Tobias Carlisle has authored The Acquirer’s Multiple (2017), Concentrated Investing (2016), Deep Value (2014), and Quantitative Value (2012), following an early-2000s career switch from corporate law to investing.
As a lawyer in the post-dotcom bust, Carlisle worked on several activist takeovers involving wealthy investors in failing technology companies that had more cash on their books than their share prices reflected.
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It is this that lays the foundation for what Carlisle defines as “deep value”. Unlike some other valuation techniques that base returns on forecasted revenues, this method is more conservative and based on revenue and cash accruals within the organisation. The economic value of an organisation is the sum of the market capitalisation, debt, and some other borrowing like preference shares, said Carlisle. Then comes the cash reserve that may be used towards a share buyback, as in the case with Apple’s [AAPL] stock. This, however, is not the end of the vetting process. Carlisle outsources a forensic audit where lawyers comb through filings to see if there are any unusual liabilities that are depressing a stock’s value – for example, a pending lawsuit.
Once that is done, it is not necessary to wait for a run in the stock after buying. A large investor can trigger a run in an undervalued stock by simply attaching a note or letter at the end of regulatory filings when they buy a share. According to Carlisle, “It's a convenient mechanism to get a big position, and then you write this letter and attach it to your 13 D filing, and it gets a whole lot of press attention.”
“It's a convenient mechanism to get a big position, and then you write this letter and attach it to your 13 D filing, and it gets a whole lot of press attention”
Carlisle explains this as the reason Tesla [TSLA] would not fit in Acquirer’s investment philosophy. The company’s stock is currently trading around $1,000–$1,100 apiece. However, based on its turnover, the value in the stock is around a mere $150, Carlisle said. In contrast, Lockheed Martin [LMT], based on the back of the envelop calculations, has an earnings capacity of around $330 apiece. The stock is currently trading close to $340.
These kinds of value buy are most concentrated in micro and small companies at the moment, Carlisle said. Last year, he took over a large-cap fund and changed its investment strategy to small caps because of the unique opportunity that lay ahead.
That said, Carlisle suggests there are still plenty of opportunities in a middle ground between the low volatility of large-cap stocks and the growth potential of small-cap shares. He told Opto: “mid-cap is sort of my favourite part of the market… it has the return characteristics of small and micro, but it has the [reduced] volatility of large-cap.”
To hear more insights from Carlisle, listen to the full episode on Opto Sessions.
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