As the “father of value investing,” Benjamin Graham made his reputation on the back of consistent outperformance.
From 1936 to 1956, Graham’s investment firm posted annualized returns of about 20%. That significantly outperformed the 12% return of the broader market.
There’s no question that the system works. Graham was Warren Buffett’s mentor, after all.
But you don’t have to be a financial genius to understand this philosophy. In fact, the basics of the “Benjamin Method” are easy enough for a five-year-old to master…
Graham simply invested in undervalued companies with sound business plans and sound financials. And this is still the most successful long-term method for creating wealth in the stock market.
The Challenge in Valuing a Stock
Now, admittedly, the most difficult task for any value investor is finding “undervalued” stocks in which to invest – especially in today’s zero-interest-rate environment and central-bank-fueled financial markets.
But undervalued stocks still abound…
Just look at TravelCenters of America (TA). Its shares have risen more than 18.2% in the two-day trading session beginning on Friday.
TA shares closed higher again on Monday, ending the day at $17.71, an increase of 6.6%.
Now, you might be inclined to believe that this unglamorous stock would no longer be undervalued after such a run-up in a very short time.
But you’d be making a mistake.
TravelCenters of America is a company with a solid business plan and impeccable financials. And shares remain significantly undervalued, according to a major shareholder, RDG Capital Fund Management.
RDG recently announced that it delivered a letter to TA’s Board of Directors indicating that the fair market value of TravelCenters of America is between $24 and $27 per share. In other words, the company has a potential upside of 53% to 72% compared to Monday’s closing price.
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Now, RDG made a clear pathway to unlocking TravelCenters’ full value:
- Conduct a sale-leaseback of the company’s significant real estate assets.
- Spin off the company’s growing truck-repair services segment.
Here’s the kicker: RDG estimates the true value of TA’s real estate and truck-repair segments to be worth more than the company’s entire market cap, which is currently north of $600 million.
Now, most investors mistakenly assume TravelCenters to be a slow-growth, low-margin company. But that’s not the case.
The company sports a growing chain of 359 quick-service restaurants, 218 full-service restaurants, 34 convenience stores, and 240 truck-repair facilities that contribute a significant portion of the company’s total revenue and profits.
Fundamentals That Graham Would Love
Granted, there’s no guarantee that TravelCenters’ Board will assimilate the changes RDG has requested.
That shouldn’t dissuade investors from including TA shares on a short list of investment contenders, however.
Whether or not the Board inculcates the requested changes, TA possesses attractive valuation characteristics, which gives investors a margin of safety.
The stock currently trades at a trailing P/E ratio of 9.7, a significant discount to the S&P 500 average P/E of 19.6.
But as my colleague, Alan Gula, writes, a more valuable ratio is the enterprise ratio (EV/EBITDA), which provides investors a better valuation of a going concern. That’s because it takes a company’s level of debt into consideration.
And with an EV/EBITDA ratio of just 3.66, TravelCenters of America is well off the average S&P 500 ratio of around 11.
Furthermore, the company boasts strong liquidity, with a current ratio of 2.1.
If Ben Graham were alive today, TA would definitely be on his short list. It should be on yours, too!