Sam Zell is one of the market’s most successful and influential real estate investors. Zell is the Chairman of Equity Group Investments, the private investment firm he founded in 1969 and also chairs five public listed companies including Equity Residential, the most substantial apartment REIT in the US.
The latest issue of Goldman Sachs’ Top of Mind research newsletter features an interview with Zell. Within the interview, he discusses the current state of the equity markets, where he’s finding value today, and his views on the US real estate market.
Sam Zell Value Hunting In Today's Market
Zell's interview starts by discussing his outlook for the economy. He can't offer much of a guided view but does believe that the election of Donald Trump has dramatically increased business optimism, which has given more life to the bullish business environment.
And despite all the noise surrounding the Trump administration, Zell believes that the president has made significant headway on deregulation. Proposed changes to Dodd-Frank are just one of the factors helping improve optimism in the business community.
Even if tax reform hits a wall, Zell is still positive on the outlook for US growth:
"I think tax legislation will be passed and will definitely feature a reduction in the corporate tax rate, likely some adjustments on the taxation of repatriated income, and maybe some reduction in taxes for middle-to-low-income people. Beyond that, I don't have much expectation for significant tax reform. And if it fails to pass, I think the opposition will be blamed, not Trump."
However, despite his views about the US economy, Zell believes that some assets are showing signs of stress. Specifically, Zell points to "opportunities when day-to-day activities don't make any sense to me:"
"I tend to see those opportunities when day-to-day activities don't make any sense to me. And there is probably nothing more relevant to seeing around the corner than assessing supply versus demand. For example, when I see people building office space without being able to identify the future tenants, as I do today, that is a warning sign that supply is engulfing demand."
As well as commercial real estate, Zell is skeptical about the valuation of Tech firms. He says that in order to justify the multiple
that Amazon trades at today, "the company would have to be worth 25% of the US economy five years from now." The company could grow to this size, but it's highly likely US policymakers will step in to restrict the business's influence if it becomes such a major part of the US economy.
"I'm also generally concerned about the size, scale, and influence of these companies, which I think is out of hand and dangerous to our overall society. Absolute power corrupts absolutely, and these companies are being set up to do exactly that."
Big tech has undoubtedly dominated the minds of investors all over the world this year. With these companies growing at the rate they are, it makes sense to want a piece of the pie. But while fund managers and private investors rush to get in on the action, Zell is finding pockets of value in the corners of the market, corners other investors have overlooked.
"The most crowded areas are in technology, applications, “disruptions,” and all of the magic words that are driving people today. But the excitement over them doesn’t make them compelling. In many cases, I don't think you're getting paid for the risk involved—and the risk, by the way, may be unbridled competition.
By contrast, I see opportunities in much more mundane areas. For example, we made a big investment this year in a trash-hauling business. We're building waste-to-energy facilities. We've been buying refineries. We're looking at agricultural investments. These are all assets that people value inappropriately, in my view. And, while perhaps less flashy than tech, that's the kind of stuff that I'm always looking for."
Put simply, even though some regions of the market look undervalued, Sam Zell believes that there are still bargains out there, and he's putting his money where his mouth it.
Zell isn't the only fund manager still finding value. In the latest issue of ValueWalk's exclusive magazine Hidden Value Stocks, we profiled two value hedge fund managers who each discussed two separate value stock picks.