4.5x EBITDA, 53% of Book Value, Recession Resistant
Today’s stock:
4.5x EV/EBITDA.
53% of adjusted book value.
Recession resistant.
40+ years of consecutive profits.
History of well-timed stock repurchases.
We’ve got a problem in this country.
On just about every metric the stock market trades at nosebleed valuations.
The S&P is down 10% ytd. The Nasdaq is off 15%.
But it doesn’t matter. Prices would still need to fall by a lot to get to historical average multiples. The S&P would need to drop ~38% from here to get to its long-term average P/E ratio.
“Shut up Dirt. Nobody cares about P/E.”
“Dirt you idiot - this market cares about chips. Not earnings.”
Maybe you’re right. Maybe markets have turned a new leaf. Maybe it’s different this time.
It’s not just large companies that are richly priced. It’s small ones too.
I spent last weekend flipping through my old Walker’s Manual. I played this little game. I’d close my eyes, turn to a random page, and take a look at the company listed.
Then I’d do the same with an OTC stock today.
Let’s play real quick:
First, the Walker’s Manual. And our company is… Kopp Glass, a manufacturer of industrial glass products. It traded at 38% of book value, 11x earnings and paid a 12% dividend in 1992.
Now let’s spin the OTC wheel and see what we find today… High Sierra Technologies Inc. It has a $20 million market cap. $5,000 (yes, five thousand dollars) of revenue. Negative book value. According to the company’s website, it produces low odor cannabis and hemp products. Good news fellas! If you get raided by the feds, you’re only carrying a misdemeanor level of dope!
I think my dealer in college was doing more than $5,000 of revenue.
So the U.S. is the most expensive major stock market in the world. The median company sucks. Venture capital and private equity absorbed most every reasonable business that would otherwise be public.
What do we do?
Fortunately, we don’t have to own an index. We can own any business we want. On the margins there are still bargains.
Today’s stock benefits from inflation, has grown through recessions and consistently cranks earnings.
Plus, there is substantial hidden real estate value.
The stock trades well below book value, and at all-time lows in terms of price-to-replacement-cost.
It’s a stable, growing business for a bargain basement price.
It’s not sexy, it won’t pop 100% with next quarter’s earnings release. But it’s profitable, cheap and differentiated from today’s broader market.