'An impending corporate-debt crisis': A fund manager destroying 98% of his peers explains why Tesla, Netflix, and other tech darlings are in the same boat as WeWork


Adam Neumann

  • WeWork, Tesla, and Netflix are all “reliant on the kindness of capital markets” for their valuations — and that’s a big red flag to Brian Yacktman, the founder of YCG Investments.
  • He told Business Insider why these popular companies are symptomatic of a potential corporate-debt crisis, and explained how his alternative approach to picking stocks produced superior returns this year.
  • Yacktman’s stock picks placed his YCG Enhance Fund in the 98th percentile of its peer group in 2019 and on a five-year basis.
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The downward spiral of WeWork was arguably the biggest business story of 2019. 

The office-sharing startup had unique leadership and financial issues that came to light after it filed documents for an initial public offering. 

But there were aspects of the WeWork saga that showcased further-reaching red flags, according to Brian Yacktman, the founder of YCG Investments. His YCG Enhanced Fund has surged 41% over the past year, putting it in the 98th percentile relative to peers, according to Bloomberg data.

For one, Yacktman argues that WeWork was not the only startup that used copious amounts of venture capital to achieve unicorn status. Its valuation — and the worth of other billion-dollar like Uber and Lyft that successfully went public — have so far proven to be too lofty.

“Before WeWork collapsed, I was saying ‘it’d be crazy to invest in that thing,'” said Yacktman, whose stock picks  placed his YCG Enhance Fund in the 98th percentile of its peer group in 2019 and on a five-year basis.

Even after WeWork’s IPO flopped, Yacktman did not consider the saga to be over. Speaking to Business Insider several weeks later, he said companies like Netflix and Tesla still had one of WeWork’s flaws: they were popular firms that relied on “the kindness of capital markets” for their valuations.  

He was not referring to the charitable leanings of individuals. Rather, he was describing investors who seemingly turned a blind eye to companies that fueled their growth with cheaply financed debt.

“The biggest concern I probably have is that all of these low rates have led to a debt binge, loaded up asset prices everywhere — in private equities, public equities, venture capital  — everywhere, Yacktman said. “And so you could have an impending corporate-debt crisis.” 

Credit investors took note of this crisis risk earlier in 2019 when recession fears reached fever pitch. The gap between the yields they demanded from low-rated CCC corporate bonds and stronger BB bonds expanded to its widest in three years, according to data compiled by Sundial Capital Research.

In other words, credit investors substantially raised the premium they demanded from the companies that would have struggled the most to repay their debt.

Yacktman’s investing approach involves steering clear of any such firm in the stock market. 

Instead, he looks for “boring” stocks that stand the test of time and are not being being chased by impatient investors. In his view, the behavioral tendency of wanting to get rich quickly leads to a systemic overpricing of popular, low-quality stocks. Meanwhile, the boring, high-quality names that attract fewer eyeballs remain up for grabs at lower valuations.

Reflecting on his portfolio’s performance in 2019, Yacktman said: “The one that surprised us — more than beaten our expectations by far — is MSCI.”

He added, “I still think that it’s a great long-term buy. We’ve owned it since 2012. In the last five years, it’s compounded at 40% annualized. They’re the gold standard for international indices. “

SEE ALSO: We interviewed Wall Street’s 7 top-performing investors to get their secrets for success — and their best ideas for 2020

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