Something I have been thinking about recently is the general state of value investing. Analysts have been claiming that value investing is on its last legs for the past couple of decades, but many investors still follow this style of investing.
However, value stocks have faced significant selling pressure this year, one of the most turbulent years in recent memory. The reason why value tends to outperform over the long term is that value stocks do not decline as much as so-called growth equities during periods of market turbulence. But on this occasion, that is not the case.
Some value stocks have fallen just as much as growth equities, even more so in some cases. So what is going on?
Is value dead?
First of all, I should clarify what I mean by value and gross equities. Value stocks are companies trading below a conservative estimate of their intrinsic value.
They should not be put into different silos based on simplistic methods such as the price-book value.
Just because the company is trading at a discount on its price-book value does not mean it is cheap. It could signal that the business is destroying shareholder value, and investors have been selling the stock as a consequence. This is not a good value investment. It is not a good investment, period.
Companies that are destroying shareholder value deserve to trade at a significant discount to intrinsic value because, sooner or later, intrinsic value will fall to the market valuation.
Some great examples of the sort of stocks that look cheap today but are not being appreciated by the market can be found in David Einhorn (Trades, Portfolio)’s portfolio at Greenlight Capital.
Deep value on offer
Brighthouse Financial Inc. (BHF, Financial), a long-term holding for the fund, trades at just 25% of book value and less than three times forward earnings. It is on track to repurchase 10% to 20% of its shares this year.
Green Brick Partners (GRBK, Financial) trades at less than four times forward earnings. Its latest share repurchase authorization saw the business buy back 5% of its outstanding shares. It has authorized a further buyback of 10% of the shares.
Then there is copper and coal producer Teck Resources Ltd. (TECK, Financial). Trading at 85% of book and less than four times forward earnings, the company’s CEO recently told analysts he would like to “buy the whole company back myself” due to its low valuation and surging cash flows.
While all three businesses look cheap, they are dealing at very depressed valuation multiples.
These are real value stocks; the sort that are creating and building value for investors and chucking off cash at the same time.
The really frustrating thing about deep-value investing with very cheap companies is the fact that it can be years before the market realizes the opportunity.
But when it does realize the opportunity, the correction can be fast and aggressive.
A fast repricing of value
A fantastic example is the retailer Dillard’s (DDS, Financial). This well-managed company's stock plunged during the pandemic, trading below $30 per share as investors dumped brick-and-mortar retail stocks.
However, the company took advantage of this and began aggressively reproducing its own shares.
The combination of these share repurchases and a sales recovery has translated into an explosive return for investors willing to take the risk of buying the stock at the peak of the pessimism.
From its pandemic low of around $26 per share, the stock has risen around 1,000%. I am willing to bet there are only a handful of investors still owning the shares today who owned before the pandemic.
And that’s the real challenge of long-term value investing.
Holding onto the right companies for long enough for value to be unlocked.
Value investing is not dead since there are opportunities out there.
Nevertheless, being brave enough and having a high enough conviction to hold these equities is a different matter altogether.
