During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed French Cashflows. Here’s an excerpt from the episode:
Q2 2020 hedge fund letters, conferences and more
Tobias: I have some presentations coming up. And I had to just go back and look at the data again for price to cash flow. This is the French data, it’s available free online. They divided up into terciles, quintiles, deciles. So, you can have a look at the low cash flow yielders versus the high cash flow yielders, which are the value stocks, the low cash flow yielders or the growth, glamour, expensive, whatever you want to call them. Data runs from July 1951, and it now goes through July 2020. So, we get to see what happened in March at the bottom and then the recovery through July. The data is always a little bit lagged, takes a while for them to collate it.
Speaking of the deciles, the value decile, which is the 10% that are the cheapest versus the 10% that are the most expensive, it got 62% behind from the drawdown, which started 2014, 2016. It really started in 2014, but there was a catch-up to 2016, where it just kissed the growth line and fell back away. So, if you’re a value guy, and you’re investing in that value, the high yield cash flow portfolio, you’re 62% behind the guys who are in the low cash flow yielding decile, which is a big margin.
Bill: Hard to keep assets doing.
Tobias: Very hard. It’s the biggest drawdown in the data by a longshot. The other ones are in the order of like 24%, like 2000 gets down to about 24% behind. And then from the bottom in 2000, through to about 2014, say, value goes up five times relative to relative to growth. So, you did much better being in value through that period of time. The value portfolio has now run from 62% behind to 56% behind. So, it’s made up a little bit of ground over those four months.
Bill: Back in the game.
Tobias: Yeah. Well, it’s not much.
Jake: So, you’re telling me there’s a chance.
Tobias: It’s not much but it’s not going in the other direction, which is a good thing.
Bill: I tell you what’s interesting, that I’ve been thinking about usually in the shower, so my good thoughts. A lot of this SaaS revenue growth, and this is a huge generalization, but a lot of the value proposition seems to me to be some sort of shared infrastructure of software or some sort of efficiency that is being created in the system or whatever. Well, there’s a lot of these slow growth companies that people think are just dogshit, you can get a lot of below the line growth if these SaaS companies are half of what people promise that they are. The efficiency that could be taken out of the SG&A line item. And, yes, even redirected to some of these SaaS companies. It does not have to be between the two companies who probably would lose in the scenario that I’m thinking about is labor, that’s a whole another issue.
But I don’t know why a lot of this technology doesn’t continue to help margins increase over the long term. And there’s a couple ways to grow. I don’t necessarily think that bottom-line growth should be valued the same way that top-line growth should. Nygein, if you’re listening, holler at me, I’d like to debate you on that topic.
I think people could be really surprised five years out where some of these companies that they sort of are like, “We’ll see what the cash flows do.” I think margins have increased and stayed higher than people thought. And I think that this is part of the reason, I don’t know that it’s got a stop. It’s not the whole reason, but it’s part of it.
Tobias: Margins are high because SaaS pulls out some of your cost in the SG&A line.
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