Minefields In Value Investing

I was discussing with a friend how amazing the valuation of Symantec was at less than six times free cash flow. It led to a bigger question of why certain stocks are getting so cheap. I believe it is the result of an aboslute minefield in value stocks in recent years.

Many value investors were killed in financial stocks banking on book value or normalized earnings. Others were caught in newspapers, radio or brick and mortar retail operations that were victims of the internet. Than there were the victims of technological obsolescence like RIMM, Nokia and Kodak. Let's not forget the coal and natural gas names who were victims to record low natural gas prices due to fracking.

I cannot recall any period of time where there were so many value traps. This has beaten and bruised value investors. When there is an issue with a company many are no longer willing to look past anything. Many who have been caught in one of these traps sell first and ask questions later. I believe this is the reason so many companies trade at such cheap levels. I also believe it is an opportunity if one can pick out the survivors.

6 comments:

asad b said...

I couldn't agree more, I think people are looking at security becoming more of a commodity and expectations are becoming lower.  If after all these years none of the security companies caught Flame why pay a premium for it ?

Tsachy Mishal said...

Consumer security is only a part of what Symantec does (roughly 30% of revenue is from consumer). I am assuming that over time this business shrinks but that their enterprise businesses grow.

Randolph Bertin said...

"it is an opportunity if one can pick out the survivors"

Ultimately, that is the crux of that matter, no? I mean, the minefield is strewn with the bodies of even "great" investors who did not get this right. None of us has the crystal ball to be able to say which of the depressed companies will make it. I don't even have a good idea how many (statistically) of the so-called value stocks end up on the chopping block vs those that muddle through, much less thrive. I am hoping SYMC will not turn out to be a value trap. But I can't honestly say I have anything more to go on than hope. I have a handful of other positions where I am hoping for a similar outcome. Perhaps that hope is irrational, but there it is.

Tsachy Mishal said...

I don't even see the existential threat to Symantec. Some products are at risk but they are well diversified. At less than 6 times free cash flow Symantec does not need to thrive, it just needs to stumble along for investors to make money. While certain businesses are at risk it is a diversified company with many products that are growing. Its difficult for me to see how I lose money but I said the same thing 10% ago.

Randolph Bertin said...

Even without an existential threat, there is always an opportunity cost. Obviously you think Symantec is undervalued, and that people should be willing to pay more, and that before too long, they *will* be willing to pay more (either because the company is earning more per share and/or investors are willing to pay more for those earnings). But, if Symantec goes nowhere for a long time, whatever money you have in that position is money that might have gone somewhere more productive. Although I am patient, I ask myself, why aren't people willing to pay more for six times cash flow? And when might they be willing to do so? Is there some kind of catalyst, or just a slow change in perception? I would feel slightly better about the situation if management were willing to send some of that cash to shareholders, but I'm not holding my breath.

Thanks for all the commentary you provide on SYMC, other companies, market sentiment, etc.

No Price Too Low said...

[...] to any stocks with “issues”. No price seems to be too low for a stock with uncertainty. I wrote a post a few weeks back about how recently valuations did not offer much support to stocks. I pointed to the sheer [...]