Deep value investing is a very specific type of value investing – the kind that “scares value investors,” according to this segment of “The Morning Show” on Motley Fool Live. During the episode, recorded on December 21, Fool analysts Jim Gillies and John Rotonti discuss what deep value investing is and what are the main drivers for true deep value investors.
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Jim Gillies: Deep value has specific and wobbly meaning. It is in no way, form or form Zoom Where DocuSign or anything other than Cathie [Wood] possesses. Deep value usually begins with a misunderstood asset value. You need something to support. Because high-value stocks seem to come at a death price, fools, most of the time. I say this as someone who has managed two value-added services for The Motley Fool over the years. Pay dirt, that’s for sure. I was parachuted into special ops when the original adviser left. Tom Jacobs left and I was put there for about six months before I started anything else. I also brought deep value principles to Hidden Gems Canada. This is my way. Growth stocks are not my path. I absolutely know it. Cathie Wood’s team and most of the rest are much better than I am at growth stock analysis, but you’re in my corner now, Cathie, and you’re completely wrong because you can’t tell me that DocuSign, just let me pull it over here, DocuSign, good company, like I said on this program before. Build a better mousetrap. I bought houses before without DocuSign, I bought houses now with DocuSign. There is no doubt which is the best methodology. Equity regimes. Equity plans before DocuSign, equity plans after DocuSign. DocuSign is better. We are not saying that DocuSign is not a good company. DocuSign at 15 times sales and unprofitable? It’s not unprofitable because things have broken down in the business and management needs to get back on its feet and so it looks a lot worse than it actually is. They are unprofitable because they distribute fairness cookies to insiders. This is a company that has spent over one hundred percent of the free cash flow it generates to buy back stock, and the stock continues to dilute at 6.7 percent a year. Pass this through your DCF, Maria. Maria is like no, because I know the answer. [laughs].
John Rotonti: Deep value is a specific subset of value investing.
Gilles: Yeah. It is value investing that scares value investors.
Rotonti: In its traditional form, it is the cigar butt investment. It’s about finding a stock that you think has a puff left on that cigar. A puff that can give you a 20, 30, 40, 50 percent pop before the cigar dies forever. I have spoken over the years, Jim, to a handful of real high value investors and their guiding principles are 10 times free cash flow, so 10% free cash flow return.
Gilles: Ten times the value. You do more metrics.
Rotonti: You are quite right. First of all, they want to enhance this balance sheet. You are quite right. Hidden asset value.
Gilles: Its investment in the balance sheet rather than in the income statement.
Rotonti: It is a balance sheet investment. You are trying to reproduce what it would cost a competitor to recreate this balance sheet, therefore to reproduce the value of this balance sheet. This is absolutely correct. It’s an investment in the balance sheet, it’s an investment in net asset value, but then statistically they looked at a 10 percent free cash return, they looked at 10 times earnings, and they looked at less than 10 percent. ‘once the book value. Statistically, these are the metrics that motivate true high value-added investors.
Jim Gillies has no position in the stocks mentioned. John Rotonti is the owner of Zoom Video Communications. The Motley Fool owns and recommends DocuSign and Zoom Video Communications. The Motley Fool has a disclosure policy.
