Value investing requires one to defy conventional thinking. It requires independent thought.
Right now, the conventional wisdom is: brick and mortar retail is going to be dead soon. Most physical retailers are going the way of Blockbuster Video and Borders books. People are going to buy everything online.
You can see this conventional wisdom in the valuations that the market assigns to the following stocks:
Wal-Mart: 14.98 times earnings
Dillard’s: 11.38 times earnings (a stock I own)
Gamestop: 6.79 times earnings (a stock I own)
Amazon: 171.87 times earnings (!)
Clearly, investors are wildly optimistic on the prospects of Amazon and downbeat on the future of more conventional retail operations. Like most things, I think that the market is getting ahead of itself. They have taken a trend (the rise of online retail) and are getting carried away with it. The amazing innovations that Amazon churns out definitely fuel the optimistic forecast.
For Gamestop, the logic is a bit more easy to understand. Consumers are going to buy more of their video games online directly to their console rather than shop in the store. Maybe. When I look at Gamestop’s actual operating income for the last four fiscal years, I see a much different story:
FY ending 2016: $648 million
2015: $618.30 million
2014: $573.50 million
2013: -44.90 million
In other words, Gamestop has been delivering consistently better results while the market has been losing faith in its prospects as a result of speculation. I do not see a business that is dying.
The point of value investing is to ignore the speculation and focus on what is actually happening and what the company is actually earning. At 6.78 times earnings, Gamestop presents a tremendous margin of safety regardless of its future. In other words, 6.78 years of earnings can pay for the entire company’s market capitalization.
Amazon is the sexiest of growth stocks with amazing prospects for the future. But the stock offers no margin of safety. Gamestop does. That’s why I am taking the unconventional route and owning brick and mortar stores like Dillard’s and Gamestop that the market hates (or is ambivalent to) and passing on incredible story stocks that the market loves.
Keep in mind that Amazon is up 332% in the last five years. Those are tantalizing returns that attract attention and investors. However, following the crowd and chasing returns is not investing. It is speculation. Investing is considering what you, as the owner of the company, are paying for what the company is earning. The logic is that Amazon will continue to grow and continue to be an amazing company. Perhaps it will.
“Perhaps” and “maybe” have no place in an investment operation. Those words are for the track, not for investing. When it comes to my investments, I demand a margin of safety.
PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures.