Joel Greeblatt interview with Fox Business news on Alphabet, Amazon.com, Inc. (NASDAQ:AMZN), Berkshire and other investing topics from March 2nd 2018 – below are the video embeds and an informal video transcript on an excerpt from the interview – see below
Finding Value In Spin-offs
Some of the best trades during the past few years have been spin-offs. Of course, I'm taking about deals like Kraft Foods Group Inc (NASDAQ:KRFT) / Mondelez International Inc (NASDAQ:MDLZ) and ConocoPhillips (NYSE:COP) / Phillips 66 (NYSE:PSX) both of which have continued to achieve record performances year-to-date. What's more, there are a number of spin-offs Read More
Gotham Asset Management managing principal Joel Greenblatt explains why he says Amazon is a unicorn.
Sure well you know the stock market is just a bunch of stocks added up together and that's the way we look at it. And stocks are ownership shares of businesses so we actually go around and value each individual business. So if you think about the S&P 500 got 500 stocks the weighted a certain way based on their market cap. And we value them daily and we've done that for the last 27 years individually and then we add them all up and rank them the way the market does. And right now we're in the 16th percentile towards expensive over the last 27 years. What that means is the market has been cheaper 84 percent of the time more expensive 16 percent of the time that we can go back and look at what's happened from this valuation level in the past and what's happened is is that from this valuation level in the past of stops your Ford returns of average 3 to 5 percent to your Ford 8 to 10. So below normal because the market's average about 10 percent a year for those 27 years. And this is 3 to 5 percent and that makes sense because the market's more expensive than it's traditionally been. But importantly not negative expected returns. Now of course we can't tell you what's going to happen in the next year. And the way we can get back to those 10 percent expected returns could be in a few ways. 1 The market could fall 18 percent tomorrow.
The other is it doesn't have to do that it could just under černý maybe 3 to 5 percent for the next three years and then three years from now we'll be back to 9 or 10 percent expected return. So I can't tell you what's going to happen in the short term but it gives you a perspective of where we stand shoulder with all of that perspective Joel where are you finding value in this market right now. Well I just told you about the S&P 500 in the 16th percentile. Well the Russell 2000 which is stock number 1000 1 through 3000 those are the small caps that's in the second percentile meaning it's been cheaper 98 percent of the time over the last 27 years so as you would expect we're finding more value in the large caps and the small cap index is expensive. We don't short that index short the most expensive stocks in that expensive index.
So our opportunity set is really in small caps so so small casual so have have created opportunities but they've gotten expensive. So you want to be shorting them small caps.
Yes that's exactly what we do. So the opportunity set on the long side is in the large caps and on the short side it's mostly in the small caps although there are plenty of high priced. The market is expensive even LargeCap. So in an expensive market if we short the most expensive stocks there are opportunities there as well.
Yeah I mean there was a lot of discussion about the small in the mid cap area around the tax plan because these smaller companies are getting a huge benefit having the tax rate corporate rate go from almost 40 percent to 21 percent.
But as the large caps today that you say you're finding opportunity. Tell me how the dollar fits into that. Joel because as the dollar has traded. That has been a negative for these international companies. But of course we've seen such volatility and most recently the dollar is down. You think that continues.
Really we don't think about the world that way. We're looking more long term you know we're looking for earnings over years and the dollar is not too far out of line with other currencies. If you look at the long term perspective what it's going to do in the short term I haven't found many people are very good at predicting that. So we are looking at streams of earnings over many years the next five or 10 years. And so what happens in the very short term is really not going to affect us some of the large cap companies have a lot of international business some don't.
Yeah I think you're absolutely right and a lot of people recently have been talking about the emerging markets creating an opportunity year. Finally we're seeing some growth numbers coming out of Europe these large caps that you are investing in are benefiting from the recovery we're seeing across the world. Correct.
Sure we that's true because a big chunk of their businesses international but we are very U.S. centric and what we do especially in the long short portfolio is where we don't have to balance currencies and trading costs and things of that nature and so we focus mostly on the on the U.S. and of course U.S. companies do benefit from international business as you know.
So do you think that this market has gotten ahead of itself. I mean are you expecting the volatility to continue and importantly the declines.
Well you know we've had actually very smooth until most recently a very smooth period of time which is not normal. And so obviously I think the volatility will pick up from what's happened over the last couple of years and I think that's good news for stock pickers. You know there will be opportunities and discernment rather than just a steady flow. So I think that's for value investors like us. That's good news.
And again when you find value is it a specific sector or are you actually looking at specific situations stock situations can you share with us. Where the value is.
Sure well you know I could name a few longs that we like Apple as you know the biggest company but we still love it. You know some people think it's just a hardware company that's going to crash and burn like all of them do other people say no it's a network. It's an ecosystem of products that play off one another. The answer is probably grey between those two. But it's trading cheaper than the market it's it grows much more than the market. It's a very good business. They have a great niche. So we still love Apple and we own a bucket of apples. These are things that gosh cash earned high returns on capital. We own Boeing which is a duopoly. No there's really only one real competitor and they are selling cheaper than the market get growing faster than the market with a better market position. We're also long Google which if you take out the cash is trading well below the market and obviously has a great business. So you know some of the big names believe it or not are still relatively good values.
You know it's interesting to hear a value manager talk about technology for the longest time we thought about these tech companies as the growth story is not the values stories but you're right. You look at what it's trading at right now and it's it's got to represent value because it's trading below the broader market.
Well besides the fact that even Warren Buffett likes it what's good about it is that it's really got a pretty sticky business it's got a brand name that people love. You know Coca-Cola has been in business for a long time and it's just sugar water and. But people like the brand and so Apple has that going for us but more importantly it's also an ecosystem of products that work together and so it's far better than the average business gets much better returns. It's got a loyal fan base. And so if you can buy that cheaper than the market that's at least on a relative basis a good deal. And so. So we like it going as I said is a duopoly that's very hard to create that big barriers to entry so you know also great business. And everyone knows about Google that even though it's a little cheaper than the market it's much much better than the average business and much stick your business. So these are great relative bargains and should get us reasonably nice returns better than.