Published to newsletter subscribers on March 20th, 2020


Markets have sold off at a large scale on the back of the Coronavirus Pandemic. Many of us were able to see this coming months in advance, noticing how the events in Wuhan would inevitably spread across the globe. Fortunately, we fell into this camp and were able to hedge market risk effectively. As markets reached the 95th percentile in terms of their earnings multiple over the past 100yrs, it would have taken a lot less to bring the markets down. In the end, it was a global pandemic that halted the decade long bull market.

We are currently seeing some value in the market that has not been present since late 2018 and before that going back to 2012/2013 as the S&P 500 index has fallen close to 30% from its peak. The problem is the world is on lockdown and near term demand has been reduced to zero. Further, we are likely facing a credit crunch in the debt markets, and massive liquidity problems in other markets primarily being caused by the unwinding of leveraged trades by giant hedge funds. Given this backdrop, we continue to like both Gold and Bitcoin in combination with other uncorrelated tactical asset exposure. Both Bitcoin and Gold offer a nice hedge in the case of further instability, or if the latest stimulus efforts result in UBI, thus unleashing some long awaited inflation.

Equity Trade Alert!

While restaurants are closed across the nation, grocery stores and home goods stores are busier than ever. Most blue chip names in this sector have already been bought up and are near fully priced, except for one gem:


  • Management has been treading water while doing everything they can to try to develop investor interest for the past few years
  • The company has produced strong cash flows but needs a catalyst to move itself out of a distressed valuation
  • Cash flows have been primarily used to finance a highly generous share buyback plan and dividend payout policy

The current Covid-19 Pandemic is the catalyst that Big Lots needed to spark a boost in profits and push the franchise into the spotlight

Main street Americans are running to their local stores to stock up on food and household necessities, in other words — many shelves will be empty at Big Lots stores all around the US as the pandemic continues to escalate. From an investors perspective, there a lot of options out there in this sector but none with as great of a risk / reward setup. Using sensitives on variety of valuation methodologies we are coming out with a price target in the $30 — $35 range. That would equate to a 2.5x+ increase from current price.

Quick Fundamentals Snapshot:

  • As of right now (March 19th, 2020) BIG is trading at 5x-5.5x our 2020 FCF estimate
  • On a TTM basis BIG offers a 49% Earnings Yield, an EV/EBITDA of 4.2x, and a total payout of 18.95% (buyback + dividend)

Investors will be hard pressed to find another company capable of performing well in the current environment trading at such a generous levels

The Virus

The tragic situation which our country now faces is starting to appear slightly more under control than in previous weeks. Given that we have seen other countries go through this crisis, much more knowledge and data available to our experts who now appear to be moving towards full on country quarantine + powerful stimulus packages to potentially include both debt relief and universal basic income. While there may have been some unnecessary delay off the starting line, it now feels like we are now doing what we can to address the situation as best as possible.

“No country in the world has the ability to mobilize for war as quickly as the US”

While the virus will continue to develop and escalate, it is important to note that at the current sell off pace — markets are rapidly pricing in a worse case scenario. As news flow will have continued negative headline risk, markets are likely to continue to be volatile. It is a good time sit on cash and wait for the right opportunities. See the below chart which exemplifies how the markets reacted to the 1918 Spanish Flu:

As you can see, it was not until the end of the virus’ cycle was near that markets began to rebound. Given our advanced technology and capabilities in modern society, I envision that market participants will front run the virus’ peak materially prior to what occurred in 1918. However, it will remain to be seen how long it will be until this virus peaks. In the immediate term markets appear quite oversold, but action is likely to be dictated by headlines.

Stay safe out there and feel free to reach out with any questions.


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Emerging Manager