27 April, 2020
Isaac Bashevis Singer, Nobel Prize laureate in literature said: “A story to me means a plot where there is some surprise. Because that is how life is – full of surprises”. The same holds true in investing, because companies, markets, and economy by their very nature are social processes. And when there are humans involved, there will always be surprises.
Current market crisis provides investors an opportunity to learn an importance lesson. The lesson being that one has to react to objective reality instead of too much thinking, hoping, or trying to outsmart everyone out there.
It is simply hard to do it during regular periods when Mr. Market buries you under many layers of noise, unnecessary information, plain lies, conflicts of interest, and a billion other ways of manipulation. But during times of crises, the truth becomes much more transparent.
Hotel companies suffer, food retail and supermarkets are doing better. Airlines are halted, internet games are all right. Restaurants feel not well, medical device stocks stay healthy.
The key for investors is not necessary to be “bullet-proof” to any possible situation because there will always be surprises. The key is to react both to objective reality but in a way that accommodates both uncertainties, upside surprises, some future scenario, and leaves room for some imagination and speculation as well.
In my book Story Investing I discuss exactly this approach and how it can be implemented at the micro level analyzing and investing in companies. The key here is not to take advantage of a story or create one where one does not exist, but to look at individual companies and their shares as you look at a good story: with a three-part story structure, important turning points, struggle, emotions and surprises.
The stories here are tools, models if you will, that allow to work better with a dynamic and partially unknown reality. Jerome Bruner, a famous cognitive psychologist, explains that narrative mode of thinking leads to conclusions not about certain absolute truths, but about varying perspectives that can be constructed to make experience comprehensible. By telling stories, we formulate these different perspectives.
I thought to compare two SPACs (Special Purpose Acquisition Corporations) and one IPO in order to showcase how these companies and their narratives are positioned vis-à-vis current market reality. Far Point Acquisition Corporation SPAC which counts activist investor Daniel Loeb among its anchor investors has agreed (in January 2020) to acquire Global Blue, a leading provider of Tax-Free Shopping and payment solutions.
Transaction reflected the following valuation:
It is probably a safe bet that during next year or two the profitability will be much lower due to international travel limitations. With a 50% decline in EBITDA company’s valuation multiple jumps to x25 – not so attractive anymore.
Compare this to Nomad Foods, another SPAC from a much better positioned sector vis-à-vis current market climate. Nomad Foods was a SPAC (Special Purpose Acquisition Corporation) established by Noam Gottesman and Martin Franklin and also included Bill Ackman’s funds as investor. In 2015 company completed acquisition of Iglo Foods Holdings, Europe’s leading frozen food company, and subsequently acquired continental European Findus Group business.
We highlighted Nomad Foods in December of 2016 in the article “Nomad Foods: Story And Narrative For A 100% Return” At that time, the company was valued at an EV/EBITDA multiple of x7.8. We estimated that over a period of three years Nomad Food shares provide an upside of about 100%. In August 2018, less than projected three years, shares reached $20.8, a return of 123%.
Currently Nomad Foods share price reflects the following valuation:
On March 13, 2020 company announced the approval of a new $300 mil share repurchase authorization. In sharp contrast to Global Blue/Far Point, it seems that Nomad Foods is much better positioned in current market environment.
As an addition example of developing and dynamic narrative, take a look at shares of TeamViewer AG. Company completed an IPO in October 2019. At the time of IPO, we even speculated that TeamViewer might be acquired. In one way or the other we believed that TeamViewer shares are attractive as they were trading at an EV/EBITDA of x25 (based on annualized H1 2019 results) while company reported a 100% growth of paid user base. Considering that in contrast to many other tech companies TeamViewer was both profitable and generated free cash flow, valuation looked attractive.
Since then shares performed reasonably well: shares started to trade at EUR 26.25 and at the beginning of February 2020 were trading at about EUR 32, a 22% return.
However, since the coronavirus developments started to take place, the TeamViewer AG story took an unexpected turn. With stay-at-home situation, solutions that cater to remote work needs started to experience a huge surge in demand. In fact, on March 23rd, 2020, TeamViewer reported 60% billings year-over-year growth for Q1 2020. Since beginning of February 2020 shares rose 30%.
To put things into perspective, at the end of 2019 TeamViewer had 464,000 paid subscribers. On the other hand, Zoom’s daily active users jumped from 10 million to over 200 million in 3 months, a x20 times increase. If TeamViewer’s user base will grow only x5 times, the company might reach an EBITDA of EUR 1,252 mil (based on Q4 FY 19 EBITDA, annualized, x5). This would value the company at an EV/EBITDA multiple of only x7.3. Maybe this is a speculative scenario, but it is a good story anyway. You might want to bet against it, but I would not recommend it.
To sum all this: times of volatility and economic crises provide investors with excellent opportunity to react to objective reality. Without distractions, noise, conflicts of interest and other obstacles Mr. Market usually puts in their way.