Fundamental Value returned 27.0% net of fees for the first half of 2021, handily besting the S&P 500’s 15.2% gain. The strategy has now returned 24.9% annualized since inception, outperforming the S&P 500’s 17.2% return by 7.7% annually.1
At less than 6.5x earnings, Imperial Brands -- a UK tobacco firm -- is one of the cheapest stocks we have ever seen for a company with consistent profits. The stock has declined by about 50% since 2017 despite flat EBITDA and profit figures. We believe this is due to Imperial’s underwhelming operational performance combined with the market's infatuation with growth and ESG stocks, two themes which do not include Imperial.
We think investors excluding Imperial on these grounds are falling prey to social conformity bias, which means they are simply aping their peers. At Bireme Capital, this is exactly the type of mistake that we seek to exploit in our Fundamental Value strategy.
In contrast to our investor peers that see a no-growth, unsavory business, we see a company with stable cash flows, beloved brands, and high returns on capital, not to mention the ridiculously cheap earnings multiple. Due to the company’s 8.5% dividend yield, we expect Imperial’s stock to provide satisfactory investment returns regardless of where the stock trades in the short term.
Cogeco Cable is an undervalued Canadian cable company, with shares of Cogeco Inc. trading at about 10x free cash flow and 7x EBITDA. For these multiples you get a company with a near-monopoly on high-speed internet in its Canadian footprint as well as significant exposure to US cable customers.
Cogeco has more than doubled sales, EBITDA, and FCF since 2008, all without growing the share count.
Long term, a strategic buyer is likely to purchase these assets at a significant premium, as Altice and Rogers attempted in the summer of 2020.
After struggling during much of 2020, Fundamental Value enjoyed a phenomenal fourth quarter, soaring 47.1% net of fees compared to a gain of 18.3% for the S&P 500. FV finished the year with a gain of 29.8%, outpacing the S&P by 11.5%. Since inception, FV has returned 23.5% annualized vs 15.6% for the S&P 500.1
Part II: Anatomy of a Bubble
In the first half of the year, Fundamental Value struggled, giving up years worth of outperformance in two quarters. In the third quarter, FV outperformed slightly, but not nearly enough to claw back its losses. FV is down -11.8% net of fees in 2020, compared to a gain of 5.5% for the S&P 500. Since inception, FV has returned 12.3% annualized vs 13.5% for the S&P 500.1
Part I: Birth of a Bubble
In Q1, FV had its worst result ever, down -26.4% net of fees. It is of little solace that the broader market was down as well, with the S&P 500 falling -19.4%.
In our last letter, I tried to convey a sense of urgency while remaining calm and hopeful during this difficult time. However, I have found that sustaining that positive mental state is easier said than done for me personally. Some clients have told me they are struggling as well. Below are some thoughts I wrote for them on maintaining equanimity and hope, both for their investment portfolio and for their health. I hope it is valuable.
We sent out our last letter only two weeks ago on February 27th, warning that although the market had fallen -12% in a week, valuations were still high, and signs of speculative excess and deteriorating fundamentals were legion.
Fundamental Value returned 8.3% for the fourth quarter, slightly trailing the market’s return of 9.0%. For the year, FV was up 29.7% vs the S&P 500’s 31.2% return. Since inception in 2016, FV has beaten the market by 4.4% annualized after fees, returning 19.2% annualized.1
Bireme Capital LLC is an SEC Registered Investment Advisor. Registration does not constitute an endorsement of the firm nor does it indicate that the advisor has attained a particular level of skill or ability. This piece is for informational purposes only. If not specified, quarter end values are used to calculate returns. While Bireme believes the sources of its information to be reliable, it makes no assurances to that effect. Bireme is also under no obligation to update this post should circumstances change. Nothing in this post should be construed as investment advice, and it is not an offer to sell or buy any security. Bireme clients may (and usually do) have positions in the securities mentioned.
THE LOW-VOLATILITY ANAMOLY
For most of its existence (Jan 2010 to today), the S&P Low Volatility Index (SP5LVI Index on Bloomberg) traded in line with the S&P 500 on a valuation basis. However, investor interest in these stocks has grown materially, likely due to academic research showing the outperformance of stocks whose prices varied less than the market.
This interest has meant asset growth for ETFs that employ a low-volatility strategy. For example, AUM for the iShares US Minimum Volatility ETF, USMV, has skyrocketed, up about 15x in the last five years.
Unsurprisingly, the surge in assets thrown at low-vol has resulted in higher valuations, and these stocks now trade at >25x earnings vs 22x for the S&P 500.