Rich Pzena: No One Believes Value Will Work Until it Already Has

Johnny HopkinsRichard PzenaLeave a Comment

In his recent Q2 2021 Earnings Call, Rich Pzena discussed the current climate for value investors saying, “Almost no one believes value will work until it already has”. Here’s an excerpt from the call:

Pzena: I’ve been a value investor my entire life.

Someone asked me recently, how I came to believe in value and I explained that it really all happened at my parent’s kitchen table. Price matters. My mom and dad would remind me, but still the question gets asked, how does the value of an asset get determined? I think the answer is pretty straightforward. It’s the earnings you can expect to be generated by the asset compared to the price you pick.

On the one hand this simple homespun version of value investing can cause a person to believe that value is just a factor, but wait. The factor in this case depends on the earnings power of the asset and that is where real research and real judgment come into play.

That’s why I keep repeating on these calls and in most of my meetings with clients and consultants that value isn’t a factor. Value is a philosophy. One other point I’d like to emphasize, value investing wins in the long run. We don’t get to win every month, every quarter, every year or even every five years, but serious research-driven classic value investing as we practice the art is a strategy that generates attractive long-term returns.

This past quarter as growth start investing seems to have regained favor has people asking whether the prior two quarters were the end of a very short value rally? As economic growth reached a crescendo this spring from the combined impact of recovery and stimulus, the value skeptics reemerged.

This is how it always feels as a value investor. Almost no one believes value will work until it already has, but let me offer some perspective on the opportunities that we are presented with today.

Companies with attractive earnings growth rates selling at low multiples very clean balance sheets, managements that adeptly navigated the challenges of COVID19 and a cynical marketplace ignoring the shifting cycle.

Further, our value portfolios are finding diverse exposure including selected utilities and healthcare names, areas where value has been scarce for a while. Last but not least, the cheapest quintile of stocks offer an earnings yield of 10% on a current basis based on First Call estimates.

While the most expensive stocks offer less than a 2% yield and the 10-year offers just above 1%. The arithmetic on this difference is compelling enough to make my entire point.

You can read a transcript of the earnings call here:

Pzena Q2 2021 Earnings Call

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