend much time trying to figure out why someone else would or would not like the stock. I tend to just focus on whether I like the business and how much I’d “appraise” that business for.
I can sometimes come up with possible reasons for why a stock I like is cheap. But, I’m never sure those are the real reasons other people aren’t willing to buy the stock.
I don’t think Quan sees himself – and I know I don’t see myself – as a contrarian investor.
So, I assumed looking to see if a stock was “cheap for a reason” is something I simply don’t do.
At least that’s what I thought before looking through the textual record of what I actually said about each stock I picked.
In my last post, I mentioned 6 stocks that Quan and I picked for Singular Diligence which are now trading at a discount of 34% or greater to our original appraisal value. So, these are the 6 cheapest stocks we know of in intrinsic value – rather than traditional value metric – terms.
I decided to go through the record and check for two things.
One, how cheap are these stocks on the traditional value metrics. I will use Morningstar’s measures of P/E, P/B, and Dividend Yield for this.
Two, what reason did I give (in the issue where I picked the stock) for why that stock might be cheap.
Here are the 6 stocks.
Discount to Appraisal Value: 58%
Forward P/E: 9.6x
Dividend Yield: 3.6%
Why I Said it Might Be Cheap:
“Hunter Douglas is an obscure stock. The Hunter Douglas brand is American. So, the company’s name is American. However, the stock trades in Europe. The company reports its results in U.S. dollars. But, the stock trades in Euros. The stock is 81% owned by the Sonnenberg family.”
(Note: Quan and I appraised this company –