Forgotten Forty Recap
A look at a few of our Forgotten Forty picks from last year which we shared with Barron's
Editor’s note: ~48 hours after publication, it was announced that Uber would be added to the S&P 500 as of December 18th 2023.
Last December I sat down with Barron’s senior writer Nicholas Jasinski to chat about some of the picks in our annual Forgotten Forty issue (which features our list of the 40 best catalyst-driven stock picks for the year ahead). Our subscribers pay good money for that information, so in fairness to them, we publicly disseminate only a handful of names, reserving the vast majority of the Forgotten Forty for subscribers only.
Interestingly, the top two best-performing companies I mentioned (Uber, up 115%, and Watsco, up 48%, as of November 30) weren’t really cheap by traditional valuation metrics—and statistically cheap stocks, like LabCorp, only advanced modestly. That was 2023 in a nutshell for value investors: growth soared, and value lagged. Driven primarily by the share price gains of Uber and Watsco, the selections in this piece almost doubled the return of the S&P 500 on average.
These results remind me of Warren Buffett’s famous observation (influenced by the late great Charlie Munger) that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Whether a company is great or wonderful is in the eye of the beholder, but our approach has historically singled out companies whose assets or brands would be difficult to replicate, especially when they are trading at large discounts to our estimate of their intrinsic value. If we can identify one or more catalysts for closing the value gap, then all the better.
Each of our team's other four picks is attractive in its own right, but many of the catalysts we identified for Uber and Watsco were realized sooner rather than later, and the market rewarded them. Now, almost a year on, I’d like to share our team’s latest thoughts on each of the companies we featured, which I remain optimistic on, but there is no guarantee that they will make the Forgotten Forty class of 2024:
FF 2023 Stocks From Barron’s Article
Uber (UBER)
This nontraditional value stock worked overtime as a value creator in 2023, appreciating by 115% YTD. The Company’s business model seems to be working (making its earnings potential increasingly evident), with revenues quickly scaling above fixed costs. Quarterly free cash flow of about $1 billion over the past couple of quarters has put management in a strong position to start buying back shares and reducing the debt load. Other potential catalysts could also continue to drive up the stock price, including inclusion in the S&P 500 index (finally eligible after having posted a trailing 12 months GAAP profit) and the ongoing success of the Company’s burgeoning advertising platform.
Watsco (WSO)
Watsco, the largest HVAC distribution company in the U.S., wasn’t one of our cheaper picks statistically speaking, but it nevertheless had a good year both operationally and in the stock market. In fact, there’s still a lot to like about the Company, although at these prices the margin of safety is slimmer than it was last year. OEMs expect the imminent transition to more environmentally friendly refrigerants to raise equipment prices 10% to 20%, creating a gross margin tailwind for this distributor (which has little trouble passing price increases to customers), and the Company’s recent acquisition of another smaller distributor at a modest 0.6x price-to-sales ratio underscores the competitive advantage of being the HVAC distribution industry’s consolidator of choice. With a net cash balance sheet, Watsco is primed to extend a helping hand to smaller HVAC owners who are looking for liquidity.
Disney (DIS)
It hasn’t been a fairy tale for the Magic Kingdom since Bob Iger returned as Disney’s CEO, but if the most recent earnings call is any indication, things seem to be moving in the right direction. The impending purchase of Comcast’s remaining stake in Hulu will remove what has been a long overhang on the stock, and although the linear business remains soft, significant long-term opportunities have emerged. With its distribution model rapidly shifting toward streaming services, the Company may also sell linear assets.
The streaming business, for its part, is making big strides: more subscribers, higher ARPU (price hikes, ad-supported plans), and rigorous cost management have the business poised for profitability by 2024. The Company is also seeking strategic partnerships for ESPN, with potential suitors including sports leagues that can provide additional content or big-name tech companies that can help with marketing, tech, and customer acquisition. The theme parks business remains strong after COVID, with traffic recovering and guests spending more than ever. In response to pressure from activist investors management is controlling costs (now targeting $7.5 billion in cuts, up from $5.5 billion). A likely reinstatement of the dividend should help the stock price by attracting a wider investor base.
LabCorp (LH)
LabCorp was one of the laggards of the group, advancing just 6% when taking into account the spinoff of Fortrea on June 30. However, that spinoff did make LabCorp a more focused clinical lab company, with well-positioned central lab and early drug development businesses. While LH is the largest independent diagnostic lab company, it has only a 9% market share of the overall $85 billion market, with hospital labs accounting for 60%—leaving plenty of opportunity for further deals and share gains. The aging population and increases in specialty testing should support further favorable growth: LH focuses on oncology, autoimmune, women’s health, and neurology testing and expects a 9% CAGR in specialty testing.
Liberty Braves (BATRK)
In July 2023, Liberty Media split off Atlanta Braves Holdings (now its own publicly traded security instead of being a tracking stock) to help reduce the discount to Liberty Braves private market value. In our view, the separation also paves the way for a sale of the Braves, which can now be sold tax-efficiently, as has been Liberty/Malone’s historical approach.
In 2023 the Forbes value for the Braves increased by double digits (+24%) for the second year in a row. In last year’s Forgotten Forty, we raised the possibility of another meaningful increase in their Forbes valuation, for reasons ranging from a significant step-up in local media rights payments to meaningfully higher sponsorship revenues now that new regulations permit jersey patch sponsorship. The Braves continued their strong on-field performance in 2023 (earning their sixth straight NL East Division title), helping drive solid financial results.
Encouragingly, the market for professional sports franchises continued to be robust in 2023, with record prices paid for professional sports teams in the NFL (Commanders), NBA (Suns), and NHL (Senators). Within baseball, rule changes have stimulated interest by reducing MLB game times by about 25 minutes.
Markel (MKL)
Ventures (MKL’s privately owned business portfolio) has delivered record results in 2023. No further acquisitions have followed the 2022 purchase of Metromont, but Markel looks well placed to resume dealmaking given competitors’ higher funding costs and the strength of its own balance sheet (~$2.8 billion in net cash). Investment income is rising rapidly, being up 9.3% YoY in the first 9 months of 2023—below the S&P return of 13.1% but commendable given MKL’s value-oriented approach and lower exposure to the “Magnificent 7.”
Unfortunately, insurance profitability deteriorated in 3Q 2023 (99% combined ratio vs. 93% in 1H), and growth also slowed. Fortunately, however, these appear to reflect largely temporary issues (e.g., challenges in a new IP collateral protection line, slowdown in capital markets), and both growth and profitability are expected to improve. Management is transparent about the challenges and conservative in estimating loss costs and is focusing on holding reserves that are “more likely to prove redundant than deficient”—all while executing the most aggressive share repurchase program to date ($270 million YTD, following $497 million in 2021-2022) alongside heavy insider buying (~$2.2 million in repurchases by eight insiders since May 2022, including $325,000 by four directors after the 3Q 2023 results).
We’ll be publishing our picks for 2024 in a few weeks with our next Forgotten Forty report, so stay tuned. And, as always, feel welcome to contact us if you have any questions or you’d like more information. ;-)
Important Disclosures. The information herein is provided by Boyar’s Intrinsic Value Research LLC (“Boyar Research”) and: (a) is for general, informational purposes only; (b) is not tailored to the specific investment needs of any specific person or entity; and (c) should not be construed as investment advice. Boyar Research does not offer investment advisory services and is not an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) or any other regulatory body. Any opinions expressed herein represent current opinions of Boyar Research only, and no representation is made with respect to the accuracy, completeness or timeliness of the information herein. Boyar Research assumes no obligation to update or revise such information. In addition, certain information herein has been provided by and/or is based on third party sources, and, although Boyar Research believes this information to be reliable, Boyar Research has not independently verified such information and is not responsible for third-party errors. You should not assume that any investment discussed herein will be profitable or that any investment decisions in the future will be profitable. Investing in securities involves risk, including the possible loss of principal.
Important Information: Performance Information. Past performance does not guarantee future results. The reports in this sample are for informational purposes only and the performance of the stocks selected is not indicative of the performance of the entire Forgotten Forty. The performance of the stocks selected and the performance of the Forgotten Forty may in fact diverge materially. Additional information regarding the performance of other companies in the Forgotten Forty is available from Boyar Research upon request. This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research. Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Clients of an affiliate of Boyar Research and employees of Boyar Research own shares in UBER, WSO, MKL, BATRK, LH, and DIS.