We attended the London Value Investor Conference last month, the tenth iteration of this conference and every year we’ve taken something away. This year, two points really struck us.
Firstly, there are a range of opportunities that are very, very inexpensive. There are companies out there that have fallen far out of the market’s favour – examples include: selected situations in the US especially smaller companies (where the Russell 2000 index of smaller companies is worth less than Apple by itself); separately each of Hong Kong and South Korea came across as extraordinarily inexpensive but with strong investment cases; and even commodities as an asset class (certainly relative to the wider US stock market). Presenters highlighted a variety of companies. Some are trading on a fraction of book value (as low as 0.2x), others on earnings multiples less than 5x, or with stacks of cash on the balance sheet, or paying dividend yields over 10%, or companies embarking on buy backs that represent a substantial proportion of their entire enterprise value. Extraordinary. As always, each situation needs to be analysed for its own merits and nuances, but the gist of these narratives aligned with what we are seeing in our own holdings.
Secondly, most investors are still looking the other way and have little or no exposure to these inexpensive areas, having done so well out of growth and momentum in the past decade. For short term speculators, this doesn’t matter as flows and momentum will dictate prices. But over the longer term the stock market aligns to where attractive opportunities lie.
Our impression of the market is that it is stretched to quite extreme levels, with the fashionable/consensus/growth so much preferred over the unfashionable/non-consensus/value. At these levels, even investors who have a strong bias against value should have some exposure – say 10-20% of their portfolio – just in case they’re wrong. Those with more of an inclination to value should scale up from there, comforted by the magnitude of the opportunity.