MicroStrategy (MSTR) and bitcoin have been in the headlines as of late and for good reason. After a more than 500% gain in its shares this year, MSTR has been selling stock and convertible securities to fund purchases of bitcoin, which recently topped $100,000 for the first time. The viewpoints on this phenomenon are all over the map, ranging from crazy good to just plain crazy. This may sound like heresy coming from a firm of value investors, but this capital allocation strategy is entirely rational, and MSTR shareholders are right to root for more. Yep, you heard me correctly. Share issuances can be useful when done properly. We are value investors at Harris | Oakmark, so we see far more share repurchase than issuance from the companies we own, but one is not necessarily better than the other. Share repurchases and issuances are two sides of the same coin, if you will, and both can be done rationally.
MSTR’s primary asset is its bitcoin position, which as of December 1, 2024, totaled 402,100. At a then price of $96,400, this stake has a value of $38.8B or $143.43 per fully diluted share. MSTR’s share price before the open on December 2, 2024 was $383.25, which put the premium to bitcoin at over two times. I want to emphasize: we do not have an opinion on the value of bitcoin or MSTR, but we do appreciate the concept of using a currency (MSTR stock) valued at twice the underlying asset value (bitcoin) to buy more of that very asset at market prices. Issuing stock in this way reduces the premium MSTR shareholders are paying to own bitcoin. This is a good thing, though the benefit is ultimately limited to minimizing the premium at which MSTR shares trade relative to its bitcoin holdings.
In the same way, rational issuers of stock are using an attractive currency relative to what they are buying with the proceeds. This could include issuing overvalued stock to buy fairly valued assets or issuing undervalued stock to buy a more significantly undervalued asset. With share repurchase, a company buys its stock with cash. Rational repurchasers view cash as an attractive currency to buy in their stock because the shares are selling at a discount to fair value. That discount widens even more when shares are repurchased and will continue to widen if share repurchases continue at a discount to fair value. Think of this as an intelligent and relatively low risk way to leverage future returns to owners who patiently wait for the price-value gap to close.
We are value investors at Harris | Oakmark, which means we own companies we believe to be selling below their true fair value. The undervalued share prices make using stock for currency quite expensive. As a result, we see far more share repurchase than issuance from the companies we own. For instance, 88% of the companies held in our U.S. large-cap value strategies* have repurchased stock over the last 12 months. On a weighted basis, our holdings have bought back nearly 4% of their market cap over the last 12 months, approximately twice the rate of the weighted S&P 500. On average, our top 10 repurchasers have bought back just over 10% of their shares over the last 12 months and our largest single repurchaser, General Motors (GM), has bought back over 24% of its average market cap. This is unsurprising to us. We look to partner with rational, shareholder-friendly management teams of undervalued companies. Experiencing twice the rate of repurchase of the broader index is evidence that we are on the right track.
Hopefully when you read of companies repurchasing or issuing stock going forward, you will remember they are two sides of the same coin. Consider the difference between the value of the currency used and the asset purchased before casting judgment because this ultimately determines the impact on the value of your investment.
OPINION PIECE. PLEASE SEE ENDNOTES FOR IMPORTANT DISCLOSURES.
*As of December 9, 2024. Applies to U.S. retail mutual funds and institutional strategies.
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As of 11/30/2024 General Motors (GM) comprises 3.1% of the Oakmark Funds total net assets, and 0% of the Oakmark Select Funds total net assets. MicroStrategy was not held in either fund.
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