Michael Wiggins De Oliveira is the founder of the London Deep Value Investment Club (LDVIC). With an impressive track record, Michael is a valuable source of investment knowledge across the board. You can follow him here.
Jason Kirsch (JK): What ‘surprise’ do you see in the market that isn’t currently getting sufficient investor attention?
Michael Wiggins De Oliveira (MWO): I genuinely believe that brick-and-mortar retail stocks will make a comeback in 2018. At the moment investors are truly phobic of investing in any brick-and-mortar retailer, from fear that Amazon (AMZN) will destroy it, that too is irrational. While there is some grain of truth to that line of thinking, investors are now so fearful that they are leaving meaningful returns on the table. Allow me to qualify this thesis. Not all retailers will make a comeback, a few will either go bankrupt, while others will be bought out very cheaply. However, many will survive – although these retailers will not be as profitable as they once were, they will still continue to generate free cash flow and reward long-term contrarian investors. Of course, picking the winners and avoiding the losers is extremely difficult. But if it was easy, then everyone could do it. Statistically, the world’s greatest investors underperform the indices 1 in every 3 years, from Buffett to Templeton to Schloss to Icahn to Ackman, so we can confidently say that the rest of us, while still outperforming the indices over time, rather than underperforming 33% of the time, will actually underperform approximately 40% of the time. Implying that, any time we make an investment, there is a 40% error rate associated with that investment. Thus, picking winners among the brick and mortar retailers will also carry a 40% error rate. We work hard so that the 60% that do go on to become winners vastly outperform the market to compensate for the losers in our portfolio. But there will be losers, undoubtedly.
JK: What is your highest conviction pick heading into the new year and why (can be a long or short idea)?
MWO: I have been advocating for anyone that would listen to me that Valeant (VRX) would be a great investment. I first wrote about it in December 2016 (Valeant Is A Great Investment To Start 2017) when the stock traded at $15. In that article I wrote that I expected the stock to be worth at least $25 by the end of December 2018. Throughout 2017 Valeant fell at least 50% before recovering. Although, in the last week the stock has gained some ground and is a little more expensive than it was back in December 2016, while on the other hand, Valeant is actually meaningfully less risky. CEO Papa and team set out an ambitious target to meaningfully reduce Valeant’s debt load by February 2018. Not only did they reduce it by more than the $5 billion which was what was originally earmarked, they have done so very much ahead of schedule.
While most investors have heard about Valeant, the only two things they know about the company is that it was embroiled in an accounting scandal and it is overleveraged. But that part of the story is old news. The company has undergone so much public scrutiny that now it is one of the most sanitized investments available. Also, while its debt is still meaningful, it is very much under control (net debt (including its drawn revolver) of approximately $26 billion). However, it is important to remember that Valeant is a resilient pharmaceutical company, it is meant to be operated with some debt. It does not need to run debt-free. Moreover, as time has progressed I have come to realize that this management means business, like little other managements do. And I now estimate that Valeant could be worth at least $11-13 billion market cap. Allow me to explain why I think this to be the case.
What I believe makes me a reasonably good investor is that when I buy shares, I understand that I am buying a portion of a company. And that the debt on the company's balance sheet is the company's responsibility to repay over time, say, over the next 10 years or so. For example, I have been arguing that Valeant would, over time, repay its debt and that I am only purchasing its equity. While, the vast majority of investors focus on Enterprise Value (EV), I opt instead to solely weigh up its market cap. Unless an investor's thesis is that the company will be acquired, then its Enterprise Value is not as important as some believe it to be. While a company's debt is mightily important, as long as the company consistently generates free cash flow and is able to use its excess free cash flow to repay its debt, over say, 10 years, then I singularly focus on market cap, rather than its Enterprise Value. Additionally, if the company repays the majority of its debt, then its EV:EBITDA should come down over the next 2-3 years, attracting investors that would now consider the company to be a bargain. This way of looking at investing I adapted from Joel Greenblatt.
JK: If you could recommend only one book on investing for individuals, which one would you choose and why?
MWO: I am frequently asked which book would be the one book which I would read about investing, if I could choose only one. While I have read You Can Be A Stock Market Genius several times, I think that to get the most out of that book one needs a certain amount of preparation beforehand. A while many might point towards Graham, I think that Graham’s’ book put too much emphasis on bonds calculations, and since that was a strategy that worked so well, that has, for all intents and purposes, been arbitraged away. Meanwhile, others might point to Buffett’s letters (Lawrence Cunningham), but again these letters can be a little abstract for beginners – although thoroughly engaging. So I actually point towards investors to The Dhando Investor (Mohnish Pabrai) because he talks about patience and having a long-term strategy will help investors think about what is the intrinsic value of a company. And more importantly, he devotes a full chapter on the topic of ‘when to sell,’ something that most value investing books avoid – because there is no right or wrong answer. He has this simple rule, which has certainly helped me and might help others; whenever one buys into a company we should not sell for two years, no matter the bad news in the interim period. This time frame goes a long way to help investors grow that most expensive commodity – patience in a fast-moving market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.