MGM and VICI: Finding Value in the Las Vegas Selloff | Value Options Podcast

SPEAKER_1 (0:01)

This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18 plus.

SPEAKER_2 (0:26)

Your credit card company is hoping you don't hear this. They're charging you 21 percent APR interest, making it hard to pay down your balance. A home equity loan from Rocket Mortgage could cut your interest rate by more than half. So you could wipe out your high interest credit card debt with the equity you've built in your home without touching your current mortgage rate. See how much you could save at rocketmortgage.com. Rocket Mortgage LLC, license in 50 states. nmlsconsumeraccess.org number 3030 Call 800-4-ROCKET for full program details.

Tobias Carlisle (0:56)

This is the Value Options Letter Podcast. I'm Tobias Carlisle, joined as always by Tim Travis. How are you, Tim?

Tim Travis (1:03)

I'm good. I'm hoping my sunburn has faded a little bit.

I'm in the Cardinal Sin in Hawaii and went to the beach with my daughters the first day and just got fried. Then my youngest daughter was calling me like a lobster the whole trip. It was not ideal, but a wonderful time.

Tobias Carlisle (1:21)

Well, welcome back to an ugly market.

Tim Travis (1:22)

Oh, God. Yeah.

Tobias Carlisle (1:24)

How are you feeling?

Tim Travis (1:26)

It's been pretty miserable, I'd say, 50 days. TOBIAS, it's one of those where a lot of things just don't make a lot of sense, and there's a lot of overreactions and business values, I feel like are very detached from stock prices right now. I think we could go over some fun examples of that.

We were mentioning what it feels like. To me, I felt this type of detachment from the index and fundamentals for a few times. I was thinking like 2011, I remember the European financial crisis. There was a lot of overreactions there, particularly with the financial sector.

I mean, there were stocks, the big banks were trading at true fractions of tangible book value and even quality ones like Bank of America. I remember Buffett bought into Bank of America, and it barely even moved the stock. I mean, it did initially, and then it kind of like retread. Then I just remember, I believe it was in October too, it was like, or September maybe, and then there was something that happened. It might have been Draghi saying, we'll do whatever it takes, and the market shifted. And it was just a torrent end of the year for a lot of the value stuff. And also like kind of 2021 when you had the memes, and then those things kind of crashed in the next year. Kind of just that kind of vibe, TOBI, to me.

Tobias Carlisle (2:59)

There's a couple of things going on in the macro backdrop that are worth mentioning. One is that long run rates seem to be just continually jacking up, and that increase impacts the businesses of small and micro and value cyclical stocks, because they've got their debt's not as well termed out.

They tend to carry a little bit more debt. The businesses are a little bit more cyclical, and so they feel the pain first and they fall fastest. They also recover first and fastest on the other side, because they're sort of the little bellwethers in the market. The other thing is energy is just another cost for most businesses are moving stuff around, and that shows up as just an additional cost. And energy oils, it's back to 100 bucks. Trading around $100 might be a little bit south of that, but it's near enough that it doesn't matter. So it's been a tougher year for anything that is small, value, cyclical. And really, in this market, that's anything that's not the biggest 10 companies in the market that are sort of AI or AI capex beneficiaries, either the hyperscalers or semis, or something that's benefiting from the build out. So it's been a frustrating market if you're not holding those.

Even anybody holding those names, if you're holding the S&P 500, you're underperforming those names. Everything's sort of underperforming a handful of names, which not a super healthy market. It may be justified in that instance, but I think that I did this little analysis where I was looking at that what has been quite predictive of good returns in the market has been profitability, and that makes sense. Highly profitable companies tend to do very well. But that as a factor by itself. In 2000, that factor topped out at seven times book value. So book value is not a great measure, I understand, but maybe more so as these companies become more sort of capital-intensive. But it's 11 times book value. Now they're at 11 times book value. So we're well through the peak of the 2000, among those highly profitable businesses that are represented and that are doing quite well in this market. So I don't know what the right price for those companies is, but 11 times book value is pretty stretch. You got to be right on the business. You got to be right on the forward growth. Analysts seem to be very optimistic about that, but I think they've been pretty consistently wrong in the past.