The Folly of Form over Substance

During every market cycle, fads happen. They become very obvious in hindsight, but the tricky part is recognizing them in real time. My prediction? Some real estate investment trusts that are currently being touted by investment analysts will be trading at the exact same prices five or so years from now (assuming the markets are rationally valued at that time.) Even if the profits grow, the countervailing force of valuation compression will be a nasty offset ensuring mediocre returns.

I’ll give an example. I just finished reviewing a company called Iron Mountain. It is a giant data manager that stores documents, communications, and official records for corporate clients. The investor community loves this stock for three reasons. It is asset light, as the majority of the capital expenditures involve securing data rather than investing in factories and real estate. It is perceived as a very scalable business because corporate clients … Read the rest of this article!

Some Stocks Are Ticking Time Bombs

There is a reason why debt matters. There is a reason why you have to dig in and study balance sheets instead of making investment decisions based on what you see pop up in a stock screener. For instance, imagine if you looked up Weight Watchers. You would see a stock generating $1.26 per share in profits and trading at a valuation of 5x earnings. That would look like a really good deal. You can reasonably think, “Hey, America has an obesity problem that is only going to get worse, and people are going to want to use services like Weight Watchers to get their BMI under control.”

This would likely lead to disaster because Weight Watchers has completely reckless management that tackled on an ungodly amount of debt during the early 2000s to repurchase stock and temporarily please Wall Street by beating expectations without giving a hoot about the … Read the rest of this article!