The Triad Perspective

Triad Investment Management, LLC is a SEC-registered investment adviser based in Newport Beach, California.  We manage portfolios, including retirement and corporate accounts, and provide investment counsel to our select group of clients, which include:
  • Business owners
  • Affluent families and individuals
  • Corporate executives
  • Family offices
  • Endowments and foundations
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Simon Says?
If you're of a certain age, like me, you probably remember the game "Simon Says." It's about as simple as games get.
I remember playing in the 5th grade. Our teacher would stand in front of the class, and issue various commands. "Simon says put your hands on your head." Or, "Simon says raise your right hand." Now: "Raise your left hand." Oops, you're out.
Why is that? Because the command wasn't preceded by the words "Simon Says."
See, pretty simple game. And yet students would go down, one by one, until the last student was declared the victor.
Yes, good times...but you might be asking yourself, what does this have to do with investing?
Well, some of our clients own shares in Macerich, a Real Estate Investment Trust (REIT) specializing in retail real estate. Like many REITs recently, Macerich shares haven't been treated too well by Mr. Market. The reason? Age-old human foibles. Greed and fear. Fashion and unfashion. Popular and not popular.
Way back in 2015, Macerich's competitor Simon Property Group offered to buy the company for around $91 in stock and cash, or about $23 billion in total including assumed debt. It would have been a pretty sizable deal. Except the guys--yes all guys--running Macerich decided it was worth more. So much more that despite Simon raising its bid to $95.50 they decided this was such a demeaning bid that they wouldn't even bother to negotiate a better deal with Simon. Like Nancy Reagan admonished, they just said no. And Simon walked away, dejected.
Fast forward to 2017, and the Macerich board bestowed around $32 million in cash severance to many of the same top dogs who told Simon to go away, should MAC be sold. Hmm...I wonder why this happened?
Today, Macerich shares languish around $43 per share, less than half of what was offered 4 years ago. What conclusions can we draw from this situation?
Clearly, it appears the Macerich boys overplayed their hand. Ninety-five bucks 4 years ago looks pretty good compared to $43 today.
But here's the real conundrum. On the one hand you have a sophisticated buyer in Simon-one of the largest and highly respected owners and operators of high-quality shopping malls--saying they think Macerich was worth close to 100 bucks per share. Yes, acquirers do pay a premium for corporate control, usually 20-25% or so. So let's be conservative and say that they thought Macerich was worth about $80 per share.
If so, why are Macerich shares on a half-off sale today from when that offer was made? The real question is this: is the per share value of the company $90 or $43? And if the market is so efficient at valuing companies, then tell us, Mr. Market, why did you value it at $90 in 2015 and today at $43?
Either Simon was wrong when it made its offer, or the stock market is wrong today in valuing the same company at a much lower level. You can take your pick as to which view you subscribe to, but this much is clear, at least to me. Given essentially the same business with no deterioration in its operations, you simply cannot tell me it's worth one figure, then tell me it's worth a much different figure. It simply doesn't compute.
The bottom line is that we think it's a mistake to rely on the market price in determining what a business is really worth. There's no substitute for coming up with your own estimate. From our perspective, in the short run, the market price and business value can often be quite different from one another.
As (a different) Simon might have ordered us, "Simon says put on your thinking cap."

I'm worth $90! No, just kidding, I'm only worth $43!

-John Heldman, CFA

Past performance does not guarantee future results.  Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a SEC-registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request.  

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