In their latest Q2 2022 Letter, Tweedy Browne explain why value stocks will continue to outperform growth. Here’s an excerpt from the letter:
Macroeconomic issues, including the war in Ukraine and the surge in inflation and commodity prices, especially oil, have been discussed in virtually every one of our research meetings of late. And while these issues are rarely determinative in our bottom-up investment decision-making process, they are seriously weighed. Moreover, they can impact our portfolio construction and stock selection decisions, at the margin. Accordingly, in researching prospective and existing holdings, we have been increasingly focused on the following:
- Balance sheet strength;
- Pricing power in the face of rising input costs (albeit often with a lag);
- Risks to operating margins as a result of persistently high energy prices; and
- Increased consideration of “insight information” — using insider buying as a clue to opportunity and resilience in the businesses being researched.
In our view, pricing power and balance sheet strength will be critically important in an environment of persistent inflation. Central bankers have, unfortunately, been late in addressing the problem, particularly the US Federal Reserve, and are playing catch-up, which could ultimately lead to a recession.
We believe that current market conditions should continue to support what has been an ongoing market rotation from growth to more value oriented investments, as periods of rising inflation and interest rates tend to favor shorter-duration risk assets such as value stocks.
In addition, for the most part, value stocks, particularly non-US value stocks, continue to trade at a discount to their more growth-oriented brethren. As we have said before, with money no longer free, price and valuation should matter again.
You can read the entire letter here:
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