In his recent Insight video, Bill Nygren highlights the current appeal of value investing due to a significant valuation gap between a few mega-cap tech companies driving the S&P 500 and other industries.
While the S&P 500 trades at a high PE multiple, value stocks are available at much lower valuations across diverse sectors like consumer durables, healthcare, and media.
Nygren emphasizes the importance of patience, as value investors must endure periods of unpopularity while waiting for market repricing. Despite new all-time market highs, he argues that most stocks remain undervalued, offering opportunities to build diversified portfolios at pre-bull market prices outside of technology.
Here’s an excerpt from the video:
I think it’s an unusually attractive time to be a value investor today, because we’re starting with such a wide spread in valuations between those handful of companies that have driven the S&P 500, mostly mega-cap technology companies, and everything else.
The S&P 500 today sells at a PE multiple in the low 20s, which is about twice as high as the PE level that we have in Harris Oakmark large-cap strategies today. That spread is unusually wide, and we think tilts the odds in the favor of the value investor.
One of the nice things for a value investor today, because the S&P has been so concentrated in large-cap technology companies, is that the cheap stocks are spread out across most of the other industries.
So, I think there’s an unusual opportunity to put together a very well-diversified portfolio today in low PE stocks across lots of industries.
It’s not just bank stocks and oil stocks that look cheap, but consumer durables, health care, and media companies. The stocks available at low PEs are distributed across most industries outside of technology.
I think the biggest challenges for value investors remain the same year after year after year. The nature of being a value investor is you’re buying what’s out of favor, the companies other people are worried about. The benefit is you get a much lower price because others are worried about those companies.
So the value investor has to step in when others aren’t willing to, and be patient and allow enough time to pass for the market to reprice the companies that are currently out of favor.
The S&P 500 has hit new all-time highs many times last year. And investors, we think, are too worried about that. It’s not all that unusual for the market to be at a new all-time high.
In fact, it happens about every other year that the market hits a new all-time high. And we’ve gone back and checked the records, and investors would actually have performed much worse had they sold the market every time it was at a new all-time high than if they just bought and held.
And I think the other thing that makes it less worrisome today is the ability to construct a portfolio that’s valued so differently from the S&P 500. Yes, the market is at a new all-time high, but it’s been driven there by about 20 large technology companies.
The rest of the market is priced nothing like that. And it’s almost like you’re able to buy the rest of the market at pre-bull market prices.
You can watch the video here:
Bill Nygren – Why The Odds May Favor Value Stocks
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