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Why was 2001-2005 so good for value investing?


BG2008
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Old economy was cheap and tech/telecom was ridiculously overpriced.  Many old economy stocks had near single digit PE ratios while tech and telecom were 50+ if they were profitable.  Many hedge funds did well on both the long and short side, and due to the overall market being weak did well with low net exposure.

 

Today, despite what you hear about FANG and big stocks pushing the indexes higher, prices are higher across the board. 

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Tim,

 

Could you provide some specific examples?  I noticed that many REITs were paying double digit dividends in the late 90s.  Owning real estate must of have felt so "old economy" and boring back then.  If you can delve into specific names or specific industries, it would be extremely helpful.  I find it fascinating because during 2008/2009, most value fund went down roughly the same as the market.  So, it seems like the out performance among value managers following 2000 was across the board rather than isolated to specific manager. 

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Tim,

 

Could you provide some specific examples?  I noticed that many REITs were paying double digit dividends in the late 90s.  Owning real estate must of have felt so "old economy" and boring back then.  If you can delve into specific names or specific industries, it would be extremely helpful.  I find it fascinating because during 2008/2009, most value fund went down roughly the same as the market.  So, it seems like the out performance among value managers following 2000 was across the board rather than isolated to specific manager.

 

Ya I would love to hear some specific examples from the early 2000's.

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Guest Cameron

Clayton Homes, Hingham Savings, there were several "tech" companies that fell really hard to the point they were cash net nets Bell Industries and GTSI Corp would be two examples. Apple was actually really cheap coming out of the tech bubble. Amazon got slammed during the tech bubble and fell 90%. NewMarket Corp. CarMax, Banks were cheap in 2002. CAT was as well

 

Any of the big oil companies you can think of.

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Michael Burry bought Deswell in 2000 for $13.75: http://web.archive.org/web/20000815073003/moneycentral.msn.com/articles/invest/stratlab/5747.asp?Strategy=3

 

What all this adds up to after backing out the $5.33 per share in cash is a stock trading at about $8.50/share after earning $2.01/share over the trailing four quarters -- and quite a bit more than that in free cash flow. This despite recent revenue growth in the 40% range and additional growth expected for the foreseeable future.

I think he bought Deswell earlier as well. I remember reading it was a net-net at some point and he had put 10% of his portfolio into this. The company is still around, but is having a much tougher time now. Burry's forum posts at SiliconInvestor can be found here: http://www.siliconinvestor.com/profile.aspx?userid=690845 (requires free registration to view).

 

Apparently there were lots of small foreign companies that were being ignored by investors and could be picked up really cheap. A couple of other names he mentioned in forum posts were New Holland and Telebras.

 

These were some comments I found from another forum member (not Burry) about New Holland:

Deere is the U.S. leader, but New Holland sells more tractors globally than anybody in the industry. The business produces about $300 million in free cash flow (they did $400 last year, so I'm being conservative) and the market cap is under $3 billion. They are reinvesting that free cash flow (I define free cash flow as cash flow less the capital expenditures required to maintain the franchise - if they reinvest beyond that at a good return, that's even better than paying it in dividends) back into a non-U.S. business franchise that I think is a real winner. (Wall Street analysts and institutional investors are very U.S. oriented in this industry despite saying they want global leaders. New Holland is at the very least neck-and-neck with Deere globally).

 

The stock trades at 7 times earnings. Senior management is honest and capable. They have done virtually everything they said they were going to do. Fiat will not sell its shares at anything under 30, nor will I. Wall Street analysts agree that the stock is extremely cheap, but don't want to upgrade without a catalyst.

 

It's also worth checking out John Hillery's letters from this period: http://hilleryvaluecommentaries.com/Commentaries. He discusses a number of very cheap small caps as well. He was also a Deswell owner IIRC.

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The stock that made Ted Weschler's career:  WR Grace.  It filed for bankruptcy in 2001 due to Asbestos, stock was at something like $1, never delisted, and today it's 70+, having topped $100 a couple of years ago. 

 

Asbestos brought down a whole bunch of US chemicals and industrials.

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