The Mullet Discount
<April 7, 2022>
In 1989, Jeff Foxworthy released his best-selling book, You Might Be a Redneck. The book pokes fun at Foxworthy’s southern roots with 74 pages of “You might be a redneck if…” one-liners. Samples include, “You might be a redneck if you’ve ever been involved in a custody fight over a hunting dog.” And, “You might be a redneck if your mother doesn’t remove the Marlboro from her lips before telling the State Trooper to kiss her ass.” And of course, “If you’ve ever been too drunk to fish, you might be a redneck.”
When Jeff Foxworthy’s book was published, I was attending high school in a small town outside of Louisville, Kentucky. There weren’t traffic lights, and we lived on a gravel road. I even sported a mullet haircut that was later classified by the experts as a “Kentucky Waterfall.” Since I spent my childhood and adolescence growing up in the country, I could relate to many of Jeff Foxworthy’s jokes. Whether I was laughing at others or myself, it didn’t matter—it was good humor!
After graduating from high school, I left Kentucky to attend Stetson University in Deland, Florida. My mullet was assassinated in 1990 by a hairstylist in a Deland shopping center. As my glorious waterfall was cut off without permission, the hairstylist said with determination, “We’re getting rid of this!” And just like that, some of my Kentucky heritage was lost. However, as Frank Martin (Palm Valley partner and fellow absolute return investor) once said, “You can take Eric out of Kentucky, but you can’t take Kentucky out of Eric.”
And Frank was right. Kentucky remained with me long after leaving the Bluegrass State. After graduating from Stetson University, I joined a large bank in Florida, working in the Trust and Pension division. During my first portfolio manager meeting, I introduced myself and briefly described my background. The head of fixed income was the only person to comment. He said, “You don’t sound like you’re from Kentucky.” I responded, “Really? And I’m wearing shoes too. Can you believe it?”
Later in my career, I was in Beverly Hills, California with a colleague giving a presentation to a group of consultants. For some reason we began talking about our backgrounds and hometowns. As the conversation turned towards our Southern upbringing, a consultant asked if we owned shotguns. Unsure how to take such a question, I responded, “Of course, lots of shotguns, and our Chief Investment Officer’s name is Ricky Bobby.” While everyone was laughing, I took note of the conversation and used it to support a theory I’d been developing about the perception of Southern investors and business executives.
One of our favorite businesses and investments we’ve followed during our careers was Total System Services (also known as TSYS). The company was an established market-leading credit card processor for banks. It had a fabulous balance sheet and consistently generated significant free cash flow. It was everything we like in a business. Our main concern with TSYS wasn’t its business or financials—it was its valuation. We couldn’t understand why it sold at such an attractive valuation. And then it hit me while listening to one of their quarterly conference calls. TSYS suffered from the mullet discount!
Based in Columbus, Georgia, TSYS’s CEO, Philip Tomlinson, had a very thick Southern accent. When he said “percent,” it sounded like “purrr-cent.” Each time he said percent during the call, I was convinced TSYS’s stock would tick down. Regardless of Mr. Tomlinson’s long history of growing the business and allocating capital wisely, TSYS’s stock traded at a meaningful discount to the market and other high-quality businesses. While Wall Street may not have appreciated TSYS’s business results and Mr. Tomlinson’s accomplishments, we were impressed and thrilled to be able to buy its business at such an attractive valuation.
Similar to most market inefficiencies, the mullet discount eventually disappeared. Mr. Tomlinson retired in 2014, and TSYS was acquired by Global Payments in 2019 at a significant premium.
Market inefficiencies and biases come in all shapes and sizes. Identifying such anomalies can provide independent investors with opportunities others may be unwilling to assume. Recognizing your own biases can also be insightful. For example, while some investors may discount a thick Southern accent, a slick and overly polished CEO tends to make us uneasy. We often leave such meetings wondering if we were being informed or sold!
In addition to slick CEOs, we’re skeptical of most advice coming from Wall Street. In our opinion, large Wall Street firms have a significant interest in promoting and maintaining inflated asset prices. As such, we’re biased against most of their research and guidance, which we believe is driven by objectives different than our own.
And while we tend to avoid Wall Street opinions, we’re not above making fun of them. Given how many Kentucky jokes I’ve endured throughout my career from Wall Street types, I think it’s only fair to turn the table. In Jeff Foxworthy fashion, we present our “You Might Work on Wall Street If…” top ten list!
10) You might work on Wall Street if you kiss a heart frame picture of Jerome Powell each night before going to bed.
9) If your vacation house is twice the size of your client’s main residence, you might work on Wall Street.
8) If you’ve never initiated coverage of a stock with a sell rating, you might work on Wall Street.
7) If your loafers cost more than your Rolex, you might work on Wall Street.
6) You might work on Wall Street if you start every question on company conference calls with, “Great quarter guys!”
5) If you’re a frequent guest on CNBC and have said “buying opportunity,” “cautiously optimistic,” or “we are still in the early innings,” while wearing “look smart” glasses, you might work on Wall Street.
4) If your marketing department actually manages your portfolio, you might work on Wall Street.
3) If downgrading a stock from Strong Buy to Buy really means Strong Sell, you might work on Wall Street.
2) If you believe getting defensive means rotating 1% of your portfolio out of technology and into consumer stocks, you might work on Wall Street.
1) You might work on Wall Street if you consider it a success if the market is down 50% and your clients’ portfolios are “only” down 49%.
After reviewing our biased top 10 list, we are pleased to announce, we do not work on Wall Street!
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