My last post talked about my purchase of Lexington Realty Trust (NYSE: LXP) during the financial crisis. I sold most of my shares when they recovered, but I still hold a few. I have it on my radar and have watched it drop over the last several months. It looks interesting again.
My Basic Thesis on LXP
My basic thesis for this company is that funds from operations are going to be in the $1.00-$1.10 range and that any price under $7.00 per share allows for a payback period of just over six years.
Another way to look at it is by valuing the assets. Book value is not a good indicator for REITs because depreciation is a continual drain on assets at the same time that those assets could actually be increasing in value. Just basic back of the envelope valuation would look at NOI in the most recent quarter of $88 million annualized to about $353 million. Apply a capitalization rate of 7.5% to this income and you get an asset value of $4.7 billion. This is $1.3 billion above where property assets are held on their balance sheet. Adding this on to their book value would indicate a market value of equity of $2.8 billion, or $11.35 per share.
My lovely wife asked me to answer a question on value investing from a friend and what the main criticism of value investing would be. Below is my response:
The efficient market hypothesis is the primary criticism. Its validity is apparent if you go and do the math on a particular company. I would encourage you to try it. Pick a well-known company with a good balance sheet and consistent earnings. Estimate the growth in earnings over 10 years or so. Discount those earnings back at a rate of return that you find acceptable (say 15%). I bet you find that the price of the company is higher than the value you determined.
One the beneficial aspects of even having a stock market is that it provides so many diverse businesses that one can invest in. Because there is so much diversity, there is likely value somewhere. The key is identifying where there is value and then doing the due diligence to determine if the investment makes sense. The headlines in the news can point the way. After that, almost all the data you need can be accessed in seconds. All the rest is up to us to figure out. So where is there value today? I have identified a few places to look.
Matthew Frankel of the Motley Fool recently published a post entitled 9 Rules That Helped Warren Buffet Produce a 1,826,163% Return in 50 Years. This brought to mind several ideas to keep in mind when building a portfolio of stocks.
When it comes to investing, my first inclination is to seek value. I want to take advantage of the market mispricing a company and their prospects. People from the established investing world might read this and think of low P/E stocks, but I think value can manifest itself in a variety of ways. Here are three ways that I look for value.
Welcome to Investing Odyssey. I have missed financial writing as it really does help me make better investing decisions. On the about page you can learn more about me and my track record. Other than that, I’m ready to get started!