Deep Value: Why Activists Investors and Other Contrarians Battle
for Control of Losing Corporations (WILEY; August 2014:
Hardcover & e-book; $85; ISBN: 978-1-118-74796-4) is a must-read
exploration of the philosophy of deep value investment. Written by
Tobias Carlisle—an active deep value investor and the well-known blogger
at greenbackd.com —
this important resource describes the evolution of the various theories
of intrinsic value and activist investment from Benjamin Graham to
Warren Buffett to Carl Icahn and beyond. Filled with engaging anecdotes,
penetrating statistical analysis and meticulous research, the book
illustrates the principles and strategies of deep value investing and
examines the counterintuitive idea behind its extraordinary performance.
“Deep value is investment triumph disguised as business disaster. It is
a simple, but counterintuitive idea: Under the right conditions, losing
stocks – those in crisis, with apparently failing businesses, and
uncertain futures – offer unusually favorable investment prospects,”
explains Carlisle. “This book is an investigation of the evidence, and
the conditions under which losing stocks become asymmetric
opportunities, with limited downside and enormous upside.”
Carlisle presents an insider’s perspective on valuation and activism in
a format that is accessible to both professional and general investors.
The value investment philosophy as first described by Benjamin Graham
identified targets by their discount to liquidation value: the most
conservative estimate of value. This approach has proven extremely
effective; however, those opportunities have all but disappeared from
the modern stock market. To succeed, today’s deep value investors have
adapted Graham’s philosophy, embracing its spirit while pushing beyond
its confines. Carlisle examines Graham’s 80-year-old intellectual legacy
using modern statistical techniques to offer a penetrating and highly
original perspective: That losing stocks—those in
crisis, with apparently failing businesses, and uncertain futures—offer
unusually favorable investment prospects.
Each chapter tells a different story about a characteristic of deep
value investing, seeking to demonstrate a genuinely counterintuitive
insight. Through these stories, it explores several ideas demonstrating
that deeply undervalued stocks provide an enormous tail wind to
investors, generating outsized returns whether they are subject to
activist attention or not. It begins with former arbitrageur, and option
trader Carl Icahn. An avowed Graham-and-Dodd investor, Icahn understood
early the advantage of owning equities as apparently appetizing as
poison. He took Benjamin Graham’s investment philosophy and used it to
pursue deeply undervalued positions where he could control his own
destiny.
As a portfolio, deeply undervalued companies with the conditions in
place for activism offer asymmetric, market-beating returns. Modern
activists exploit this property by taking large minority stakes these
stocks and then agitating for change. What better platform than a
well-publicized proxy fight and tender offer to highlight mismanagement
and underexploited intrinsic value, and induce either a voluntary
restructuring or takeover by a bigger player in the same industry?
Carlisle adds, “Investors aren’t rewarded for picking winners; they’re
rewarded for uncovering mispricings – divergences between the price of a
security and its intrinsic value. It is mispricings that create
market-beating opportunities. And the place to look for mispricings is
in disaster, among the unloved, the ignored, the neglected, the shunned,
and the feared – the losers. “
Deep Value is a practical guide that reveals little-known
valuation metrics that activist investors and other contrarians use to
identify attractive, asymmetric investment opportunities with limited
downside and enormous upside—undervaluation, large cash holdings, and
low payout ratios. These metrics favor companies with so-called lazy balance
sheets and hidden or unfulfilled potential due to inappropriate
capitalization. Activists target these undervalued,
cash-rich companies, seeking to improve the intrinsic value and close
the market price discount by reducing excess cash through increased
payout ratios. The book analyzes the returns to these metrics, and
applies them to two recent, real world examples of activism. The power
of these metrics is that they identify good candidates for activist
attention, and if no activist emerges to improve the unexploited
intrinsic value, other corrective forces act on the market price to
generate excellent returns in the meantime.
Contact the publicist:
Melissa Connors
Publicity Manager
mconnors@wiley.com
201-748-6834