We Study Billionaires - The Investor’s Podcast Network - TIP253: An Intrinsic Value Assessment w/ Jesse Felder (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, you're in for a treat because we have an incredibly intelligent guest, Jesse Felder, with us. Out of all the people we interview and have on the show, I have to say Jesse's methodology is not only impressive, but extremely instructional. Jesse has managed funds in excess of a billion dollars, and you'll quickly see from our discussion that he has the ability to look at things very differently than most people. Throughout this entire episode, we're going to be talking about a single stock pick and one

Starting point is 00:00:29 that most people wouldn't even give the time of day, which I think makes it extra interesting and special. But there's tons of learning that happens in this episode. So I think you're going to thoroughly enjoy this. And if you're a Buffett-style investor or a momentum-style investor, Jesse's going to be giving you some serious stuff to think about. And at the end of the episode, he talks about how he's determining the intrinsic value of the company. So here's our in-depth analysis of Bed Bath and Beyond with Jesse Felder. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:01:20 Welcome to the show. My name is Dick Broderson, and I'm here today with my co-host, Preston Pesh. We have a fan favorite here as our guest, Jesse Felder. Jesse, welcome to the show. Thanks, Sig. It's a pleasure to be here. Jesse, you might not know this, but I consider you. to be a fantastic friend. And you might be, why, stick? Why are we such good friends? Well, I don't

Starting point is 00:01:44 know if you remember, but back in Q2, 2017, we had you on for a mastermind meeting. It was back on episode 143, which we'll definitely link to in the show notes. And Beth, Beth, Beyond, the stock we're going to talk about today. That was trading at $35. And now the stock is trading around $10, and I pitched it to the group because I thought it was a great stock compared to the price. Then this guy, Jesse, Jesse Feller, tells me, I would probably think twice about that stock pick stick. So I ended up not investing. So thank you so much, Jesse. You're very welcome. To me, it's the price you pay determines your rate of return is maybe my favorite Warren Buffett Court of all time. And the price just didn't make sense to me at that time.

Starting point is 00:02:27 So, Jesse, fast forward to today, because you're here on our show actually to pitch Bethbeth beyond. So we're turning the table. So it's going to be very, very exciting. Yeah, you know, it's a stock that I really wasn't paying much attention to until you brought it to my attention. And then I started, you know, looking at it. It's funny, you know, this is a stock that's gone from being a large cap, $17 billion, dollars not too long ago to just over a billion dollar market cap today. So it's literally, I mean, it's gotten absolutely crushed. So these are usually the types of things that peak my interest. You know, what is the most hated stock in the market? You know, where's the most fear in the market? And I really think that Bed Bath and Beyond qualifies for those types of candidates right now. So let's talk about what happened this year for Bethbath Beyond. It's been quite a year.

Starting point is 00:03:13 We had activists calling for new leadership. Mary Winston became the new interim CEO back in May. We have talked about turnaround plans. How would you describe 2019 for Bethbeth Beyond so far? Well, it's absolutely right in the midst of a transition. And there's tons of question marks about the business, about the company, about the leadership. That's usually what's required to get deep, deep value in the market. There's just tons of uncertainty surrounding this company right now. So it's right in the midst of a transition in leadership, transition in trying to figure out

Starting point is 00:03:45 how it's going to run its business, what it's going to do to turn around the business. So yeah, there's just tons of gray area that makes investors very uneasy and they sell the shares and push it down to an incredibly low valuation as, you know, in reaction. So that's kind of the way I look at it right now. So, Jesse, we're going to get to all the risks and issues with bed, bath and beyond, but let's quickly hear your bull case on why you think it might be a buy right now. The way I look at a potential investment, there's three things. I want to find something that's cheap. And the way I look at it, we could talk about my valuation system. This stock is one of the cheapest stocks that I've seen in years right now at its current price valuation. But at the same

Starting point is 00:04:24 time, I don't want to, and this was another reason I didn't like Bedbath and Beyond a couple years ago, I don't want to buy something that has strong downside momentum. I want to see something that technically looks like it's trying to form a bottom. And we can talk about the types of tools I use in that regard. And then finally, I want to see what are the insiders doing? And typically I like to see heavy insider buying. There's not been any buying here, but there really hasn't been any selling on the part of executives. And executives have been exercising a ton of stock options recently and holding on to all of those, not selling any for even tax purposes or anything. So interpreting that insider activity is important too. And I really think that's not as bullish as I would really like to see, but it's

Starting point is 00:05:02 pretty darn bullish. The fact that they've been exercising a ton of options tells me that they think there is a potential floor under the shares. And along with that, they have a massive buyback program left at Bedbath and Beyond with, you know, I think it's a billion two authorization. The market gaps a billion, too. So I mean, if they pulled this off, they would essentially take the company private. So I think that's maybe what investors are looking at, or insiders are looking at too, is that, you know, look, we could basically, the company could put a floor under the shares if they chose to right now. You mentioned before, Jesse, which tools do you use whenever you say that it might look like it's hidden bottom? And now you see a positive momentum trend.

Starting point is 00:05:39 When you look at the momentum in terms of the price versus a 40-week moving average and the price versus a 10-day moving average. Recently, as the price has been hitting new lows, momentum has been actually making higher lows. So that kind of non-confirmation tells me that downside momentum is potentially waning. And you can also see it in those typical technical tools, too. So you look at like on a weekly chart, look at MACD and RSI, money flow, all these things are not confirming the new lows in price, which to me says, okay, this thing doesn't

Starting point is 00:06:07 have this super strong downside momentum that I would try and avoid. It's kind of running out of steam to the downside potentially. Which tools would you use for insider trading? There are so many tools online that not all of them are consistent, especially for something like insider training. My friend Asif has put together a site called Insight Arbitrage, which is terrific. And he puts out a free weekly newsletter highlighting the most interesting buying and selling during the week. So I use his site. And his site is also beneficial too because he shows this options activity that I'm talking about.

Starting point is 00:06:38 But there's another site I like too called Open Insider. It is basically just buy and sell activity. doesn't show the options activity as effectively as Asef site does. But those two are the sites that I go to probably on a daily basis to just monitor this stuff. Let's talk more about the company. One of the things that really stands out whenever you look at a company like Bethbeth Beyond is the short float. That's currently at 46%. Perhaps could you explain for the audience what is the short float and what is the impact for me as a long investor? Yeah. So this is actually one of the things that has gotten me really aggressive in the shares right now because typically,

Starting point is 00:07:13 when I look at a stock and I see a very high short float, I typically assume this short sellers are right. So essentially, all short float is so you take the float of the company, which is essentially the shares available for outsiders to trade in the market. So the share is not held by 10% owners or other insiders like the executives. The fact that half of those, almost half of those shares that are available to trade have now been sold short, sets up a potential for a short squeeze. If things do not turn out as badly as people are anticipating right now, these shares have to be covered. They have to be bought in at some point. So these short sellers have gone to their brokerage firm. They've borrowed the shares from the brokerage firm and they've sold them in the open market.

Starting point is 00:07:52 At some point, they have to buy those back and return them to the brokerage firm. So I do a lot of short selling myself. I look at this and this is the last stock I'd ever want to be short because it is so incredibly cheap and because the short side has become so crowded that the potential for a squeeze is pretty serious. So, Jesse, what would you be calling a high number. Stig alluded to 46 being a high number, but what do you think? Certain things you look at, you could look at days to cover. So you look at like the number of shares that are sold short versus the average daily volume. And when you see, you know, it would take like five, 10, 15, 20 days for the shorts to cover, you know, similar to like this 50% of your float.

Starting point is 00:08:29 If you look at the history of the float in Bed Bath and Beyond, it was really kind of minuscule for a long period of time. And now that the stock is potentially forming a double bottom, technically, and momentum looks like it's waning to the downside. Now shorts have really stepped up to go heavily into this thing on the short side. And I really do think a lot of this is probably just CTAs and trend followers who are not necessarily looking at the fundamentals. They're not looking at any of these types of indicators that I'm mentioning. They're simply looking at this stock is in a steep downtrend and we're going to short it

Starting point is 00:09:00 as a basket of similar shorts that are in technical downtrends. Looking at a company like Beth Beth Beyond, you know, it's so, unfortunately. popular, as you also mentioned. But how much of the negative sentiment is really about retail and about losing out to Amazon and how much is specifically tied to the performance of BethBath Beyond? Well, you're right. I mean, retail is really out of favor right now. But one of the things that I really do think this is mostly about Bed Bath and Beyond and the specific company issues, because when you look at the valuation of this company relative to its peers, which is one of the evaluation tools I look at, in peers, I'm talking about, you know, coal.

Starting point is 00:09:38 and Target, Walmart, William Sonoma, Restoration Hardware, you know, companies that are in kind of similar lines of business, if this stock were to trade in line with those companies based on price to sales ratio, price to free cash flow, price to tangible book value, this would be a $60 stock today if it traded in line with its peers. It's a $10 stock today. So it's not only trading at a severe discount to the market, it's trading a serious discount to its peers. You take the cheapest stock in that basket that I mentioned, which is Coles. And if Bedbath and Beyond traded at the same valuation is coals, it'd be a $30 stock. So it still trades at, you know, 70%, 65% discount to the cheapest stock in its peer group. So this is definitely about Bed Bath and Beyond.

Starting point is 00:10:19 So what kind of multiple are you using here? A P.E. or what are you using? I use a variety of different ones. I typically stay away from a P.E. multiple. For this retail group, I used price to sales ratio, price to free cash flow, and price to tangible book value are the three metrics that I'm using in this case. It's interesting that you would bring up these metrics. And I know we were supposed to talk about Beth Bath Beyond, but I would like to take the conversation momentarily into another direction here. So we spoke to Bill Miller here on the show.

Starting point is 00:10:48 We talked to Bill Nygren here on the show. They both talk about how PE used to be a good metric in terms of valuation, but then gradually during the 90s, it started to change because of the shortcomings of that metric. Do you use price to earnings at all today in your valuation? I mean, there's two reasons why I don't like it. One is because leverage is at record levels. And so the simple price doesn't factor that in. That's why I like enterprise value better. The reason I don't like earnings is that corporate profit margins are also at record highs today. The only way I would use a P to E is to try and normalize it somehow. My friend Eric Sinamon has done some great work on

Starting point is 00:11:26 this where he talks about let's normalize earnings over the cycle. And I think if you're not normalizing profit margins, normalizing earnings, then you're doing yourself a lot. a disservice because a lot of times you're going to build a valuation on top of peak earnings, which doesn't help you at all. That's part of the reason why I like I'm using price to sales and price to free cash flow and these other things. So Jesse, when you say price to sales and price to free cash flow, how much are those multiples also impacted by credit cycles, especially when you're looking at them for a company like Bed Bath and Beyond? This speaks to the broad market too. I look at the broad market from a price to sales ratio too, I think is much more

Starting point is 00:12:01 valuable. The price to sales ratio takes out that cyclicality and profit margins. And so that's why I like that one. I do believe in cycles. I do believe the Federal Reserve hasn't ended the business cycle. And so I want a valuation that's going to build in that full cycle type of numbers for me. I don't want to be assuming that we're not going to have a recession built into my evaluation model, which if you're using peak earnings, you're essentially assuming that we're going to continue to see economic expansion. And I think that's a very dangerous assumption that investors making on macro and micro levels. Let's take a quick break and hear from today's sponsors.

Starting point is 00:12:36 All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories

Starting point is 00:13:11 from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because

Starting point is 00:13:55 you can attend in person. Standard and patron Passes are available at Osloof Freedom Forum.com, with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses.

Starting point is 00:14:36 It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the Netsuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, Netsuite helps you stay ahead.

Starting point is 00:15:11 If your revenues are at least in the seven figures, get their free business guide, Dismifying AI at Netsweet.com slash study. The guide is free to you at Nessuite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters.

Starting point is 00:15:42 For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting to the company. getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions, and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business

Starting point is 00:16:20 today with the industry's best business partner, Shopify, and start hearing, sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Jesse, I was in a call with Bill Nygrin from Okmatt funds here the other day. He co-managed his $24 billion. This is an episode. so they'll be out in a few weeks. He talked about why the bigger banks are gaining market here because they can provide services and a platform that's just so much better than what the smaller banks can. I talked to you and we talked about you would pitch Bethbeth Beyond. I was thinking if the same principle would apply for a small company like Bethbeth Beyond whenever it's competing

Starting point is 00:17:14 against Amazon. Absolutely. This is one of the issues is that Amazon is a massive competitor. Wayfair is another one that's come into the market and has become a very important competitor for Bed Bath and Beyond. These are the issues. And so the way I look at it is, does the valuation account for these risks, these challenges? Does the valuation not account for that? I would argue that the current valuation absolutely does account for the challenges that they're facing right now. So that is what's going on with the company right now. It's why the valuation is so cheap is because they're trying to figure out, okay, how are we going to best compete against these online competitors who have essentially zero percent, profit margins at the end of the day. And how do we, you know, compete against them without going out of business? And so it is a challenge. So it's somewhat absurd the amount of consolidation that we've seen in this sector. What's your expectation moving forward and are we going to

Starting point is 00:18:05 see even more? I think there's two major kind of macro factors going on right now. One is you're starting to see discussion around a renewed antitrust framework, which is really targeting Amazon among a couple of others. We're starting to see Washington. Washington discuss breaking these companies up at the very least, preventing them from entering new businesses. If Amazon were to be restricted and its ability to manage, run its platform and compete with its own customers, that would be very beneficial to companies like Bedbath and Beyond. I don't think that you have to believe that's going to happen to be bullish on the stock. But that's one factor. The other factor is that we've seen during this cycle,

Starting point is 00:18:43 We've seen investors being willing to fund companies that generate losses and have no prospect of generating positive returns. That is also potentially shifting. So you see Uber and Lyft and WeWork and I would throw Wayfair into this category. I do think investors certainly at the end of this cycle, but I think we're already seeing early signs of this are getting to the point where they are becoming more reluctant to perpetually fund these loss making businesses. to the extent that that continues, it's going to benefit companies like Bedbath and Beyond. If you look at the top line of BethBeth Beyond since 2016, it's been flat, but margins just continue to decline. If you just take one example, the gross margin, that's been going on for close to a decade now. So we went from 41% to now only 34%. Why has this happened?

Starting point is 00:19:37 It's a combination of a couple factors as people shopping more online. It's the product mix that they've been able to sell. I think it used to be that foot traffic was a lot better in these stores, and Bed Bath and Beyond was maybe the best in the business at selling you things you didn't realize you wanted when you walked into the store. So they'd have all of these things all over the store that would catch your eye, grab your attention, and they would just sell extra products at higher margins due to the foot traffic and then their ability to monetize that foot traffic. Now that the foot traffic's down, you know, that business model is not working as well as it has in the past. And they're also being forced to compete on price. They have gone into online. The price competition has

Starting point is 00:20:16 gotten more severe in recent years, too. So I think it's a combination of those two things. Another thing I would like to bring into the mix is those infamous coupons that they keep sending out. You know, whenever you are on these earnings call with the management of Beth Bathion, they talk about how it's also squeezing margins. For me, as an investor, I would be worried if they're inflating themselves. You know, it's sort of like the fat, you know, they just keep doing QE. So Beth Bath Beyond can't do that, but they can keep on printing their coupons. We'll give people either free shipping or 20% off or whatever it is. I guess also as a consumer, I would think, why would I ever buy anything at retail price? I would just wait for one or those coupons.

Starting point is 00:20:55 It's a really interesting question because if you look at the attempted turnaround of JCPenney a few years ago, when they brought in, it was Ron Johnson, I think, from Apple. And he tried to go from a coupon base to everyday low prices and eliminate coupons. And it almost killed JCPenney. When you have a customer base that is addicted to coupons, you take those coupons away, even if you're very good at your messaging saying, we don't need coupons anymore because we're going to give you these prices all day every day. That's not going to work. People love to get a good deal. They love to feel like they're getting a good deal, not an everyday low price. And so I do think you have to know your customer base. I think bed bath and balance is probably doing a better job with that. In balancing that every

Starting point is 00:21:38 day low price with still giving people what they want, which is the feeling that they're getting a deal by getting a coupon. And so they basically just changed over the board. I think it's 12 out of 13 board members just changed over. And those are all brand new people, but they all have extensive backgrounds and retail. So I think they have a really good base to discuss these issues with people from diverse retail backgrounds and figure out what is the best way forward. So Jesse, you were talking a little bit about the management there. So when you look at the old management of Bed Bath and Beyond, they were the very definition of excessive compensation. So I'm curious how you think about executive management compensation and how maybe you value that or how you view that from a cultural

Starting point is 00:22:20 perspective for the company. It's really critical. I think pay absolutely should be tied to performance, but not to per share performance. That has huge incentive to buy back stock at uneconomics. prices. When executives are, I guess, incentivized by per share pay, all they got to do, if they're not going to meet their numbers, that quarter is buyback extra stock. They can meet their performance hurdles and get those bonuses. You know, that's one thing I don't like to see. Interests are not aligned between, you know, shareholders and management because they buy back stock to boost their own bottom line and potentially harm the company. So, but that's one thing I'm really excited about Bed Bath and Beyond right now is they have the potential to bring in somebody new, bring those pay practices back in line. And, they just started in their second quarter buying back a ton of stock at this $10 to $15 price range, which to me is right now it's exactly what they should be doing. They have this huge authorization. They have the cheapest stock in the history of the company. So if there was ever a time to be buying back stock, it's right now. And I'm glad to see that they've been doing that. So for all the terrible things that we said about Beth Bath Beyond so far, what's the

Starting point is 00:23:27 mode of the company? This is an interesting thing to think about too, because when you read analyst reports about it, especially I was reading through the Morning Star reports recently, and they refer to it as no moat, Bed Bath and Beyond, which tells you a lot about the sentiment towards the company right now, is that investors want these companies with moats. There are very few of them actually in the markets, and that's why they're so highly valued right now. Bed Bath and Beyond probably doesn't have much of a moat. I think generally retail, it's very difficult to find retailers with moats. It's usually some type of branding, some type of unique products that they offer that creates that. So that's what Bedbath and Beyond is struggling with right now is

Starting point is 00:24:04 what is our moat. That's a question right now, and that's why the stock is so cheap. So I would highly recommend for the listener to go back and listen to episode 143, where I originally pitched Beth Bath Beyond and then track some of the development that happens until today. But one of the things that Jess is said during that conversation was the old Warren Buffett quote that you're only as profitable as you were dumbest competitor if you're in a commoditized business. Given that the biggest competitors, Amazon, perhaps even more, Wayfair, not really making any money, how should we as investors look at that quote today, Jesse? Yeah, you have to say, okay, how is this company going to survive in a commoditized business? They're selling the same

Starting point is 00:24:47 products you can go buy on Amazon or on TV or on, you know, through Wayfair. How are they going to survive in that framework? I would just point out that, you know, the company has had over $4 in free cash flow over the last 12 months, even while competing with Wayfair and Amazon, $4 in free cash flow. That's cash from operating activities, less capital expenditures. If they can generate four bucks in that type of a competitive environment, that to me is a sign that they're doing just fine competing against these guys. They're still figuring out ways where they can sell high margin products using that foot traffic. And they're finding ways to like a cost plus world market. They do have unique product lines that do give them some sort of a moat along some of those

Starting point is 00:25:28 product lines. But I also think Wayfair's going to get to the point probably where investors are going to be tired of funding losses for a company that sells furniture. This is not Netflix, which can be $2, three, four billion in negative free cash flow and people will fund it because it's a technological miracle that has very high capture among its audience. Wayfair's not that. People will switch away from Wayfair to whatever has the best product at the best price. And as soon as investors, you know, get to the point where we're not going to fund half a billion losses at Waifer any longer, they're going to have to figure out a way to become profitable. And at that point, that's going to be very, very beneficial to a company like Bedbath and Beyond.

Starting point is 00:26:05 I do think it's important to think about, okay, yes, they're competing against these companies against Amazon, Wayfair, et cetera, and others who are happy with zero to no margins. But Bedbeth and Beyond has found a way to do it over the last 12 months, even in the midst of such incredible negativity among investors. They said, you know, they're going to earn two bucks a share this year. So it's trading five times earning. So if you can earn two bucks a share and profits in this type of environment, then I think they're doing pretty good. So let's shift gears and talk about the online portion of the company. Back in 2012, the company started to build somewhat expensive data centers, which increased their fixed cost structure. And then in 2016, they acquired a company

Starting point is 00:26:41 called personalization mall.com for $190 million as part of this online strategy. So how do you evaluate their online retail so far? The online is working. The return on investment for what they spent on that. I don't know if that was worthwhile, but it's something they actually have to do in order to compete with the online companies. So they have spent money on it, but I think comps were negative 6.6% in the last quarter, but the stores were closer to, you know, the higher end of, you know, single digit decline in comps. So the online is growing and it's offsetting some of that decline in stores. So it is working. They created a membership platform that gives people free shipping and whatnot to try and compete with Amazon Prime. And so these are efforts that are still

Starting point is 00:27:23 kind of in their early stages. From my perspective, it seems like they're helping to stem the decline in same store sales. So to that extent, they're worthwhile. So we already talked a bit about it. But let's talk more in depth about Beth Bath Beyond's Capital Allocation Strategy. And the company has long been known for not to pay out dividends, which changed back in 2017. A few years before that, they also took on a lot of debt. So that's another thing to consider for this company. I guess my question goes to how do you evaluate the allocation strategy? It's still buying back up stocks. It's paying out a decent dividend, 6.5%, but it also has to reinvest in the business. How do you evaluate what they're doing right now with the new management? The way I look at the

Starting point is 00:28:06 enterprise value, and this might not come up in some of the standard ratios that you look at, they have about 900 million in cash, 1.4 billion in debt, and that doesn't include, I think, operating lease obligations, which is something I don't factor in. That's a new accounting standard. So they have net half a billion dollars in net debt. That would put the enterprise value. I think market caps around $1.2 billion, something. I put the enterprise value in around $1.7 billion. And the company does about $700 million in EBIT. So they could pay off all the net debt in one year's EBITDA. The other factor about that, too, is if you look at their debt, and I was talking with Eric Sinamon about this just yesterday when we were looking at the company together. And he

Starting point is 00:28:46 pointed out that the company's maturities are, I think, 2034 and 2044, and they're paying 4 to 5% on this debt. So if I'm bed bath and beyond and I could go issue more debt, I mean, this is why I don't think it would be hard to take the company private, because you look at $1.7 billion enterprise, I mean, or just 1.2 to buy out the equity. They already have $900 million in cash. If they went borrowed another $500 million that's matured in 2044 and borrowed at 5%. They could take the company private in a heartbeat. The capital allocation strategy that I would do right now if I were them, and this is probably a way too aggressive for any public company, is borrow a little bit more money with a 2049 maturity, you know, issue a 30-year bond at 5, 6% with today's interest rates,

Starting point is 00:29:30 and just say we're going to buy back stock until we buy it all. We'll take the company private if we have to. They're in a position right now to be able to do that, which to me is if I was a short So it would be absolutely frightening. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

Starting point is 00:29:54 VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps you, your deals moving. Instead of chasing spreadsheets and screenshots, Vanta gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Riter spend 82% less time on audits with Vantta. That's not just faster compliance, it's more time for growth.

Starting point is 00:30:28 If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at Vanta.com slash billionaires. That's Vanta. com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more.

Starting point is 00:31:02 Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more.

Starting point is 00:31:43 Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors. private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be

Starting point is 00:32:23 a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the fundrise income fund in just minutes. Funds total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show.

Starting point is 00:33:03 So, Jesse, talk to the audience about what it means for an existing shareholder if the company would go private. So today trades at $10. They'd have to probably offer some type of a premium to today's price. And the blowback from public investors would be really severe. I mean, with the activists they have now, the activists who are getting involved in the name are not buying it at $10, $11, $12 so they can sell it for $15, $15, $16. They're getting involved today so that they can sell it for $30, $40, $50, $60, $60 a share down the road. I think that would be the biggest impediment to taking the company private as it would be very, very, they would probably get sued by shareholders. That would be unhappy with only getting 13, 14, 15 bucks a share or something like that.

Starting point is 00:33:43 So it gets at another issue of buybacks. The way companies should do buybacks, if they were really going to be above board and not manipulate their own share price, is to just use tender offers and just say, we're going to buy back this number of shares at this price. And you can elect to participate or not and keep your shares. And so I do think, you know, Bed Bath Mia could do a tender offer. That, you know, would be a good idea. But generally, they have the ability to buy back a ton of stock right now. I'm glad to see that they're doing it. When they were asked on the conference call about it, it was interesting, too, to hear

Starting point is 00:34:12 the interim CEO and the CFO talk about it. They kind of didn't want to answer the question. They giggled a little bit. To me, that suggested that there's something up their sleeve, that they are planning on buying back a ton of stock this quarter. Do you see the company stop paying out dividend in the future and perhaps even reinvest less in the business because of this plan. I would love to see him cut the dividend to zero and just buy back stock right now because

Starting point is 00:34:35 I'm getting 6% dividend yield. But buying back stock today at five times earnings is essentially a 20% earnings yield. So I would prefer them to cut the dividend to zero right now, use all that money to buy back stock. But that's probably not going to happen because once you attract those income-oriented investors like they have done, I think, you don't really want to alienate them. So I don't think it would be necessarily a smart. art move PR-wise to cut the dividend, but today makes much more sense to buyback stock.

Starting point is 00:35:03 What would be the impact of an activist for an investor of Bedbath and Beyond? Well, I always like it when activists get involved with a name, whether it's, you know, Carl Icon or Bill Ackman or any of these guys, they usually advocate for positive change on behalf of shareholders. And so it's a good sign. I know that, you know, Toby has talked about, he looks for companies. It's why it's the acquirers multiple. He looks for companies that are trading at a cheap enough valuation that would attract activists or attract buyouts. And to me, the sign that activists are getting involved is a sign that this stock is cheap enough to get some very smart investors that have the power to affect positive change. And that's what's

Starting point is 00:35:41 happening right now. So I look at that as a very positive thing. Keeping all the facts in mind that you presented here so far, what is your assessment of the intrinsic value of the stock? I come at the intrinsic value or the fair value of the shares three different ways. One is looking at it versus its peers. You know, if it traded in line with its cheapest peer, I get a 30 bucks to share valuation. I look at the valuation history of Bed Bath and Beyond. And this is difficult because the stock was very expensive for a long period of time and traded, you know, 30, 40 times free cash flow for a long period of time. It's also why the stock has gone down so much over the last several years. It's because it went from extremely overvalued

Starting point is 00:36:19 to extremely undervalued at this point. But if you look at the stock, the history of the valuation, If it just traded it in line with its average valuation in the last five years, and I'm excluding all those times before that when it was extremely overvalued. It'd be a $45 stock. If you just look at the cheapest levels it traded out in the last five years, I'm taking the low price of the last five years compared to free cash flow compared to these metrics. It would be $33 a share if it traded at its lowest valuation in the last five years. So let's just use that as a number. So I get $30 relative to its peers, $33 based on its valuation history. And then I do a very simple discounted cash flow analysis too where I'm assuming a zero percent

Starting point is 00:36:58 growth rate in cash flow. And then I'm backing out the net debt of the company. And I get a $25 share valuation there. So I put those together. I get about $30, $29, $30 to share fair value. I think $30 is a very conservative number for this. And so to me to be able to buy a dollar for $33 in this name right now is a very attractive opportunity. So how worried should a person be about the declining margins and potentially even declining revenues moving forward? And how do those variables enter into the way that you would be valuing the company? Yeah. So let's take actually the trailing. So this is another fun thing I do with the discounted cash flow model. And like I said, I only project out earnings three years. I don't think anybody can project out more than that. So I project out three years and then

Starting point is 00:37:43 I use a terminal value at the end of three years. And so I look at what is, actually priced into the shares right now. What does that mean for the company? So basically, I have to go to a negative 5% per share free cash flow. And then I have to use a discount rate of 15% in order to get to the $10 stock price today. So that tells me that even if cash flow declines 5% per year of the next year, this is cash flow per share. This is cash flow and everything. I mean, they would have to, cash flow would be probably going down 10% a year for per share to go down 5% a year. I use a discount rate of 15%. So it's basically telling me even if I pay 10 bucks a share for the stock price today and cash flow per share declines 5% a year, I still should get a 15% return on my purchase today.

Starting point is 00:38:25 So to me, that's one of the fun things about a discount of cash flow money. You can see what's actually priced into the shares today. What's the scenario? If I use a 10% discount rate, I have to go to a negative 15% or more cash flow numbers. So if cash flow defines 15, 20% per year and I pay 10 bucks a share today, I'm still going to make a 10, 12, 13% return on my money over the next several years. This is how I approached that concern. And I will just say that I've never had a really successful investment that I wasn't scared to buy. So you have to be a little bit scared. That's what creates the opportunity.

Starting point is 00:39:02 Fantastic. Jesse, we learned so much from you. Where can the audience learn more about you? My website is thefelder Report.com. I try and put up a blog post there once a week about usually about broad. market stuff. There's also a free newsletter available on the site every Saturday morning I send out. Basically, the five things I found during the week that were most valuable to me. It could be charts, links, stories. It could be a podcast. That's just at thefelder report.com. And then I'm super active on

Starting point is 00:39:29 Twitter. I'm constantly reading and sharing research and things that I find interesting on Twitter. That's just at Jesse Felder. Jesse, thank you so much for coming back on. I know I always learn an absolute ton every time we get a chance to talk. So just really appreciate it. It was a blast, as always, and appreciate you having me on again. All right, guys, so at this point and time in the show, we'll play a question from the audience, and this question comes from Max. Hi, Preston and Stig. This is Max from San Francisco.

Starting point is 00:39:57 Really love your guys' podcasts and the work you guys do. The question I have for this week is around macro factors and how those impact your projections for free cash flow when you're trying to find the intrinsic value of a company. How do you weight those? How do you not wait those? It seems like today's nuke cycle constantly. is changing and it would be great to kind of understand your guys' process when you're projecting high growth or low growth and trying to find your margin of safety. Thank you, Max, for your question.

Starting point is 00:40:25 I would say that I generally pay a lot more attention to the micro factors, meaning the stock itself and the industry, rather than macro factors like interest rate, inflation or whatever it may be. But to answer your question, how do I include macro in my investment thesis? I would say that I always look at the main economic cycle. Unless you have a counter-sick like a company, say a company that specializes in bankruptcy, you will see a decline on your bottom line when the economy is in a recession and a boost whenever you anticipate and upswing. We have a lot of good economic indicators to make predictions, but it's a lot harder than it sounds,

Starting point is 00:41:07 which is also why I don't attribute too much to the macro factors, but it's very good to have a reasonable idea of where we are in the cycle. It's not about knowing a specific date when everything will go bad. No one knows. Another macroeconomic factor I always pay attention to is the interest rate, as it influences everything in business. I typically don't invest in companies with significant debt, but it's still important to consider. One reason is that competitors might have debt, but more importantly, if the interest rate

Starting point is 00:41:38 goes up, the comparative value of my investment would go down as with all other equities. So really to sum up, the way I factor both cycles into my decision is that I like to have a rough idea of where we are on this cycle. And if the outlook is gloomy of where we are right now, I would add a higher margin of safety and vice versa. Max, great question. So Warren Buffett is really famous for saying that he doesn't pay attention to macro factors. And I think that one of the reasons he's always had this point of view is due to the countless companies you have to choose from whenever you're making a stock selection. So on today's show, we were talking about bed bath and beyond. At the end of Jesse's assessment, you heard him say that he thinks that the company's

Starting point is 00:42:21 trading at one-third its value. Now, regardless whether you agree with his assessment or not, if you can find a company that you believe is undervalued by that kind of margin, the macro input should be somewhat negligible. The one thing that Warren does pay attention to is the interest rate, but he's not paying attention to the interest rate to make some grand projection on where it's going to go next. Instead, he's using the 10-year treasury as a ruler, kind of like a ruler that you would measure the table with. He's saying, okay, I can go out and get 2% return before inflation on the 10-year treasury.

Starting point is 00:42:58 Therefore, that's my measuring stick. That's what I'm going to use to see how many. multiples of that ruler I can go out and get. So let's say he comes across the company that will give him a 200% return on his money. Well, that kind of seems like an obvious decision when you're comparing it to a ruler of call it 2%. So you can see how when you're doing these assessments of smaller businesses, and this is where it's gotten really hard for Buffett recently is because for him to go out and buy a company like Bed Bath and Beyond, it's so small relative to the capital that he has to employ that it's a little bit harder. It's a lot hard. It's a lot hard.

Starting point is 00:43:32 for him to do the things that he was doing when he was a lot younger. But you can see why his methodology is to pretty much ignore macro. He does pay attention to the interest rate because he uses it as a ruler, but beyond that, I don't necessarily see him paying too much attention to macro factors. All right, Max, thanks for the outstanding question. As a token of our appreciation, we have an online course called our intrinsic value course that we're going to give you completely for free. Additionally, we have a filtering and momentum tool.

Starting point is 00:44:02 which we call TIP Finance, we're going to give you a year-long subscription to TIP finance completely for free. Leave us a question at Asktheinvestors.com. That's Asktheinvestors.com. If you're interested in these tools, simply go to our website, The Investorspodcast.com. And you can see right there in our top level navigation, there's links to TIP finance and also the TIP Academy where you'd find the intrinsic value course. All right, guys. That was all the Preston I had for this week's episode of the Investors Podcast. See each other again next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to theinvestorspodcast.com.

Starting point is 00:44:42 To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted. before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP253: An Intrinsic Value Assessment w/ Jesse Felder (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.