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By Mike Liss - July 22, 2019
U.S. growth stocks extended their winning record over value stocks to 10 years. I believe a key reason for this performance disparity is disruptive change occurring in the business landscape. There are companies defying the status quo with new ways of thinking, and investors are trying to determine who can withstand the threats. For example, Amazon is challenging retailers and other industries, and Netflix is attacking the video market. But for all the talk about disruptors, we believe there will always be a market for value stocks.
The companies we focus on those we believe have the financial strength, management quality and foresight to survive and thrive in a new environment, although their stock prices may not currently reflect it. Taking it company-by-company, we’ve found some attractive risk/rewards open up, while at the other end of the spectrum we see companies with valuations too stretched to be rewarding to our clients.
Tune into my latest video to find out where we’re uncovering compelling investment opportunities and what we’re avoiding.
There's always a market for value stocks out there. Whether it's when I started 21 years ago or ten years ago or today. Do I think that there are more value stocks out there, or that there's a bigger discrepancy in the valuation between growth and value right now? Yes.
I think we're seeing this big disparity in valuation level because there's disruption out there. And the market is trying to determine who's going to be able to deal with the disruption from companies like Amazon, who are challenging retailers, and companies like Google, and companies like Netflix who are attacking the video market in a much different way.
Amazon just doesn't go after retailers, they go after so many different other areas, as well. That's what the market is dealing with. The companies that we're focused on, we think that they can deal with the threats from Amazon and from Google and from Netflix. We think their returns on capital are going to hold up because they have strong barriers to entry, and they can fight back.
A company like Walmart, for instance, in retailing. Or the drug distributors, Cardinal Healthcare, and McKesson. Those are companies that we think that can deal with a threat of Amazon, if they decide that they want to get into drug distribution. So, you take it company-by-company, and we think that good risk/rewards have opened up.
In terms of value versus growth, it's been a tough slog. For 10 years now, value has underperformed growth, and the last three years have really been intense, as far as value underperforming growth. But that just means that we're seeing better risk/rewards in the value areas that we're analyzing. That means that financials, especially banks, have attractive risk/rewards. Energy companies have attractive risk/rewards.
And at the other end of the spectrum, those companies that are thought of as defensive and in some really high growth technology companies, they're not good risk/rewards because the valuations are very stretched. Whether you're talking investors just running for safety in utilities or consumer staples or real estate investment trusts, those are just not attractive valuations for our clients.
It's an important question. It's how do you want to view your investments overall? Do you want to be a value investor? Do you want to be a growth investor? If you are a long-term investor, you're probably want to have both. Now for me, professionally, I really enjoy value style, and so I focus on that. I feel like we can generate some good returns for our shareholders by applying a consistent value process over time. And that means trying to find high quality companies that are trading at a discount to what we think is their fair value and buying those companies when they're out of favor.
Now, we own companies that you might say are value companies, but in another time, they were growth stocks and they might be growth stocks again in the future. The perfect thing for us is when we buy a stock that's underearning, it's undervalued and they improve their operations, and then their earnings start to grow, and then the growth people start to see them as, “Oh, this is a growth stock.” They were out favor for cyclical reasons, or there was an idiosyncratic reason, and then it becomes a growth stock again, and we hand it off to the growth people. That's a perfect situation for us.
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