In his latest Q4 2021 Market Commentary, Bill Nygren discusses how to apply value investing to growth stocks. Here’s an excerpt from the commentary:
Oakmark was one of the first value managers to acknowledge that accounting rules overly penalize the companies investing to grow their businesses. Thirty years ago, we were buying cable TV companies that lost money every year and had negative book value. Why? Because we saw an active private market for cable TV companies at about $1000 per subscriber, which was much more than their stocks implied.
The income statement was charging these companies for 100% of their investment in acquiring subscribers even though subscribers tended to remain for many years. Further, the depreciation expense for underground cable was based on a much shorter useful life than the assets actually had. When we adjusted the income statements, the substantial profitability of the industry became apparent.
We see a strong analogy to Netflix today, where we adjust the income statement for customer acquisition cost and the strategic underpricing of its subscriptions. For Alphabet, we add back its research spending on Waymo and “other bets” and add an asset for the value of those money-losing ventures.
We also value cash separate from the business because if you valued cash at a normal P/E today, you’d be valuing it at pennies on the dollar. When we make our adjustments to Alphabet’s financials, we own its wonderful search business at less than the S&P multiple, which we consider to be a bargain.
You can read the entire commentary here:
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