During his recent interview with Meb Faber, GMO’s Ben Inker explained why U.S deep value stocks are super cheap. Here’s an excerpt from the interview:
When we’re talking about value, the default way most people think about it is halves of the market. So there’s the value half of the market and the growth half of the market.
But within that half, there can be substantial differences. And just as when I was talking about the high yield market, BB bonds and CCC are really quite different.
When we break the market up into finer pieces than just halves, occasionally something interesting pops out of that. And right now there is something weird going on within the US stock market in particular, which is what we refer to as deep value, which would be the cheapest 20% of the market looks really cheap.
It looks cheaper than it has been 98% of the time through history relative to the market. So value is always trading at a discount to the market by definition. But sometimes that discount is big. Relative to history, sometimes it’s small. Right now for the cheapest 20% of the market, they’re trading at the second percentile. So cheaper than they’ve been 98% of the time.
Now, if we look at the rest of value, which if the cheapest 20% is deep value, I am calling the next 30% shallow value. The next 30% of the market is trading more expensive relative to the market than it almost ever has.
So that next 30% right now is trading at an absolutely tiny discount to the market, and it is more expensive than it has been 98% of the time. So it’s as expensive versus its history as deep value is cheap versus its history.
So that causes us to say, “Hey, you don’t just want to be looking at the cheap half of the market because the cheap half of the market contains two very different groups of stocks.
And we think if you’re going to be buying value today, you really want to be buying the deep value stocks, that cheapest 20%, because they are priced much cheaper than they normally are and the rest of value is much less attractive than that group and substantially less attractive than normal.”
You can listen to the entire discussion here:
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