Value Does Not Have To Mean Cheap: ANGI A Good Example
It’s a scenario value investors dream about: a growing company whose shares are selling at a statistically cheap price. Of course, these types of stocks can be hard to find—and the search for them may lead you straight into a value trap. But just as a stock selling for a low valuation doesn’t always mean a bargain, a richly valued stock doesn’t always mean value investors ought to automatically look elsewhere. The Boyar Value Group recently identified one high multiple stock that may be worth paying up for. Keep reading to find out more.
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People like to categorize investors into clearly delineated categories like growth investors and value investors. But in some sense, I’ve always felt like everybody is a value investor. After all, who wants to overpay for a stock? I doubt there are many successful growth investors out there who make a deliberate decision to overpay for a stock. They buy it because they think it’s worth more than what they’re paying for it.
It has not just been rough year for David Einhorn’s own fund. Einhorn’s Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500’s return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More
Here at The Boyar Value Group, we’re technically value investors-it’s in our name, after all. In reality, however, we consider ourselves opportunists. When we look for value, we look for stocks that cost considerably less than what a knowledgeable acquirer would pay for the whole business. That means looking for characteristics that might not necessarily show up in traditional valuation metrics-things like network effects, valuable real estate, or underappreciated brand power.
The Limits Of Low Valuations
Screening for value opportunities solely among low-valuation stocks could miss stocks that have realized some of their intrinsic value but still retain a large amount of potential upside. A stock that has advanced significantly from its lows or one that is richly valued shouldn’t necessarily stop you from taking a closer look, provided you believe the business has specific attributes or competitive advantages that will produce long-term growth.
As I’ve written before, there are two crucial steps to avoid value traps: a firm conviction in a company’s potential and a catalyst that will help realize that potential. When it comes to richly priced securities, that conviction is even more important, because the downside risk is much higher. For that reason, it takes more compelling evidence of potential upside to make us comfortable with a high-valuation stock. In particular, we look for things like size of the addressable market, underpenetrated markets, sectors or industries that offer unseized opportunities for market disruption, and significant competitive advantages.
Recent Example: PayPal (PYPL)
In 2017, we profiled PayPal in our 45+ year old research service Asset Analysis Focus, which at the time was trading at 40 times earnings. Despite that valuation, we believed its position was unappreciated for several reasons. First, it offered a much simpler, lower-friction online payment method than the contemporary alternative of entering credit card or bank information with every transaction. Second, it had first-mover advantage and greater scale than its competitors, having established strong network partnerships in the digital space. An investor who dismissed PayPal out of hand because of its valuation in 2016 would have missed out on its share price nearly quadrupling to around $190.
High Potential In A High Valuation: ANGI Homeservices Inc
ANGI Homeservices Inc (NASDAQ:ANGI) is the largest home-improvement site in the digital space today. Selling at more than 300 times earnings, it is also far from a cheap stock. But it is also undergoing a transformation that, if successful, could not only make it a much more profitable company, but could also significantly increase its market share.
Home improvement has traditionally been a referral business, and the marketplace is severely lagging other industries where services like Uber have made frictionless online transactions commonplace. When I spoke recently with ANGI Homeservices CEO Brandon Ridenour on my World According to Boyar Podcast, he suggested a demographic reason for the slow evolution of the home improvement space: homeowners as a group skew older on average than most categories and aren’t digital natives. But that trend is about to change as millennials purchase homes. They are digital natives. They’re also more used to price transparency and dependable service than the home-improvement industry has historically delivered. At the same time, the coronavirus pandemic could drive more urban-dwellers to the suburbs, potentially increasing the number of consumers seeking home-improvement services.
The World According to Boyar Podcast Featuring Special Guest Brandon Ridenour CEO of ANGI Homeservices – The Boyar Value Group
That trend could magnify the company’s already-sizable existing potential. Ridenour estimates ANGI Homeservices’s total addressable market at $500 billion, with online penetration still hovering below 10%. The company’s potential first-mover advantage in a market that size could be substantial (they have roughly 40% to 50% of the online market). It’s also currently rolling out a new platform that could further extend its competitive advantage by shifting from a lead-development tool for contractors to a full-fledged service provision platform with fixed-price and on-demand offerings. This move has the potential to reduce the power of competitors such as Google, that continue to rely on the older advertising model. As the platform develops and gains traction among consumers, it could attract more service providers as well, generating a virtuous cycle that further separates ANGI from its competitors.
A More Conservative Alternative
Barry Diller’s holding company, IAC, holds an 85% stake in ANGI Homeservices. So, purchasing IAC may be more attractive for investors interested in tapping into ANGI’s growth opportunity who might balk at the high valuation. IAC’s current equity value is ~$10.4 billion. The value of IAC’s stake in ANGI Homeservices and the cash on its balance sheet is ~$9.2 billion. Investors who purchase shares in IAC also get to invest alongside Barry Diller in other early-stage companies, including digital media company Dotdash and Software-as-a-Service (or SaaS) video tools provider Vimeo, at an implied valuation of $1.2 billion, which I believe could easily be a relative bargain compared to their long-term value.
In either case, no matter how expensive the stock is up front, its true value must factor in its future potential. Low valuation or high, conviction is the key to an opportunistic stock purchase.
The author and/or certain Boyar Asset Management clients own all of the aforementioned stocks either individually or through pooled vehicles the firm manages. For additional important disclosures, please visit: www.lp.boyarvaluegroup.com/disclaimer
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Article by Jonathan Boyar via Forbes