Isn't debt repayment also a form of investor yield? If the company uses its cash to payback debt liabilities decrease and book value increases. This should directly impact the stock price returns.
Buybacks might be a more powerful signal because in most cases management thinks the stock is undervalued. But debt paydowns implies strong confidence in the company cash flows.
May 23, 2023·edited May 24, 2023Liked by John Huber
John, great piece. Thanks for sharing it! We've been growing in our understanding of the power of low PE's over the long term. We think some of the energy names provide great examples on this potential today.
In the piece we wrote three weeks ago, we talked about how David Einhorn seemed to be shifting his focus to plays with low PE's and can produce returns by returning capital.
Useful presentation - wondering how you think about assessing reasonableness of entry multiples, is it mostly comp vs peers or are you running DCFs? Thanks & keep up the publishing!
I think another core reason many investors focus on a change in multiple is that ultimately most investors are not long-term oriented and a change in multiple is a great way to drive short-term performance. The article I linked below states that the average holding period for an investment is something like 10 months in 2022.
I'm guessing the average mutual fund holding period isn't much better and many investors judge mutual fund performance over short-term periods (e.g. one year performance relative to the S&P500). It's honestly something that has frustrated me quite a bit even outside of the retail investment space. If you look at private equity, which owns a large number of privately held middle market companies, you see a similar short-term focus on maximizing an exit that may occur within a short (e.g. five year) holding period. I've seen companies in this space taking actions that help to maximize the exit multiple, but I think will ultimately hurt the ability of the business to maximize free cash flow over the long-term or that build an interesting story or narrative, but doesn't have much substance if you look under the covers.
Then if you look at the venture capital and startup ecosystem many of the people I see building startups are far more concerned about chasing a maximal valuation versus building a long-term business. This can often chasing fads like blockchain or more recently trying to include AI and LLMs into products where it doesn't make sense.
I guess it shouldn't be surprising that the majority of people want to get rich quickly as soon as possible with minimal effort.
Isn't debt repayment also a form of investor yield? If the company uses its cash to payback debt liabilities decrease and book value increases. This should directly impact the stock price returns.
Buybacks might be a more powerful signal because in most cases management thinks the stock is undervalued. But debt paydowns implies strong confidence in the company cash flows.
John, great piece. Thanks for sharing it! We've been growing in our understanding of the power of low PE's over the long term. We think some of the energy names provide great examples on this potential today.
In the piece we wrote three weeks ago, we talked about how David Einhorn seemed to be shifting his focus to plays with low PE's and can produce returns by returning capital.
https://specialsituationinvesting.substack.com/p/shadowing-david-einhorn#details
Useful presentation - wondering how you think about assessing reasonableness of entry multiples, is it mostly comp vs peers or are you running DCFs? Thanks & keep up the publishing!
Link is not working for some reason
I think another core reason many investors focus on a change in multiple is that ultimately most investors are not long-term oriented and a change in multiple is a great way to drive short-term performance. The article I linked below states that the average holding period for an investment is something like 10 months in 2022.
https://www.etoro.com/news-and-analysis/in-depth-analysis/the-costs-of-rising-short-termism/
I'm guessing the average mutual fund holding period isn't much better and many investors judge mutual fund performance over short-term periods (e.g. one year performance relative to the S&P500). It's honestly something that has frustrated me quite a bit even outside of the retail investment space. If you look at private equity, which owns a large number of privately held middle market companies, you see a similar short-term focus on maximizing an exit that may occur within a short (e.g. five year) holding period. I've seen companies in this space taking actions that help to maximize the exit multiple, but I think will ultimately hurt the ability of the business to maximize free cash flow over the long-term or that build an interesting story or narrative, but doesn't have much substance if you look under the covers.
Then if you look at the venture capital and startup ecosystem many of the people I see building startups are far more concerned about chasing a maximal valuation versus building a long-term business. This can often chasing fads like blockchain or more recently trying to include AI and LLMs into products where it doesn't make sense.
I guess it shouldn't be surprising that the majority of people want to get rich quickly as soon as possible with minimal effort.
Hi - very nice presentation. The link to it stopped working for some reason though. Looks like the permissions have changed