This is the best buying opportunity since 2020
Discounts in plain sight
I think the market is extremely cheap right now due to indiscriminate selling of companies with fortress balance sheets and great 2022s ahead. This market selloff has given these opportunities the chance to buy back their own stock at cheap prices and increase earnings per share permanently.
Indiscriminate selling
First, I have fairly high conviction we are seeing indiscriminate selling not related to business fundamentals. A while back I wrote in my post Evergreen Personal Finance Strategies:
People say these [buying opportunities] are hard to identify at the time, but in my mind all are marked by media panic, CNBC “special” coverage, 10%+ corrections and media saying stocks are a dead asset class. Most everyone will say the market has lower to go at times like these, and it probably does – but missing the exact bottom is not punitive over a long-time horizon… I think it’s important to remember that when everyone turns bearish on the market, there are no sellers left. People who are going on TV expressing caution and dire warnings have already sold.
If you use Twitter, I encourage you to open up your feed and check out the extreme bearishness happening. A snapshot of WSJ’s front page right now also shows you the consensus focus on stock market declines, tech blowing up and war:
Other blogs have covered this but sectors that should be inversely correlated or not correlated at all are trading in lockstep downwards (check out MSOS and ARKK, or NCMI and megacap tech, or CROX and ZM).
Q1 earnings seem not to matter at all. Several companies I follow beat and raised, including CROX and PENN, and the stocks all sold off.
Watch the business - companies are posting strong results and buying back stock on cheap
I wrote a few months back in Is Saas Cheap Yet:
Start with the idea that I want to get a 10% annual return by the time my non-existent kids are old enough to help run the business (so say 25 years from now). I want my return to only come from cash the business can generate, because remember I can’t sell the business (note - this can include terminal value of cash flows). When the kids take over (“take over” - read on for more), the business should be worth more than 10x+ what I paid for it (1.10^25)
My point in this entire piece was really borrowed from Buffett’s thoughts around owning a business and not stocks. The Oracle most recently expressed this idea in Berkshire’s 2022 Q&A:
If you -- going back to investing, I mean, investing is laying out money now with the hope of getting back more later on. It's really laying out purchasing power not without getting more purchasing borrower back. But that's the reason. And that's the way you learn it in the textbook, you defer consumption now so you can consume more later on so that you can take care of your family, all these things about how investment takes place.
And that is what happens with farms. I mean that somebody buys the farm and they generally they leave it with their kids or they got it from their parents. And I mean they don't sit there every day and get quotes 15 times a day and say, "I'd like to get a call. I'd look to sell a put on those farms next to me. You can have a call on mine. And then we'll have something called a straddle or a strangle or whatever it may be. They just -- they go about making the farm worth more money. And they do the same thing if they got an auto dealership and they do the same thing if they got an apartment house. They look for proven track tenants, all those kind of things.
If I think a business can return 10%+ for close to forever, I’m going to buy it no matter what the general market is doing. In fact, I always prefer to buy at the lowest multiple to cash flow possible to get even more margin of safety on those returns. I get this is obvious to many readers, but I think what is not being talked about enough is many companies are improving their terminal value and seeing their stock prices go down.
There are many businesses right now beating expectations and buying stock back aggressively. Casinos are among them. I’m doing a podcast tomorrow with IBET portfolio manager Jeffrey Kamys (see my last podcast with him here) and in researching PENN and MGM I was impressed with both their Q1s and aggressive buyback strategies. On PENN:
Record quarter:
Now transitioning to our first quarter results. You'll see on Slide 5, we achieved record first quarter revenues of $1.56 billion and adjusted EBITDAR of just under $495 million, which grew 23% and 11%, respectively, over 2021 levels driven primarily by strong property level performance across all segments, including the older core demographic who are reengaging through both increased visitation levels and spend per visit. We're also encouraged by the ongoing visitation of our younger demographic. We remain focused on reimagining our properties and offerings to enhance the entertainment appeal to the steadily growing segment of customers.
Buybacks:
Now talking about share repurchases, we were quite active in the quarter under our share repurchase authorization given our view that the market was undervaluing our shares. We repurchased 3.8 million shares of our common stock in open market transactions for $175.1 million at an average price of $46.04 per share. There is $574.9 million remaining under our $750 million authorization. As I mentioned on our fourth quarter earnings call, our balance sheet gives us the flexibility to be opportunistic in a dynamic marketplace and to return capital to shareholders. We continue to see a dislocation between where we value our shares and where they are currently trading, and we expect to allocate capital accordingly if this dislocation persists.
…Yes. Thanks, Shaun. Yes, I think that we're going to continue to be opportunistic. So as you know, we've already repurchased 175.1 million shares. And if you go back to the K, I think, we reported that we did about $107 million. So we were obviously active in March for as long as we could be, which got us to that average price of roughly $46. With our stock where it is now, I think it's fair to say that if we thought our stock was undervalued at $46, we think it's undervalued in the high $30s.
And so we'll be in the market again, but it's going to be opportunistic. And I talked about our strong balance sheet and our liquidity. And so we're just in a really fortunate place to be able to be nimble and take advantage of the dislocation that we see.
PENN stock closed at $31.87. Think the company might be looking at swooping up its own shares?
One more point here is I often hear that despite great Q1 results, inflation and an imminent recession will slow the consumer down. While that may be true in some sectors, there are a number of recession-resistant industries where this isn’t true (and I don’t think we’re headed towards a recession). From the PENN call:
Thanks, Shaun. So I'd put us in the camp with really nothing to see here [BB note: re: consumer slowing down. Even going into April and now into May, just based on where our properties are and I guess, to give a little more color to what Joe asked as well. That lower end, so look at it kind of that 0 to 49, that's really down less than 0.5%, 0.3%. But really, we're making that up on the 50 to 99, which is up 3.7%, the unrated, which is up 5.4%. And we're seeing really positive visitation.
When we kind of slice and dice our database and look at not only the work segments, but also kind of the geo location. We are seeing anybody that most of our customer base is within 50 miles just based on where our properties are located. So everything in there is actually trending very well.
As Jeffrey noted in the podcast, sports gambling is going to CAGR easily at 15% at the industry level for years. The companies involved are going to realize higher margins on the online segment and will see CAGR go up even more aggressively. California may legalize sports betting next year. Is this priced in with many casinos trading at their old brick and mortar multiples?
I’m viewing the current selloff as a chance to buy companies I already thought could provide 10% IRRs at 20-30%+ discounts. I have high conviction the management teams will use this dislocation to buy back stock on the cheap and boost terminal value per share. Q1 suggested to me the idea that inflation / recession will destroy terminal value for all companies is simply false. Management teams are disagreeing with analysts suggesting that on calls and putting their money where their mouths are with buybacks.