Top Performing Value Investor Explains Why the Market Isn’t Overvalued and Hasn’t Hit the Blowoff Top Phase | Charles Lemonides | ValueWorks LLC

Rivian Automotive

• Charles Lemonides · ValueWorks LLCBullish

  Rivian has the same potential as Lyft and Instacart: a growth stock priced like value.

  He groups Rivian with Lyft and Instacart as a name trading like a value stock that could be perceived as a growth stock. Rivian has scale in a market he sees as large. He expects Rivian vehicles three years from now to be quite fully self-driving, and the company is part of his effort to find growth names at value prices. He says investor fatigue applies to Rivian as well, though to a lesser degree than Lyft and Instacart. The case is thinner than for Lyft and Instacart.

  “And we see the same potential in names like Rivian to Instacart to Lyft and a whole bunch of other ones.”at 9:04

Micron Technology

• Charles Lemonides · ValueWorks LLCNeutral

  Micron's earnings should last a couple more years, but the stock at current prices is less attractive.

  Micron is a growth name that long traded like a value stock. His fund bought it years ago when valuations to book and cash flow were very low, and the stock rose from about $70 to about $1,000 in roughly a year and a half. Micron's valuation has typically fallen to three or four times peak earnings. He thinks earnings will last a couple more years, but he is less sure about the stock at today's prices. He has scaled the position back but still holds it as a core position and will let it run for now, while looking for the next such name. He acknowledges that cyclical stocks look riskiest when they look cheapest.

  “We think the earnings are likely to be there for another couple of years, but we're not as sure about the stock at today's prices”at 10:34

Intel

Across the shows: 2 speakers in other episodes, 0 bullish and 1 bearish calls, past 30 days

• Charles Lemonides · ValueWorks LLCBullish

  Intel is one of few firms with real foundry capacity, and its yields are improving, so it has big upside.

  Intel is one of only a couple of companies in the world with real foundry capacity. It brought new capacity online over the past year and a half and gets better yields every quarter. In a market where no one can get enough chips, the constraint is manufacturing rather than chip design, and Intel is ramping manufacturing. Its technology is state of the art. The foundry business has been weak for a long time, but because it is cyclical and Intel is one of the few players, he sees dramatic upside. He views Intel as both a CPU trade and a foundry trade. His fund bought in around $55, built a large stake as it fell to around $45, trimmed around $100–120, and then bought a healthy stake after the sell-off, so it is heavily weighted in the portfolio.

  “Intel is one of only a couple of companies in the globe that has real foundry capacity. And they have brought new capacity on stream over the past year and a half. And it's getting better yields every quarter.”at 12:15

Lyft

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• Charles Lemonides · ValueWorks LLCBullish

  Lyft is long-held at a quarter of Uber's valuation; scale does not make rideshare winner-take-all.

  The fund is long Lyft, which trades around a quarter of Uber's valuation. The winner-take-all argument does not apply: rideshare's main costs are driver pay, which does not fall with scale, so it is not a zero-marginal-cost business. Lyft has scale, the market is large, and dominant players have not stopped it. Lyft has grown consistently and been cash-flow positive consistently. Price-war fatigue and investor fatigue after years of poor returns may explain why it is cheap. He expects a 2x to 4x return over three to five years, timing unknown, and says the portfolio will benefit whenever sentiment shifts.

  “And we're long Lyft, which, you know, is second to Uber in terms of valuation, but it's roughly a quarter of Uber's valuation.”at 19:45

Maplebear Inc. (Instacart)

• Charles Lemonides · ValueWorks LLCBullish

  Instacart trades at a quarter of DoorDash's valuation, with growing, higher-margin business and no winner-take-all risk.

  The fund is long Instacart, perceived as second to DoorDash but trading at about a quarter of DoorDash's valuation. Online grocery and goods delivery is a secular growth business, and people use it more each year. Instacart has grown consistently and has far better margins than DoorDash. Its costs are not zero marginal cost: the shopper and the groceries are real costs that do not fall with scale. Scale matters, but the market is large enough that dominant players have not stymied it. Investor fatigue with a stock that hasn't gone up is part of the discount. He expects a 2x to 4x return over three to five years.

  “And we're long Instacart, which is perceived as second to DoorDash. And again, it's trading at one quarter of the valuation.”at 19:54

Cord

• Charles Lemonides · ValueWorks LLCBullish

  Cord trades at three to four times expected cash flow, which is hard to argue with.

  Cord, transcribed as 'Cord', is a domestic independent E&P with an $8 billion valuation. He thinks it trades at three to four times what his team expects in future cash flow, which he finds hard to argue with. E&Ps own acreage, drill wells, and pump oil and gas from them, so their output is real and their multiples to cash flow are very low. He also mentions a smaller peer, Unit, with a $300 million market cap that he expects to generate $75 million of cash flow over the next year and holds $100 million of net cash.

  “I specifically like Cord, which is an $8,000,000,000 valuation. And I think it's at three, four times what we think will be cash flow going forward, which is hard to argue with.”at 30:26

Valaris

• Charles Lemonides · ValueWorks LLCBullish

  Valaris is very cheap relative to the replacement cost of its rigs and next year's cash flow.

  He likes Valaris a lot because it trades at a steep discount to the replacement cost of its drilling rigs and to probably next year's cash flow. His investment decisions in offshore names are based on price relative to replacement cost. Offshore names get very cheap at troughs, often 20–30% of replacement cost, and that is when he gets involved, building exposure gradually.

  “I like Valaris a lot. It's very cheap based on the replacement cost of those rigs and probably next year's cash flow.”at 31:47

Tidewater

• Charles Lemonides · ValueWorks LLCBullish

  Tidewater's supply fleet costs twice as much to rebuild, and tight supply will drive large cash flows.

  Tidewater has long been the largest public offshore supply vessel company. Rebuilding its fleet would cost about twice the current price, and the fleet could be bought for near today's price or about 20% more. Each offshore drilling rig needs four or five supply vessels to shuttle back and forth, the number of rigs keeps rising, and there are no spare vessels left. Supply and demand has become completely tight, so he expects the fleet to generate massive cash flows.

  “It would cost you twice the price to rebuild their fleet of ships. ... But that fleet of ships is going to generate massive cash flows because supply and demand has gotten completely tight.”at 32:13

Hornbeck Offshore Services

• Charles Lemonides · ValueWorks LLCBullish

  Hornbeck is one of his favorite offshore names, now re-listed after a merger; he expects it to surprise.

  Hornbeck is one of the fund's favorite offshore names. It went private through a bankruptcy long ago, and the fund owned it through the bankruptcy. About a month ago it merged with an existing public company worth about $1.5 billion and took the Hornbeck name. The combined company will report its first operating quarterly results soon. He thinks people will be surprised by how it is doing. The thesis rests on the offshore supply and demand tightness he describes for vessels and rigs.

  “...one of our favorite names, which is Hornbeck. They went private in a bankruptcy quite some time ago, and we owned it through the bankruptcy.”at 32:51

Texas Pacific Land

• Charles Lemonides · ValueWorks LLCBearish

  Texas Pacific Land is overvalued; its land and royalty assets are worth far less than the market price.

  The fund is short Texas Pacific Land because it estimates the company's roughly one million acres at about $2,500 an acre, or about $2.5B. It adds a couple of billion dollars for mineral rights and about $2B for the water business, which is paid by oil companies to dispose of or supply water. His rough total is about $4B of assets, and he thinks investors are double-counting value. He admits the fund shorted the stock at half today's price and watched it rise much higher, so Max Wheatley has been more right on it than he has.

  “The reason we're short is because we think ultimately the thing this company has is a million acres of land. And those million acres are worth something like $2,500 an acre, which makes those acres worth something like $2,500,000,000.”at 38:17

Office Properties Income Trust

• Charles Lemonides · ValueWorks LLCBullish

  Office portfolio and rental cash flow are worth about $4B, so the fund is long.

  The fund is long the office property owner. Its portfolio is about 17 million square feet, which he values at about $150 per square foot, or roughly $2.5B. Rental revenue of about $300M a year produces about $200M of cash flow, which at 10x is about $2B. Adding the buildings and the rent stream gives about $4B of assets.

  “we're long [Office Properties Income Trust]... they have 17,000,000 square feet and each square foot is worth, yeah, $150, so it's worth $2,500,000,000... So add those two together, and I got $4,000,000,000 worth of assets.”at 39:11

Mesabi Trust

• Charles Lemonides · ValueWorks LLCBullish

  Mesabi Trust is a favorite holding, priced fairly with a roughly 10-12% royalty yield.

  [Mesabi] is one of the fund's favorite investments. It is small and owns royalty rights to an iron ore range in the Midwest that ships about 4.5 million tons a year. Earnings have swung between zero and $8 a share, and the stock trades near $20. At current iron ore estimates, the yield is around 10-12%, which he calls a fair price. The main risk is that the operator, Cleveland-Cliffs, has been hostile at times and once stopped running the mine. Cliffs lost arbitration over its royalty pricing, and it now operates the mine and pays the royalty again.

  “one of my favorite investments is [Mesabi] Trust. It's small. It's a couple $100,000,000 equity cap, but they own royalty rights to an iron ore range in the middle of America.”at 42:04

Casey's General Stores

• Charles Lemonides · ValueWorks LLCBearish

  Casey's is overvalued at 35-40x earnings, with a boosted fuel margin that will not last.

  The fund is short Casey's. The stock trades at 35-40x earnings. Each store costs about $1-1.5M to build, yet the market values the company at roughly three or four times that. Fuel margins jumped during the energy price spike, and that inflated earnings. The growth story depends on building more stores, but the U.S. has limited room for new gas station and pizza sites, so it is not a real growth business. He sees the fuel-margin cycle already turning against the company.

  “it costs you something like a million, a million and $0.5 to build one of those. And they're trading at basically three or four times that from a valuation perspective, and that's just not going to last.”at 48:31

Walmart

• Charles Lemonides · ValueWorks LLCBearish

  Walmart is shorted on valuation, weak growth prospects and overdone investor enthusiasm.

  The fund has been short Walmart because it thinks the stock's valuation and growth prospects are overdone. He points to heavy competition in grocery from Costco on one side, Walmart on the other and eBay as well. The thesis rests on valuation and enthusiasm more than on specific earnings numbers.

  “we've been short Walmart on valuation and growth prospects and an overdone enthusiasm.”at 50:42

Weis Markets

• Charles Lemonides · ValueWorks LLCBearish

  Weis Markets trades at 35-40x earnings, with flat earnings, so the fund is short.

  The fund is short Weis Markets, a Pennsylvania supermarket chain. On its run-rate earnings it trades at 35-40x. A COVID bump lifted the stock, but it has been dead money for a while, and net income has been flat for almost ever. At about $70 a share, he does not think the company will earn the price implies. Grocery competition from Costco, Walmart and eBay makes the growth outlook weak, and the company's delivery partnership with Instacart does not change that.

  “we've been short as a smaller one called [Weis Markets], which is a supermarket chain in the Pennsylvania area... trades at something like 35, 40 times earnings in our estimation, based on run rate.”at 50:53

Honeywell International

• Charles Lemonides · ValueWorks LLCBullish

  Honeywell gives cheap indirect exposure to quantum computing via its 50% stake in Quantinuum.

  Quantum computing is one of the fund's growth themes. [Quantinuum] went public recently and is 50% owned by Honeywell, and the fund owns Honeywell. Holding the parent means it gets exposure to the quantum company at what he calls very fair prices.

  “[Quantinuum], is 50% owned by Honeywell, and we own Honeywell. So we're getting at that stock for nothing. And we're getting the parent company at very, very fair prices.”at 53:47

Caterpillar

• Charles Lemonides · ValueWorks LLCBearish

  Caterpillar trades at about 40x on cyclical earnings that are not trough levels; the fund is short.

  The fund is short Caterpillar. The stock trades around 40x. Earnings may not be at a peak, but they are not trough levels either. He expects an extended growth period, but not one lasting six to eight years. He thinks it will be about three or four years, and the stock is priced for much longer growth on a cyclical business.

  “we're short Caterpillar. Like, I'm sorry, the stocks at 40 times. They may not be peak earnings, but they ain't trough earnings.”at 54:00

The Boeing Company

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• Charles Lemonides · ValueWorks LLCBullish

  Boeing is cheap as one of two big aircraft producers; new management could triple the stock.

  At a $175B valuation, Boeing is cheap. It is one of only two major producers of large aircraft in the world, and the Western market will likely stay that way for a long time. He thinks the company is getting its house in order. It also has some space exposure through its partnership with Blue Origin, which is a growing business. If new management can make the company perform, he thinks the stock could triple.

  “They're only going to be two big producers of big aircraft in the world for a long time, or at least in the Western world. And they seem to be getting their house in order and the valuation is super cheap there too.”at 54:41

Ørsted A/S

• Charles Lemonides · ValueWorks LLCBullish

  Ørsted is a favorite holding; offshore wind is unloved after administration hostility.

  The fund likes offshore wind, a sector he says has been kicked to the curb, and the administration is pushing it there too. Ørsted is one of the fund's favorite holdings because it owns wind farms. The contrarian case is that the sector's unpopularity creates a fair entry point.

  “we like the offshore wind space. I mean, that's been kicked to the curb and obviously is being kicked to the curb by the administration... one of our favorite holdings is Orsted, which owns the Windmill Farms”at 55:43

Cadeler A/S

• Charles Lemonides · ValueWorks LLCBullish

  Cadeler is a secondary offshore wind holding that owns turbine installation vessels.

  In the offshore wind space, the fund sees [Cadeler] as a secondary holding. It owns the vessels that install offshore wind turbines. This is a brief remark, so the case is thin. It rests on the same contrarian view that offshore wind is out of favour under the administration.

  “a secondary one in the space is [Cadeler]. They own the vessels that go out and install the offshore wind turbines.”at 55:50

US stock market outlook

• Charles Lemonides · ValueWorks LLC

  The market is fully valued but not overvalued, and the bull market has not yet reached its blow-off phase.

  The S&P 500 is not overvalued but is much more fully valued than before, and P/E is a little high. The bigger point is that the market has risen for 18 years without a correction of more than 25%. He argues the clock has not struck: the best returns come in the final years of a bull market, and bull markets have massive blow-offs to the upside before the downside. He has not yet seen that liftoff in this cycle. Investors should prepare for a turn but also participate, because the rally could last another two to five years. He says valuations are not overblown and only a handful of companies trade at excessive prices. He rejects the idea that falling multiples alongside rising prices signal a top, since earnings growth has been strong.

  “The market is not necessarily overvalued, but it is an awful lot more fully valued than it once was.”at 1:16

• Charles Lemonides · ValueWorks LLC

  The market advance is investment-led rather than consumer-led; luxury stocks are at multi-year lows.

  He does not expect a consumer-led advance. The rally is driven by investment spending, not by household demand. He points to luxury names such as LVMH and Hermès, which are at multi-year lows, as evidence of weak demand from high-end consumers. Retail growth is constrained by competition and by limited scale in premium grocery.

  “It's not a consumer led advance. It's an investment led advance.”at 52:40

Oil & fuels

• Charles Lemonides · ValueWorks LLC

  Energy names still offer a good story with high energy prices, though refiners and tankers now look too late.

  His fund built a large energy exposure during the pandemic and scaled it back as those stocks rose. The remaining holdings have retreated a lot while energy prices are high, so he sees a good story in those energy names. He regrets missing refiners and tankers, which have exploded, and thinks it is now too late to buy them. The better value is in domestic independent E&Ps and offshore suppliers and drillers.

  “They've now retreated. The remaining holdings have retreated a lot, and energy prices are high. And I think there's a good story to be had in those energy names.”at 18:53

• Charles Lemonides · ValueWorks LLC

  Offshore oil production has a trend with five to ten more years to run.

  Offshore production has been a growing business for a long time. Each decade the industry does more of it in more sophisticated ways, and the amount of oil from these facilities today is far larger than when he first recommended an offshore driller in the 1980s. Rising demand and rising offshore output have been a long-running trend, and he thinks it has another five to ten years to run. Beyond that he says he does not know anything about energy.

  “So the increased demand, the increased amount of offshore production has been a trend for a long, long time. And I think it's got another five, ten years to run.”at 34:25

US growth & recession risk

• Charles Lemonides · ValueWorks LLC

  US growth is still running too fast despite higher rates, with no sign of slowing in six months.

  His concern on rates is that the economy is growing too fast, and the Fed is raising rates to curb that growth. Higher rates usually take a while to slow growth, and he sees no slowdown yet. Nothing suggests growth will slow six months out either, and since markets discount future events, that matters more than current data. He adds that policymakers are doing everything they can to keep the expansion going.

  “Look, our concern on the interest rate front is that we're growing too fast, right? ... there's nothing to indicate the growth will slow down six months out from now either.”at 3:26

AI infrastructure & data centers

• Charles Lemonides · ValueWorks LLC

  Data center and chip spending is driving US growth and will not slow anytime soon.

  The investment side of the economy, meaning data centers and chip purchases, is what powers growth, while housing and autos are struggling with high rates. He sees this as half full and half empty. If AI-driven investment slowed, policymakers could cut rates, easing pressure on housing and restarting residential construction and office development, which has been near zero for a long time. Still, he expects data center growth to continue and says the financial market's excitement will center on exciting companies in the final stages of the bull market.

  “On the other hand, look, the growth is happening in the data center stuff, and we don't think it's gonna slow down anytime soon.”at 6:19

Robotics & autonomous vehicles

• Charles Lemonides · ValueWorks LLC

  Driverless tech will be a commodity, so Waymo is no unique threat to rideshare incumbents.

  Driverless vehicles will be ubiquitous, and automakers such as Tesla, Rivian and GM will sell cars that Uber and Lyft can buy and deploy. Self-driving technology will be a commodity, so Waymo has no special edge. A rideshare company with a user base can offer driverless rides as an option in its app. Incumbents already have customer relationships, and it is hard to see why riders would add another app just because a ride is driverless. Only if Waymo were the sole provider would it be a real threat. He conceded that sourcing riders is the hard part, and that the rideshare companies have that advantage.

  “If Waymo were the only company to have a driverless vehicle, then yeah, it would be a threat. But driverless vehicles are going to be ubiquitous.”at 24:29

Commodities (broad)

• Charles Lemonides · ValueWorks LLC

  Commodity prices fluctuate around the cost of incremental supply, so valuation matters more than price.

  Commodity prices swing, but over time they gravitate toward the cost of new supply. Producers need a return on investment, so prices cannot stay far below that cost for long. For that reason, when a commodity company's valuation is disconnected from the cycle, he cares less about the spot price. He pays closer attention to where the valuation sits against normalized prices.

  “Because what we know about commodity prices is that they fluctuate. And they fluctuate eventually around the cost of incremental supply.”at 46:39