I’ve been fielding a lot of questions over the past couple of weeks about three of our long trade ideas so I thought I would just provide an update here on those. First, I just want to note that this may be a buy signal in itself. A few months ago, I was mainly getting questions about several of our short trade ideas that just “weren’t working.” Most of those have fallen 40%, 50% or more since then and suddenly those questions have gone quiet. Second, the trade ideas are just that: ideas. I encourage everyone to do their own due diligence and to have their own rationale and trading plan should they decide to invest in anything.
With that out of the way let’s take a look at Annaly. This one has been hit far harder than it deserves, far harder than it has ever been hit, in fact. It now trades at less than half its net asset value, a level it has never seen before. While it’s true many other mortgage REITs have come under stress for good reason, nearly 95% of Annaly’s portfolio is made up of agency MBS, or mortgages backed by the Federal Government. This simply means that at today’s prices, investors are buying a portfolio of government-backed mortgages at less than 50 cents on the dollar. It’s truly a case of “the baby being thrown out with the bathwater.”
Turning to Macerich, with the federal government implementing “social distancing” policies and many state governments implementing “shelter at home” policies, it’s not a great time to be a retail outlet or a landlord for retail outlets like MAC. That said, the Federal Reserve and the Treasury are now providing loans to both in an effort to prevent business failures as a result of the “force majeure” that is Covid-19 (even if insurance companies don’t see it that way). Most landlords are not currently providing relief to tenants as most tenants are eligible for relief from the federal government. Small businesses are even getting free money with which they can pay rent. However, MAC does have the financial wherewithal to forego rents for several months or quarters if need be. And at less than one-third of book value, the shares are as cheap today as they were at the depths of the Great Financial Crisis.
Finally, Bed, Bath & Beyond is a stock that has also been hammered for reasons very similar to MAC. It’s been forced to close most of its stores and that’s just not a good thing for a company that was already suffering from declining traffic. But BBBY has nearly a billion dollars in cash on its balance sheet and no debt due in the next four years. In fact, the majority of its debt matures in 2044 so there is almost no way this company can go bankrupt any time soon. What is likely going on here and with MAC is that, by falling under $1 billion in market cap, they are no longer qualified to be held by many funds and so they are suffering from systematic liquidation. In addition, short sellers, most likely algorithmic strategies, have also targeted the companies. BBBY also trades at just 26c on the dollar in terms of its book value and short sellers have now sold 86% of float. The bit of short covering we saw late last year resulted in a rally of over 130%. That was just a hint of what will happen should shorts be forced to cover to a much greater degree.
In all, I think it’s helpful to think about these stocks in the light of one of my favorite Stan Druckenmiller quotes: “Never, ever invest in the present. It doesn’t matter what a company’s earning, what they have earned… You have to visualize the situation 18 months from now, and whatever that is, that’s where the price will be, not where it is today… If you invest in the present, you’re going to get runover.” The present looks pretty bleak for most companies today but that doesn’t really matter to a market that discounts what things will look like 18 months from now. My guess is that 18 months from now will look a lot better than it does today and, due to the record monetary and fiscal stimulus, it could even be a pretty explosive rebound for the economy and stocks like these once Covid-19 passes.
As Dylan Grice put in on Twitter recently, “did you ever look back at a chart of something in 2008 – a stock, bond or anything else – and marvel at how obviously mispriced it was, while ruing not doing anything? this is one of those times. dislocations in every mkt you look at. its a good time to buy.” I would argue that we will look back and marvel at how cheap these stocks, and many others, got during this time. True investors take advantage of these opportunities. You don’t have to be bullish on the broad stock market to be bullish on individual situations. In fact, I make it a point to not let my macro concerns get in the way of micro opportunities. I’ll continue to buy them and use opportunistic or systematic hedging strategies to ameliorate my bigger picture concerns.