Finding Value With Danny DeVito

Value investing

When the market closed Tuesday, market momentum remained negative. Every sector except for energy was in “red” territory as far as net-selling by institutions goes. There’s not a lot of buying ahead of the Fed’s announcement Wednesday. 

As for a pre-Fed drift, the markets are positive. The S&P 500 was up. That’s not been the theme of 2022, so any gains should be celebrated. 

But the bears are still in charge. I’m sitting in cash. I’m not saying you need to load up on stocks like Jim Cramer did yesterday. Instead, let’s be more cautious like Paul Tudor Jones, who warned about the macro environment for stocks and bonds. 

He’s bearish like most fund managers I know. But, let’s dive into another bullish strategy today with two picks to get you rolling. All with the help of Danny DeVito…

Not Frank Reynolds

Everyone loves the movie The Big Short, the iconic tale about greed and the financial collapse of 2008. Wall Street remains the movie that is often quoted about the ethics of capitalism and the market. 

I really love the film Margin Call, which tells the tale of an investment bank ditching worthless assets before the rest of the market catches up to their scheme. But if you’re a value investor, it’s hard to argue against the 1991 classic Other People’s Money. The film stars a slightly miscast, but still excellent Danny DeVito. 

He plays a fund manager named “Larry the Liquidator,” a notorious, activist shark who buys up shares in undervalued companies and then forces their sale to a bigger company. Ben Graham and Warren Buffett would be proud of this writing. 

In the film, Larry targets a small-town conglomerate called New England Wire & Cable Company. He also falls in love with the founder’s daughter – but that’s not important right now.

When he meets the founder, he explains that he values all of the company’s assets at $125 million – the land, the fully funded pensions, the machines, and anything that could be sold at auction. In a worst-case scenario – the company might be worth $100 million or $25 per share. 

Larry is looking for a bargain. And when he scanned a list of companies that looked cheap, he found out that the stock was trading at $10 three weeks prior. “That’s a 10 for a 25-dollar item,” he says. “What a sale.” Larry sees 150% upside. 

What Is This Value Strategy

So Larry values all the real estate, fixtures, equipment, and inventory. He comes up with what is known as the “rational liquidation” value of the company. That’s $25. That would be the tangible book value of the company.

In a market where things are falling, there are many companies that start to trade under their liquidation value. This means – if the company went belly up or sold tomorrow – the shareholders would receive at least the tangible book value of the company. 

Now this might sound too simple right? But we back tested this strategy to 2000, just buying stocks under their tangible book value. It delivered an annualized return of 32.6%. That figure is important because the S&P 500 averaged 7.46% during that period.

Pretty good huh?

If you’re looking for a few ideas, check out steel products manufacturer Friedman Industries (FRD) at 70% of liquidation value, and the 11th largest U.S. home manufacturer, Beazer Homes USA (BZH), at 64%. Then, just hold it.

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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