By Joel M Shulman Ph.D., CFA, ERShares Founder & CIO
Perhaps lost among investors in their mad dash to buy value stocks is the potential to bid up deep discount equities well beyond reasonable levels. While it is commonplace to bemoan the valuation of Tesla, which at 7X return in 2020 and an $800B market cap, would be on track to eclipse global GDP in less than 3 years. It is perhaps less commonplace to recognize over-exuberance among so-called value stocks. This may no longer be the case. Take for example a few of the neglected companies now approaching record price levels. This list includes well-known entities such as Marriott, Bloomin’ Brands (parent to Outback Steakhouse, Bonefish, etc.), and SeaWorld. Avis is also nearing a 15-year high and gets honorable mention for this list. Notwithstanding the compelling case that each of these companies deserve a healthy step up from pandemic bottoms, the height of current levels borders absurdity to even the most optimistic, rational investor.
Case in point. Marriott International, a longstanding beacon in the hotel industry, boasts a 94-year history, 7600 properties, and 30 hotel brands in 133 countries. Last year its revenues dipped 50%, coupled with plummeting margins, rising costs, skyrocketing debt levels, and other significant obligations coming due soon. If that weren’t crippling enough, heavily fortified, cash-bearing new entrants such as Airbnb, recently entered the arena with a disruptive approach that threatens the very underpinnings of the hotel industry. These new pioneers provide a variety of accommodations, without burden of capital investment, annual maintenance, or SGA infrastructure. This is almost identical to the case of Uber and Lyft who completely gutted the cab industry through disruptive technology. Moreover, as competitors feast on Marriott’s market share, the parent had to contend with a mountain of debt service arrangements, rising interest rates, and a never-ending supply of angry timeshare owners. Given these reasons it seems very perplexing to witness Marriott’s stock price anywhere close to an all time high level. Perhaps even more surprising than Marriott would be the examples of SeaWorld, Bloomin’ Brands, and Avis. In the past year, each of these companies has been flirting with bankruptcy, yet the first two rest at an all time high price.
SeaWorld Entertainment, still smarting from a 2013 film (Blackfish) and global campaign to boycott and shut down the enterprise, has experienced a catastrophic drop in attendance (81%) while fending off rumors speculating bankruptcy. An examination of the balance sheet suggests a healthy level of cash, but it belies the $2B of expensive debt recently raised (9.5% coupon) which was primarily used to cover past losses and resupply depleted working capital accounts. Recognizing that post-pandemic attendance will surely rise from the prior year’s debacle, it is still unclear how investors could price this stock to an all time high given longstanding neglect to property, plant, and equipment, and future debt hurdles. Bloomin’ Brands provides another puzzle to the over-priced “value” company situation. Parent to familiar brands such as Outback Steakhouse, Bonefish, and Carrabba’s Italian Grill, last year this company experienced significant drops in gross margins and revenues along with soaring debt levels. It has current lease and debt obligations that exceed short-term cash levels yet not unlike the other examples, this stock price has also recently reached the prized all time high accomplishment.
Each of these four examples undoubtedly warrants an increase from pandemic levels. However, it remains a mystery how investors can justify current all-time high price levels. In recent weeks we have witnessed high-flying tech companies fall, on average, 20-30% from market peaks, and in some cases as much as 50-60%. The latter appears to be a floor to the price drop. By contrast, strongly bid-up value stocks have the potential to drop much further. As Hertz, Sears, JCPenney, and other fallen angels have demonstrated quite clearly, the floor to an overvalued, debt-intensive company is not 50 or 60%, but rather 100%. Buyers beware. Price levels corresponding with Marriott, Bloomin’, Avis, SeaWorld, and other overpriced value stocks are vulnerable to a major correction without a chance for recovery. We maintain that investors need to be very careful in buying value stocks now. The value no longer exists in the traditional buckets contained within the Dow Jones and S&P 500. We maintain that it has reverted back to Tech. Prices are low, and we can see an extended rally for a few more weeks.
