Deep Value: An Article That Doesn’t Mention Russia, Biden, the Fed, or Inflation

Deep Value

I won’t say those words. I WON’T SAY those words. If you’re a bit exhausted by those four topics in the subject line, you’re not alone. Imagine being on phone calls each morning where those subjects cover 58 of the 60 minutes…

Or imagine being at a child’s birthday party over the weekend and having five parents find out that I’m an economist. The first question they ask is… “What do you think about…

I WON’T SAY THOSE WORDS. Telling someone that I work in the markets is an invitation to an inquisition that rivals only a Marine father talking to his daughter’s prom date. Let’s change the subject and focus on where opportunity lies in this market: in deep value stocks.

Really Deep Value

As I noted on Monday, ARK Funds’ founder Cathie Wood attempted to rebrand her flagship fund ARK Innovation (ARKK) as a deep value fund. She asked that investors give her five years – HALF A DECADE – before her fund showed mind-boggling returns. She estimated that her fund will deliver a compound average growth rate (CAGR) of 40%. 

While that figure is technically possible, the probability is low. If she accomplishes this, I argue that she is the world’s greatest stock picker in the history of the world. Because with that level of prognostication, I also want to know who she thinks will win the World Series each of the next five years as well. And the Super Bowl. And the champion of the LPGA in 2026.

Not only did Wood ask for five years, she also said that ARK Invest is a “deep value” portfolio. She’s defining this as the cost of the stock today compared to the expected value in five years. But that’s not really deep value. 

After all, “deep value” comprises the need to focus on stocks with extremely cheap valuations (ARKK stocks don’t really have this). Tobias Carlyle has written a great book called “Deep Value” that teaches investors how to approach cheap stocks and cheap valuation multiples. It doesn’t consist of buying stocks with price-to-sales ratios of 10 or higher like Wood. It consists of buying “a dollar” for 65 cents. And that brings me to one of the best ways to measure value. 

Deep Value is All Around Us

I’ve talked to you before about buying stocks that trade under a price-to-tangible book value of 1. This came from conversations with the father-in-law who is one of the top community banking analysts in the world. He recommends banks that are trading under their liquidation value. Basically, the bank trades at 0.9 times a tangible book value of one.

You’re buying something for 90 cents on the dollar. His strategy is to hold these stocks and wait for consolidation in the space. Given that consolidation in community banking has run about a rate of 3% to 5% over the last 30 years, you can say that this is a very good trend.

You can also look across the energy, mining, and utility space and find companies trading under a book value of 1 and trading under low buyout multiples (EV/EBITDA, EV/Free Cash Flow). 

Now, I stress that it’s important to focus on stocks that carry these low metrics, trade on U.S. exchanges, and are ripe for consolidation. If these stocks have wide bid-ask spreads, then you want to use limit orders (not market orders) to purchase them. Don’t pay any more than you need to in this market. Just set a limit order, wait, and if it fills – don’t look at it for a few months. 

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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