How Does Value Investing Work In 2018?

by: SA Marketplace


Value investing felt out of step with the times in 2017 as growth everywhere at any price continued in the markets.

Our panel of Marketplace authors shares how they are keeping or tweaking the faith to succeed in today's market.

The good news for investors? Value is in the eye of the beholder, and there are many ways to define and find value, it appears.

2017 has been an exciting year in the markets. All-time highs seem to fall every week, the market has shaken off three Federal Reserve rate hikes as no big deal, and there is so much bitcoin to talk about that it makes a head spin.

It's also been an exciting year on the Seeking Alpha Marketplace. Marketplace is our platform for authors to offer investing services that go beyond what they can do in public articles. In 2017, we went from 75 authors on the platform to 155. Those authors have a wide range of expertise and backgrounds. And while 2017 has felt like a year where everything has gone in one direction - up - we wanted to draw on this diverse array of backgrounds.

So, we're doing a Year End Marketplace Roundtable series. Over the next 2 weeks or so, we will be featuring expert panels giving their outlook on 2018 in corners of the market ranging from Tech to Energy, Dividends to Alternative Strategies, Gold to Value Investing. We hope you'll find these discussions useful no matter how you invest.

Today's roundtable covers Value Investing, as we ask our panelists how to stick to the discipline when FAANG, BTC, and FOMO seem to be the key acronyms of the year (for Facebook/Apple/Amazon/Netflix/Google, Bitcoin, and 'fear of missing out', respectively). Our panel:

(Editor's note - the questions were sent out and answered in the first half of December 2017, before the recent U.S. tax reform bill was passed and ultimately signed into law).

Seeking Alpha: Warren Buffett's career can be divided into WB 1.0 - cigar butts and special situation work-outs - and W.B. 2.0 - 'great companies at fair prices'. In the markets recently there has seemed to be a tension between those two approaches among value investors, as more and more seem to have focused on the latter approach. In 2017/18, which approach do you find more relevant to your investing and why? (Or what's your alternative?)

The Value Investor: Definitely 2.0 as the world is moving quickly to a winner takes all principle, driven by digitalization and globalization. This means that trends take place quicker and that companies gain a greater market share, but their leadership/competitive position becomes more vulnerable as well. The cigar butt approach still works, provided that there is a catalyst.

Long Hill Road Capital: I started out my career investing mostly in cigar butts and special situations, but evolved into investing solely in high-quality compounders. But instead of "great companies at fair prices," I would call my approach "great companies at unfair prices." Even the best companies can be priced to deliver average or poor forward returns, so my job is to 1) understand them, 2) figure out the price I'd have to pay so I'd expect to double my money in under five years (~15%+ annualized returns) and then 3) wait patiently for my price. It sounds easy but it's very hard.

Chris DeMuth Jr.: 1.0. He suffers from a $475 billion market cap forcing him into far more conventional investments; I don’t.

General Expert: Coincidence or not, my investments have been shifting towards growth (though I wouldn't call them "great"). Some would even call it speculation. There are growth stocks that make sense (to me) and those that don't (to me). At the end of the day, it's cash flow over time that matters. If I invest in an "expensive" stock, that's because I believe ultimately its future cash flows will be much greater than today. If I was given a choice of putting down $10 for $1 a year that doesn't grow, or $20 for $1 a year that grows 100% a year, then of course I will choose the latter, despite it being more expensive based on short-term multiples (10x vs 20x). In today's market I think it's easier to find a mispriced growth stock (if people don't get the story) than to find a cigar butt, that's especially true for larger investors. When boring no-growth stocks are trading at 20x, it is hard to find cigar butts.

J Mintzmyer: Both of these approaches are essential for value investors, but I think it's important to realize that Buffett primarily transitioned from one tactic to the other due to his skyrocketing account size. 'Cigar butt' investments are usually only accessible to smaller and midsized investors, once you start dealing in the millions it gets difficult. Billions? Forget about it!

We focus on deep value and the maritime shipping sector. This is much more similar to 'WB 1.0,' but we always prefer to invest with quality management teams and will pay a premium for an improve trust factor and a better asset base. So of course there's a blend. We buy the unloved firms, but they need to have good management teams and quality assets.

Chris Lau: Finding great companies at fair prices proved difficult in 2017 so I looked for special situations. Finding "cigar butts" is fine, so long as the stock is valued below its fair value and has one or more upcoming catalysts ahead. You need both (a discount and a catalyst) when value investing.

Ranjit Thomas: First, I think a lot of investors are buying "profitless prosperity". Most of these aren't great companies at fair prices. They are companies buying revenue growth because the market is rewarding them for it.

In the coming year, I will continue to focus on holding the stocks of companies that are growing earnings, trading at reasonable valuations, and returning cash to shareholders. As in the past, will try to generate some additional income from these positions with options.

David Trainer: In the ongoing bull market, there are plenty of firms that meet the “quality company” criteria, but fail when it comes to “undervalued price.” In times like these, investors need to find companies that generate consistent (and growing) economic earnings and high returns on invested capital. These are the types of companies that, long term, an efficient market allocates capital to since they deliver the highest profits per dollar invested in them. This process is what New Constructs and our Value Investing 2.0 service aims to do, find quality companies at undervalued prices.

W.G. Investment Research: I typically end up with big losses whenever I try the cigar butt or special situation investing approach, so I believe that W.B. 2.0 is the way to go. Moreover, in my opinion, it is extremely hard to find cigar butts in today’s environment and when you do, the easy money has likely already been made. Based on my experience, these opportunities are few and far between.

The W.B. 2.0 approach of finding great companies that are trading at fair prices has worked wonders in 2017 and I anticipate more of the same in the upcoming year. There are plenty of companies that have great businesses and that also have stocks that are still trading at what I would consider reasonable, or fair, valuations, which is an important factor to consider when the market is trading at (or near) all-time highs. A few examples include: Bank of America (BAC), Citigroup (C), Pfizer (PFE), AT&T (T) and Cisco (CSCO). The P/E ratios for these storied companies may be higher than what you would like, but, as Warren Buffett once said, “price is what you pay, value is what you get”. In a bull market, this is especially important when you are evaluating companies that you plan to hold for the long term (i.e. at least the next three-to-five years).

Jason Phillips, CFA: I’ll begin by saying something I think everyone can agree on: All else equal, it’s always preferable to buy “great companies” than “good companies.” There are a lot of great companies out there. And if you are willing to do the work, there always seem to be at least a few of them that are available at great prices. A couple of the companies that stand out for me, whose operations I really liked, and which we have made successful investments in in the past, were W.R. Berkeley (WRB) and Gentex (GNTX). Even Intertape Polymer (OTCPK:ITPOF) which I came across recently but still have more work to do on, looks like it has the potential to be a holding that could outperform for the next five years. Yet there is a lot of volatility in the market. Even most large-cap stocks swing by at least 30% annually. It seems to me then, that the optimal use of capital would be to ride these shorter-term waves and use volatility as your friend, rather than following a simple “buy and hold” strategy and have that same volatility work against you.

One of the advantages of today’s stock market is that transaction costs are extremely low. It’s very easy for the average investor to get in and out without paying a penalty. However, Buffett today does not share this advantage due to his size. Hence the reason, I suspect, that he was forced to shift his strategy over time.

The Turnaround Letter: We are finding that most “great companies” currently have valuations above a “fair price”. Similarly, “cigar butt” stocks are quite rare and often priced fairly given their higher risk, leaving limited opportunities for investment. Our focus is on special situations – companies that are out-of-favor but are undergoing significant positive changes. Even in today’s expensive and well-followed market, these kinds of stocks do exist and we are finding many of them. Quality research is critical for identifying the true bargains amid the list of initially promising candidates.

David J. Waldron: Whether 2017/18 or 2027/28, I am seeking 'great companies at fair prices' as the most profitable approach to value investing. The cigar butts and special situations are more about trading stocks and practicing arbitrage than investing in companies and therefore are purely speculative.

I think Peter Lynch sums it up best in his book, Beating the Street: "Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is 100% correlation between the success of a company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies."

Elephant Analytics: While I do often look at struggling companies, I think that the increased availability of information has made it harder to achieve significant returns from what Buffett described as "cigar butt" investing. Any struggling company of decent size will be sufficiently scrutinized so that there will be a limit to how cheap it trades compared to its intrinsic value (based on its current situation). The opportunity with struggling companies is more in whether the market has underestimated the chances of the company improving its situation. If that's the case, then one can buy into an improving company at a cheap price.

Seeking Alpha: 9 years into a bull market, traditional value techniques that focus on current earnings power and the value assigned to it by the market run the risk of investing in bad companies that are correctly valued as such. How do you adapt your approach, if at all, to the current market climate?

The Value Investor: Think critically about the business model in the light of changing consumer preferences, health and environmental changes as well as technological changes. This is key, as a critical view about leverage and current margins in relation to historical margins should be addressed as well when determining valuation ranges.

Long Hill Road Capital: Given my long-term approach, I don't focus on multiples of current earnings power. I focus on how big and profitable a business is likely to be in 5-10 years, and then try to pay a price that's likely to result in strong long-term returns. The primary risk I face is overpaying because the future is always uncertain and a lot can happen in 5-10 years.

Chris DeMuth Jr.: I see financial risk as the risk of overpaying. I am less concerned with subjectively hairy situations or the risk of looking stupid for either missing out on something that requires overpaying or for underpaying for something that does not work out well.

General Expert: I don't think it's correct to look at current earnings power. The past can provide a good approximation of the future, but they are not equal. If someone invests in a value stock and it turns out that it is no longer a value stock because earnings drop, the fault lies with the investor, not the value investing philosophy. Of course, no one is right all the time, but it's important to make the distinction between "I'm buying it because it's cheap" versus "I'm buying it because it's cheap and I don't think its earnings power will deteriorate (that much)." For me the "cheapness" of the stock has to be unjustified for it to be a real value stock.

J Mintzmyer: We're definitely in a rich market environment; however, we focus on a fairly niche sector that is incredibly unloved. Shipping has performed fairly poorly over the past 7-8 years due to a major oversupply hangover from the 2008 bust. We are just now starting to turn the corner, but investors are nowhere to be seen. This is different than almost every other sector that is trading at record multiples. In terms of avoiding 'value traps,' this goes back to our first response about searching for good management teams and quality assets. Traps still exist, but we can skew the odds in our favor by initially skirting the toxic ones.

Chris Lau: Have discipline in this environment. Look out for companies growing because the market is frothy and borrowed money is plentiful. But in the biotech sector, stocks I covered and avoided were due to those who needed more cash, would sell stock and dilute shareholders. Example: Synergy Pharmaceuticals (SGYP). Of the 3 or 4 out of 20 Top DIY ideas, I cut down one of our emerging research biotech stocks close to its peak and we avoided a drop of up to 40%. DIYVI (DIY Value Investing) is about defensive investing. Sell losers and let your winners run higher.

Ranjit Thomas: A declining business with debt (e.g. a lot of retailers) is a recipe for disaster. The key is to determine whether the company is growing EPS. A cheap valuation can be misleading if the company is in secular decline.

David Trainer: The current bull market has left many firms with a high valuation that simply cannot be justified given the fundamentals of the business. This scenario creates significant opportunity for those investors that can identify the stocks with high potential to blow up a portfolio. In all investing, identifying those firms that could wreck a portfolio, and avoiding them, can be more important than finding winning stocks. We aim to identify such dangerous stocks by quantifying the expectation for future cash flows embedded in a current stock price. Only through this lens can we begin to understand how dangerous a stock’s valuation truly is.

W.G. Investment Research: It is hard to find companies that are truly undervalued in today’s market so I have been putting capital to work in companies that I consider “reasonably valued” but that also have great stories to tell. For example, I have been heavily investing in Cisco (NASDAQ:CSCO) because the stock has been trading at a relatively cheap valuation but, more importantly, the company has also been going through a significant transition that will allow for it to be a major player in several key markets for years to come. During bull markets that are long in the tooth, I tend to heavily invest in companies that I know have great businesses and that are operating in industries that have promising prospects.

Jason Phillips, CFA: In order to address the threat of “value traps”, I think there are two complementary approaches you can take. One, is to avoid looking at current or short-term reported earnings, whether they are depressed owing to short-term pressures, or are artificially inflated owing to some change in the business. Instead, we’ll look to what we call “normalized earnings” or what we feel the company should regularly and sustainably earn over the course of a business cycle, say three to five years. Then, in assigning a value to this earnings stream, we’ll take a careful look at the nature of the business – both in terms of the inherent risk involved as well as the company’s growth potential, and use a fundamental framework to come up with what is a “fair” or “justified” multiple for the company.

One instance where this approach worked particularly well for us was with Western Refining (WNR) where short-term earnings were temporarily depressed owing to cyclical factors, but the company had a very solid operating track record working in its favour. We assigned a multiple to that more stable earnings stream, ignoring the level of current earnings and the multiple that the market had given the company at the time, which I believe was very high, and sure enough, the company ended up being acquired a few months later by Tesoro Corporation for $37, which happened to be very close to our target price.

The Turnaround Letter: Our approach hasn’t changed. Current earnings multiples can reflect only part of the value that a promising company may hold. We emphasize quality, in-depth fundamental research that looks not only at current earnings power, but future earnings power, the build-up of cash, and any other hidden assets that the market is missing. In an increasingly momentum-driven market, slow-growth or stagnant companies can become neglected and offer outsized returns for the careful investor.

David J. Waldron: A value investor's thoughtfulness, discipline, and patience are tested during the ascension of a bull market when bargains become scarce. Those who compromise and join the herd in scooping up overpriced growth stocks or poor quality value traps on the fear of missing out [FOMO syndrome] usually regret the purchases when the market ultimately retreats. I experienced FOMO in 2007 and have thus learned first-hand from experience that it doesn't work. You can bet on one thing: this time will NOT be different, and quality bargains will once again abound for the disciplined, patient investor flush with FDIC-insured cash. When will that happen? I have no idea and dismiss any expert predictions on market trends, stock prices, and interest rate movements as no more dependable than the Ouija board or Magic 8 Ball. I remain steadfast that holding only the stocks of quality companies outperforms the roller coaster movements of the markets over time. And the partial ownership of great companies gives us the sense of directly contributing to socioeconomic opportunities for our family, country, and the world. To the contrary, trading stocks and currencies on speculation in the quest for fast money is fleeting, and the house usually wins those bets anyhow.

Elephant Analytics: With most of the companies I look at, I attempt to model out their financial performance a couple years forward as well as examine their competitive situation. I don't focus on current earnings so much as where I think the company will be in a couple years. I think that helps one at least understand why a company may appear to be cheap according to current valuation metrics. There is still the risk that the future projections are off, but being forward looking should at least result in a better understanding of the challenges a company faces.

Seeking Alpha: What was the big story or lesson learned for you in 2017?

The Value Investor: Bitcoin. Clear indication of momentum which is not my strength.

Long Hill Road Capital: I'd separate my investments into two buckets. The first bucket includes compounder businesses that are generally performing well but the stocks are too cheap for whatever reason. The second bucket includes compounders where the business is struggling for temporary reasons and the stocks are cheap and extremely out-of-favor. 2017 has been a year when the stocks in my first bucket performed very well and the stocks in my second bucket underperformed. It isn't too surprising because the second bucket is struggling for company-specific reasons, so their stock prices will be more tied to company developments than macro or stock market swings. In a strong market, those tend to underperform.

Chris DeMuth Jr.: Coming out of the financial crisis, there was a real need for a monetary and fiscal policy to save the market from seizing up. It worked, but was a close call for a few months. Fed Governor Kevin Warsh advocated symmetry – if we pursue a policy for a given reason, when that reason is gone, then the policy should be too. But he was essentially the only one. Today, there is a nearly unanimous consensus in favor of every type of monetary and fiscal stimulus forever and no matter what. No one minds, particularly since the inflation has gone into asset price inflation, so the owners (of stocks, etc) are delighted. People like low interest rates. Voters are mostly supportive of the big budget items of social security and medical transfer payments. This disequilibrium and resultant malinvestment completely disrupts price discovery. As an investor, it makes shorting difficult. As a consumer, it drives prices towards infinity on everything with price-insensitive third party payers (see healthcare and higher ed).

General Expert: I never thought Helios and Matheson Analytics (NASDAQ:HMNY) could appreciate 500% in under a month, and for a while it looked like I was a genius. I had hoped that there would be more breaking news because it was such an exciting story. Unfortunately, no new partnership was forged, more dilution came, and the stock collapsed. I did sell it for almost a double on the way down, but the lesson here is that it doesn't matter how much you made on paper, your gains are not crystallized until you sell, this is especially true for a highly volatile security. Take hint, cryptocurrency investors.

J Mintzmyer: The biggest story in 2017 in our viewpoint has been the ongoing U.S. tax reform, primarily regarding corporate tax policies. Despite continuing geopolitical risks (Middle East & North Korea) and U.S. domestic political risk, the market has been spurred on by the promise of a significant corporate tax cut and a repatriation holiday. This potential tax cut is unprecedented and I'm hopeful we will see the bill signed into law soon.

Chris Lau: Sticking to your principles of value is not easy when the market makes new highs nearly every day.

Ranjit Thomas: It is hard to fight momentum unless there is a clear and imminent reason why it will end.

David Trainer: The biggest story of 2017 was the interest and attention that the implementation of the Department of Labor’s Fiduciary Rule received. Investors that had long been skeptical of conflicts of interest in research, or advisors not having their best interests had the opportunity to voice their concerns. Most importantly, the implementation provides the groundwork for investors to receive better investment advice, especially as advisors not acting in a fiduciary manner face tough questions and/or regulators’ scrutiny. As Michael Kitces said “you can’t unring this bell now” and 2017 made large strides in making investment advice more transparent and trustworthy.

W.G. Investment Research: The biggest lesson that I learned in 2017, which is unfortunately something that I have had to ‘learn’ over and over again, is that you have to be willing to trade around your core positions if you want to perform well during a bull market. To this point, I have been overweight General Electric (GE) for years and I saw the bear story starting to play out in early 2016 but, instead of selling a portion of my stake in this industrial conglomerate, I stayed long because I believed that the company’s long-term business prospects outweighed the near-term pressure. I was wrong and it cost me dearly, at least in 2017. When taking a step back, I should have been willing to reduce my GE position in the mid-$20’s because the company’s quarterly results showed that the cash flow issues and debt problems were not going to improve anytime soon. As such, I could have easily (hindsight is 20/20) avoided a major loss and bought back in at a lower price but, instead, I was too focused on the company's long-term story.

Jason Phillips, CFA: There were actually two very important lessons I learned in 2017, with one building on the other. 1) A company that employs a high amount of leverage should not necessarily be ruled out, but a plan to reduce debt to appropriate levels must be accounted for in the valuation. The best example of this was with GNC Holdings (GNC). When I initially found this company, I was blown away at the free cash flow which was equal to about a 25% yield on the company’s market capitalization. But what I failed to recognize is that the company had already suspended its dividend – I knew they had suspended it – but, all that cash flow was going to be directed towards retiring the company’s revolver and outstanding maturities that were coming due. It wasn’t available to the shareholders at all. In essence, the whole thing was going to take several years to play out which put the turnaround story in greater jeopardy than I had initially imagined. Given that all that available cash flow was going to be exiting the business en masse – it leaves the company in a pretty vulnerable position, without any distributions as an incentive for shareholders to stick around in the meantime. 2) Cash distributions to shareholders, are really the only thing that matters. There are cases where a company doesn’t pay a dividend today and it can still make for a good, or even great, investment. But I still believe you need to keep an eye on when and how that company will eventually start returning distributions, and what the value of those future distributions are worth today. Net 1 UEPS Technologies (UEPS) is a stock that we own that would be a good example of this type of mindset – so I don’t want you to think that we are strictly dividend, or yield investors – it’s not that simple. But, there are other cases where a company's business may be struggling, making it difficult to value the earnings stream, but not so much that you can’t still assess the value of the company's dividend. Bed Bath and Beyond (BBBY) is a good example of where the earnings stream is relatively uncertain but, even in a bearish scenario the dividend within that earnings stream appears to have solid value, so we bought it.

The Turnaround Letter: A lesson that we force ourselves to remember is the value of patience. Turnarounds can take a long time – years in many cases – with some painful times while we wait. A recent example is the shoe company Crocs (NYSE: CROX), which fell to a 30% loss in the first 12 months after our recommendation, even as the overall market gained 15%. However, their turnaround has started to show some impressive traction and the recommendation currently has a 55% profit.

David J. Waldron: 2017 was another reminder always to stay invested in the stocks of companies with compounding dividends and capital gains protected by wide margins of safety as you patiently search for bargains to add to the portfolio. If new opportunities are temporarily non-existent, you are better off just staying put. And remember that the good ideas already sitting in our portfolio may be the best opportunities to invest dry powder in as opposed to speculative or desperate new ideas.

Seeking Alpha: What are you preparing for in 2018? Any big themes to watch out for?

Long Hill Road Capital: I don't know about 2018, but I do know that some strong secular trends are likely to continue over the long term. For example, more people around the world will continue to gain access to high-speed internet. E-commerce should continue to take share from offline retail over time. Mobile internet usage should continue to grow faster than desktop internet usage. More people will join the middle class around the world. Consumers will continue to want quality products and services at reasonable or low prices.

Chris DeMuth Jr.: I am preparing for the Disney (DIS) ½ marathon with my 9-year old son. Then, I will go back to looking for mispriced securities and some way to exploit such mispricing for profit. In particular, if we get tax reform, I hope and expect a bonanza of bank and thrift M&A. Some of my long-awaited targets such as BNCCORP (OTCQX:BNCC) are likely to get vacuumed up at big premiums, but they could be among hundreds of deals. There are thousands of tiny publicly traded banks that have no reason to be independent. Deal prices are sensitive to taxes so it is hard to structure them fairly when we don’t know the corporate tax rate. As of today, the prediction markets are pricing in a 79% chance of tax reform, but it does not really matter what the specific rate is (put me down for a 0% corporate tax rate; it is an inefficient, distorting tax that is easy to evade or avoid); what matters is clarity. After there is clarity on the tax rate, many of the delayed deals will get signed. Another issue where the markets could react well to clarity: the judge’s decision on the DoJ’s bizarre jihad against the AT&T (T) acquisition of Time Warner (TWX). Their complaint reads as if it was written before the internet and before economics. There is barely a reference to econometrics and the “hot docs” weren’t too hot; they were, as AT&T had to repeat ad nauseam, “taken out of context” and “misleading”. Based on the complaint, the least embarrassing explanation for this suit is the political one: Time Warner’s CNN and CNN chief Jeff Zucker have made President Trump mad by reporting on things that he has said and done. If this deal is blocked, then we will be entering a post rule of law era in which all deals are subject to the whims of our elected leaders. Planning will be virtually impossible. However, if the judge allows it to proceed, then it will be much easier for companies to return to antitrust assumptions based on economics. A number of other deals could proceed. For example, sooner or later someone will need or want DISH’s (DISH) spectrum and will scoop it up. Meanwhile, we wait for the antitrust decision. The $13.97 net spread offers a 41% IRR if the deal closes by its April 22, 2018 walk date. Success would also benefit the market’s perception of other deal targets such as Scripps (SNI) and Tribune (TRCO).

General Expert: I am preparing for another bull market. The economy is going strong and corporate profits are growing. Multiples are getting high, but not crazy. It's unclear to me if rising rates will compress multiples, since the trend of rising rates has been telegraphed very well. I think many retail stocks will rebound. The big theme in 2017 was Amazon (NASDAQ:AMZN), but I think it's silly to say that Amazon single-handedly wrecked the retail industry. It was a simple issue of oversupply. Retail has always been cyclical.

J Mintzmyer: In the broad markets, I am worried about potential overheating in specific high-speculation areas such as cyptocurrencies and technology/momentum stocks. I'm also concerned due to historically low volatility levels combined with all-time market highs. I hope the market can transition to a more stable long-term posture. In my own investments, I am closely watching the global trade levels, and China is our largest focus. China is one of the biggest players in the global energy trades and is also the primary driver of dry bulk and container traffic. I'm concerned with their credit levels, but am very optimistic about the continual development of the "One Belt; One Road."

Chris Lau: I am adjusting the DIY top picks to account for higher interest rates and money shifting from biotechnology and technology to resources, financials, consumer goods, and fixed income.

Ranjit Thomas: The growth of the Internet will continue, with the big growing bigger. Just like no one could be fired for hiring IBM (IBM) in the past, today every marketer is shifting ad $ to Google (GOOG) and Facebook (FB). The reduction of US corporate tax rates will have a profound impact on US based companies, making their valuations more reasonable and attracting capital to the US.

David Trainer: The biggest theme, and one that could shift the investing landscape for years to come, is the increased knowledge in artificial intelligence and machine learning throughout the industry. AI and machine learning have become buzzwords in recent years, but many don’t fully understand the complexities and capabilities. The firms that actually take the time to understand and implement smart technology solutions using machines have a great opportunity to get a leg up on competition, win more assets, keep more assets and, most importantly, stay out of trouble with regulators.

W.G. Investment Research: It appears more likely than ever that a new corporate tax rate will be in place in the near future, so I believe that the benefits of lower tax rates, and more specifically repatriation of overseas funds, is going to be a major theme that plays out over the next 12 months. In my opinion, technology companies (Apple (AAPL), Cisco (CSCO), Microsoft (MSFT)) will be the real winners if the tax reform bill gets passed. I believe that most of the cash stored outside of the U.S. will likely be used for stock buybacks and dividend increases, but, in my opinion, these tech companies are going to be in a position to make game-changing acquisitions that have the potential to greatly improve their long-term business prospects.

Jason Phillips, CFA: I think the biggest development would have to be the U.S. Tax Reform, wouldn’t it? To be perfectly honest, I don’t spend a lot of time following the headlines. I’ve found that more often than not it proves distracting and increases the chances of getting “whip-sawed”. One day oil is headed to $80 in 2018 and the next we are faced with an oversupply. I follow the charts closely and if I see anything there that catches my attention, I'll make the decision to look into it more. But the proposed tax cuts seem to have material implications for the U.S. and global economy. On the one hand, there’s a sizable tax break for the average American who conceivably will take that refund and go out and spend it. Then, you’ve got what could be a very material tax cut in corporate rates. With the American consumer going out and spending more that would seem to provide the right incentive for American corporations to take that “found money” and reinvest it in the economy. It could be what we’ve all been waiting for, as that “spark” to reignite the U.S. economy, ten years later.

The Turnaround Letter: While nearly every indicator points to continued gains in stock prices in 2018, this consensus view is at risk of becoming the “only” view. With valuations being high and signs of excessive speculation starting to appear, we are vigilant about how quickly any change in the increasingly one-sided sentiment can create impressive levels of volatility.

David J. Waldron: The perpetual search for wonderful companies temporarily trading at bargain stock prices just like we did in 2017 and will again in 2019.

Elephant Analytics: One thing that I am expecting in 2018 is for the cryptocurrency bubble to pop. For example, Bitcoin mania has reached rather extreme levels now, with Google search volumes for Bitcoin on par with Santa during December. At the same time, the extreme volatility in Bitcoin prices has quite negatively affected its chances of becoming a mainstream currency. During December, Bitcoin's daily high (in US dollars) has averaged 14% more than its daily low. That daily range is equivalent to the 14% range in the British Pound (in US dollars) on the day that the Brexit vote occurred. In terms of volatility, every day is Brexit for Bitcoin. Aside from that, I'm monitoring the potential effects of the tax reform bill. Take home pay may start to reflect the changes in early-to-mid-2018, so we should start seeing some preliminary info on how it affects consumer spending.

Seeking Alpha: What is one of your best ideas for 2018, and what is the story?

The Value Investor: Too early to tell. Closed out of some value retail as of recent, keeping a close eye on IPO and M&A induced action.

Long Hill Road Capital: TripAdvisor (NASDAQ: TRIP) is an enduring business with excellent economics that is seeing a divergence in the operating performance of its hotel and non-hotel businesses. The core hotel segment is struggling and the emerging non-hotel segment is crushing it. The stock has been decimated because the market is focusing on the former and failing to appreciate the value of the latter, which I believe is worth over $3 billion. Given where the stock trades, the market is valuing the core hotel business near $1 billion or close to 1x revenue. I think that is significantly mispriced on either a standalone basis or to a strategic acquirer.

Chris DeMuth Jr.: I would start by lightening up. With market prices high and volatility low, I would start with a bit of housekeeping then will mention one of my best ideas. If you read The #1 Stock In The World and bought VelocityShares Daily Inverse VIX Short-Term ETN (XIV): sell half. If you read Up 78% In The Past Year, Still A Top Pick For The Next and bought Bitcoin, sell half. I still like these for the next 20 years, but would maintain sizing discipline. If you want to hedge equity exposure (especially if you have big short-term gains in taxable accounts that you want to offset without selling), look to the 2x and 3x long ETFs for short ideas.

Once I am done on defense, here is where I would go on offense: VMWare (VMW), Alibaba (BABA), and Tencent (OTCPK:TCEHY).

Chart TCEHY data by YCharts

I like exposure to each of these but hate paying for them, especially after they ran up this year. What is a price-sensitive investor to do? Buy them each on sale, via, respectively: Dell-VMWare tracking stock (DVMT), Altaba (AABA), and Naspers (OTCPK:NPSNY). Each offers massive discounts and catalysts to capture that discount. For example, today Altaba (AABA) trades at a 26% discount to its adjusted NAV, much of which is comprised of Alibaba (BABA). Owning a basket of these three parent companies is like getting a second chance at owning their subsidiaries before much of their 2017 run-ups.

General Expert: My best idea is Roku (ROKU). Based on current Seeking Alpha articles and Wall Street research, there seems to be a gross misunderstanding of Roku's place in the ecosystem. Roku is building a distribution network for content in a very capital efficient manner. As it continues to grow, I believe that it will become one of the major media TV distribution channels. Unlike Netflix (NFLX), there is no significant need for capital in order for it to grow.

J Mintzmyer: We've recently unveiled our 'Top Idea for 2018,' which is Navios Maritime Partners (NMM). I've followed this stock for nearly a decade. We avoided them a couple years ago due to their risky balance sheet and market exposure, but they began a massive turnaround in early-2017 that has gone completely unrewarded by the market. We declared NMM as our 'top idea' in late-November when the stock was in the $1.90s. NMM is a rare situation where the bearish downside isn't much lower than the $1.90s, the base case provides over 50% upside, and in bullish scenarios, we could be looking at a triple or even a quad-bagger in 12-18 months. Navios is underpinned by long-term contracts, but their upside depends on continuing strength in the dry bulk markets. As I mentioned above, China is the key player there. If China can keep growing, NMM will likely provide massive returns for investors.

Chris Lau: The DIY service will look for the "alpha" in the shift in medicare in the U.S. (Walgreens (NASDAQ:WBA), CVS (NYSE:CVS)), China's relentless growth (Alibaba, Baidu (NASDAQ:BIDU), Tencent), and growth in ADAS (self-driving cars) so Nvidia (NASDAQ:NVDA), Ambarella (NASDAQ:AMBA), Intel (NASDAQ:INTC), and AR (augmented reality), so looking at Apple, Qualcomm (NASDAQ:QCOM), and Himax Technologies (NASDAQ:HIMX).

Ranjit Thomas: I recently wrote an article on DaVita (DVA). The company is selling an underperforming business worth $5 per share for $25. So that's $20 of value creation. The stock was up only $6 at the time I published and has now trended a little higher, but there is still some upside left with low downside risk.

David Trainer: Synchrony Financial (SYF) - SYF is the largest provider of private label credit cards. It partners with retail giants such as Walmart (WMT), Lowe’s (LOW), and Amazon (AMZN) to provide consumers with store-branded credit cards. The high net interest margin earned on these cards helps SYF earn a high ROIC. The company’s ROIC is moving back in a positive direction, and increased from 16% in 2015 to a top-quintile 18% over the last twelve months. SYF is the biggest player in the private label credit card market in terms of both number of active accounts and the dollar amount of transactions. More customers and more transactions leads to more data, which SYF can then leverage to more effectively market to consumers. As retailers begin leveraging machine learning in their analysis of customer trends to increase efficiency, the data SYF collects from consumers will become even more valuable. Best of all, despite its track record of improving profitability, SYF trades at a steep discount to other companies in the consumer credit industry. Despite having the second highest NOPAT growth rate over the past twelve months, SYF has the lowest price to economic book value of its peers.

W.G. Investment Research: Citigroup (NYSE:C) is my best idea for 2018 and I believe that there are several catalysts that will help propel C shares higher over the next 12-18 months. The most significant catalyst is the rising interest rate environment, which is already positively impacting the bank's operating results (net interest income was up big in Q3 2017). Pundits are predicting 3 interest rate hikes in 2018 and, if this comes to fruition, Citigroup will be one of the biggest beneficiaries. Additionally, the new Fed chair is expected to be dovish and the financial community anticipates for the current administration to roll back several burdensome regulations in the banking industry, and all of this bodes well for Citigroup, and the other large banks. Lastly, Mr. Corbat, CEO, has Citigroup well-positioned to perform in 2018 and the bank expects to return over $60 billion to shareholders over the next 3 years. Therefore, I believe that there is a lot to like about this bank at today's price.

Jason Phillips, CFA: We tend to hold most of the ideas in our portfolio for more of a matter of months, rather than years. So for us, what may seem like the “best” idea today may not be the case a few months from now. If you had asked me this question at the start of November, I would have answered with companies like Dick’s Sporting Goods (DKS), Bed Bath and Beyond (BBBY), or AMC Entertainment Holdings (AMC). But those stocks, with the exception of AMC, have run up considerably since then. AMC still sets up as an attractive trade but I don’t know if I would be willing to call it my best idea for 2018. Instead, I’ll point to Net 1 UEPS Technologies, which is up 26% since the start of November on the back of news that the company recently inked a deal with Bitstamp. We’ll take the recent run-up from the announcement as a welcome bonus, or “icing on the cake” but it isn’t necessarily a part of our thesis with the company, and we don’t hold a view on the future for bitcoin or cryptocurrencies. I can’t help but think that in the future, the traditional physical wallet will be gone, to be replaced by a digital wallet on our smartphones. Particularly, when you look to emerging market economies, for example India, Southeast Asia, and sub-saharan Africa, these markets don’t have the traditional payment processing infrastructure in place, meaning there are considerably lower barriers to entry for new payment processing technologies. Having established “proof of concept” in the South African market over the past few years in managing the transfer of welfare beneficiary payments on behalf the government, UEPS is now smartly expanding its presence to other international markets including partnering with Mobikwik in India, where the digital economy is expected to grow by 200% annually between now and 2020. Not to mention that the UEPS technology is also compatible with established technologies, like EMV, meaning the company has the potential to become a truly global payment processing operator. And UEPS’s KSNET business alone is probably worth at least 550M of the company’s 650m market capitalization which means you’re basically getting a free call option on the growth potential of the company's international operations. Hopefully the recent deal with Bitstamp will bring greater attention to the company as when I review the investor day presentation it certainly seems as though this is an opportunity simply being missed by the market.

The Turnaround Letter: General Electric clearly has problems, but investors’ frustration with its lost decade (or longer) has led to an overly pessimistic view of the company’s prospects. The new leadership has a tremendous opportunity to improve GE’s core profitability and to highlight the value of their non-core assets. We think there is considerable value hidden inside of GE amidst all the current uncertainty and doubt.

David J. Waldron: Cable and media giant, Comcast (CMCSA) may have lost to Disney (DIS) in the Fox (FOX) asset grab, but we like CMCSA as a contrarian idea to the cord-cutting fears. Comcast is diversified along the entire cable bundle spectrum and as a major internet provider should benefit from the net neutrality fiasco. Plus, like Disney, Comcast owns a major network, a movie studio, an animation studio, and theme parks. Content is king, and there is no reason Comcast cannot compete with Disney in the Netflix (NFLX) and Amazon (AMZN) streaming wars. CMCSA is currently presenting as attractive in our three favorite valuation multiples: price to sales, price to cash flow, and enterprise value to operating earnings.

Elephant Analytics: I have been primarily focusing on upstream energy companies, and believe that Halcon Resources (HK) has one of the best upsides of those companies. Halcon restructured in 2016 and subsequently sold off all its old assets and became a pure play Delaware Basin producer. It has more than enough cash on hand to carry out its growth plans, with the aim of growing its Delaware Basin production from around 7,000 BOEPD in Q4 2017 to 28,000 BOEPD in 2019.

I believe Halcon's price is currently being negatively affected by continued selling from Franklin Templeton funds, which have sold 13 million shares during the last four months. The Franklin Income Fund ended up being Halcon's largest shareholder when its bonds were converted into post-restructuring equity. However, holding a large amount of Halcon's non-dividend paying common equity isn't exactly in-line with the goal of an income fund. The selling should probably be done in a few months though, and then Halcon should be more fairly valued on its ability to carry out its growth plans.


Thanks to our panel for joining us, we hope that gave you a few good ideas!

Follow this account to get all of the Marketplace year-end roundtables, which will be running through the first week of January. And if any of these authors' approaches interested you, you can follow them or check out their services at the links below:

Tomorrow's Theme: Macro

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: W.G. Investment Research is long BAC, C, PFE, T, CSCO. Long Hill Road Capital is long TRIP.
Chris DeMuth Jr. is long BRK.A, BRK.B, BNCC, TWX, DISH, SNI, TRCO, DVMT, AABA, NPSNY. I reserve the right to make investment decisions regarding any security without notification except where notification is required by law. Disclosed ideas are related to a specific price, value, and time. If any of these attributes change, then my position might change. This post may contain affiliate links, consistent with the disclosure in such links.
David J. Waldron is long DIS.
Jason Phillips, CFA is long BBBY and UEPS. J Mintzmyer is long NMM. Ranjit Thomas, CFA is long DVA. General Expert is long ROKU. Elephant Analytics is long HK.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.