"There are many ways to make profits if the time horizon is not short term"
Mark and Jon Boyar — respectively, the founder, and a principal — of Boyar Value Group, aren’t wasting time debating bear or bull, recession or no. Their firm’s efforts remain focused — as they have been since Mark established his research boutique in 1975 — strictly on bottom-up financial analysis of individual stocks to find “value.” In their case, high quality businesses whose shares — because of the vicissitudes of the market — are currently selling at a significant discount to what a private equity acquirer would pay — over a reasonable horizon. In other words, the Boyars’ patience isn’t infinite; they insist on finding a catalyst for surfacing under-water value within a few years. It has worked splendidly for them and their clients.
Mark: Yes, I have been a professional investor for 50-plus years, I am a skeptic. With the benefit of hindsight, all bubbles have the same characteristics. Whether you were talking the blue chip bubble of the ’Sixties, whether it was the bubble that preceded that 1987 crash, whether it was the internet bubble, or the real estate bubble that preceded that Great Financial Crisis — when you step back and look at — think about — any of the historical bubbles, you have to wonder, “How can anybody have bought these things at those prices?”
Most of the Nifty Fifty never came close to returning to the heights they scaled during that roaring bull market. And this period is not going to be any different. The market leadership will change. People will take a break from growth for a while. They’ll wind up buying — gasp — value stocks instead.
Just say that as we honed our skills, we decided that we didn’t only want to buy something trading at 50 cents on the dollar or less. We also wanted a catalyst or something that’s going to surface that value during our lifetime.
When you reflect on previous cycles you’ve lived through, which reminds you the most of our current experience?
Mark: The dot.com boom and bust. The parallels are very striking. At that time, you had the day traders. This time, you have the stay-at-home guys, the Work From Home crowd, and young speculators congregating on Robinhood or Reddit. It’s all very similar. They were all buying the same stocks, driving them to valuations that were just stupid. And I think it’s going to play out exactly the same way. In the 2000 bear, many former market leaders lost 75% - 90% of their value, never to approach again their previous highs.
Jon: It’s sobering to recall, in that context, that after the NASDAQ peak in March 2000, the index didn’t surpass that high for fully 15 years. So when I’ve lately heard some pandemic darlings being referred to as “bargains” down 60% or 70% from their peaks, I can’t help saying, “caveat emptor.”
Meaning stock-picking skills are relevant ?
Jon: You’re preaching to the choir. Although the overall market might not have bottomed, many individual stocks might have already done so. That’s the opportunity. But I also recognize that patience will be required. Timing is always a question. And it’s very much worth reiterating here that the NASDAQ didn’t surmount its 2000 peak until 15 years later.
Can I assume that Boyar Asset is buying selectively here, but keeping some dry powder?
Jon: I think you make those decisions on a stock by-stock basis. I’m of the belief — and I learned this from my dad — that you should invest slowly over time. You’re never going to pick the bottom, so investors should not waste effort trying. Just pick stocks to research and then to buy — when they are cheap — and keep adding to that position prudently and opportunistically. There’s a long list of stocks in our universe that already have been unfairly punished in this downturn, in our opinion.
Cable hasn’t been an exciting business for decades. But you think it’s undervalued?
Jon: Let me outline our case for Comcast.
First, the company’s cable unit, which includes broadband, is its crown jewel — currently generates two-thirds of revenues and about 80% of profitability.
Second, what’s weighing on the shares at the moment — they’re down about 30% from recent highs — is that its broadband operations have reported a slowing in their growth rate. There was a significant pull forward in broadband demand during the pandemic, so comparisons are out of whack, but will normalize given a little time.
Third, Comcast has whittled its leverage back down to management’s comfort zone, following its 2018 acquisition of Sky — which leads us to believe that outsized share buybacks are likely. The company increased its share repurchase authorization to $10 billion earlier this year.
Fourth, Comcast continues to increase its payout to shareholders (14 straight years of dividend increases) including an 11% increase in 2022 (current yield: 2.6%).
Fifth, Comcast boasts a hidden asset in Hulu. The asset is likely to be monetized in the coming years and we would not be surprised if proceeds were returned to shareholders as is its wont, via dividends, repurchases or even a special dividend.
Sixth, Comcast’s fledgling Peacock streaming service holds a great deal of potential, which should become more obvious as it reclaims key Universal content from rival streaming services.
Seventh, Comcast’s theme parks have recovered — even though international tourism remains depressed. A recovery in international travel should go a long way toward sustaining the momentum in the theme parks business — as should a new park in Beijing (“opened” last September) but still held back by Covid restrictions.
Our eighth reason comes down to dollars — and sense. The market is currently applying a “conglomerate discount” to Comcast shares, with investors able to acquire the Company’s attractive cable communications business at a discounted valuation — and receive about $35/per share in additional intrinsic value for free. Finally, as I think we’ve made clear, if Comcast shares continue to languish, we would not be surprised to see Roberts pursue more aggressive actions than the outsized buybacks/dividends, etc. he usually employs to unlock value. A separation of the content business from the cable business could go a long way toward narrowing the valuation gap.
Where do you spy value away from the communications/entertainment sphere?
Jon: Well, the banks are cheap. Bank of America (BAC) is probably our favorite, and a great way of playing a rise in interest rates, as the most interest rate-sensitive major bank. There are lots of ways in this market to make money, if your time horizon is not tomorrow.
I’m impressed. Concise and cheap. Just to be clear here, guys, whether we’re in/heading into a recession isn’t really entering into your investment decisions here?
Mark: Recessions come and go. They end. And, a lot of these companies have already predicted a recession by collapsing 60% or 70% from their highs. Some of which were obviously ridiculous….My point is that a lot of these companies are already discounting a recession, and even if they prove to have a bit more downside, it’s probably only around 10%. But meanwhile they’re offering you more than double that in upside. I like those odds. Even it it takes five years to double, that’s not such a bad return on investment.
A new bull market will start at some point. When? Who the heck knows? Forecasting is a loser’s game. Buying into true bargains, as they become available, isn’t. The cycle will turn.