Transcript

Steve McDonald: Hi, everybody. I’m Steve McDonald, and this is your Market Wake-Up Call. Alexander Green – for my money, the best mind in the money business – is with us today to talk about value investing and what’s left in this market. Welcome, Alex.

Alex Green: Hey, Steve. Thanks for having me.

Steve McDonald: It’s my pleasure. Well, we’ve got the bull that will not die – at least it looks that way. And I’ll tell you, value investing, to me, looks like the only viable area left in this market. Where are you on this?

Alex Green: Well, I happen to agree because growth stocks have made a tremendous run, and as a result, they’re more expensive than they have been in quite some time. Over the last two centuries, the average stock has traded for about 16 times trailing earnings, whereas today it trades for more than 20 times trailing earnings. So stocks are currently trading 25% higher than average. That doesn’t mean the market’s about to go down, but what it does mean is that companies that are trading at a much more attractive discount – so sales, earnings, dividends and book value – are certainly set to provide much better performance going forward.

Steve McDonald: Most folks are familiar with growth investing or contrarian investing, but what’s unique? I mean, what are the unique indicators about value investing?

Alex Green: Well, value investing simply means that you’re looking at individual companies and judging whether they are overvalued, undervalued or fairly valued based on accepted metrics like revenue, profits, price-to-book value (which is simply the net asset value of the company – you add up all its assets and deduct its liabilities to get a book value figure) and dividend yield. And historically, these stocks have way outperformed growth stocks and with far less risk. When you buy a stock that’s very cheap relative to its fundamentals, there’s far less downside risk. Especially the bigger dividend yields mean people will buy in because they figure, well, even if the stock market goes nowhere, I’ll earn a fat dividend for quite some time. So these stocks are typically outperformers, but as you and I have discussed before, over the last two years, five years and even 10 years, growth has beaten value. These cycles come and go. And what people should really be doing now is, as Wayne Gretzky said, “skate to where the puck is going to be” rather than where it is, because going forward, it’s much more likely that value stocks will outperform.

Steve McDonald: Yeah. Well, here’s a bit of a curve because this is a number I came up with. Growth has beaten value investing in the two-, five- and 10-year return categories.

Alex Green: Yes.

Steve McDonald: Is value going to be the dark horse coming up the homestretch? Is that what we’re looking at here?

Alex Green: Let me give you some examples, Steve. Sometimes growth stocks outperform, or sometimes it’s value stocks, large caps, small caps, foreign stocks or domestic stocks that outperform. And the wheel just keeps turning. The timing of the actual transition and the tipping point is impossible to know. But what investors should do is find good companies – not companies that are cheap because their sales are flat, they’re losing market share and their earnings are going down. Investors should find great companies whose sales are rising, whose market share’s increasing and whose earnings outlook is positive, but are much cheaper than the market itself and cheaper than their competitors relative to important metrics like sales, earnings, book value and dividends. And that’s where the great values can be found. And a perfect example of this is when the financial crisis was in full swing. The Wall Street banks were decimated. And look back 10 years at what you could’ve bought Bank of America, J.P. Morgan or Chase for.

Steve McDonald: Yeah, single digits.

Alex Green: Those stocks are up many, manyfold. I mean, the market’s up severalfold, but the banks have way outperformed. Three years ago, oil and gas prices bottomed out, and that sector went through its own private depression. Those became the value stocks. And what has happened since then? Energy stocks have outperformed. So the idea is to always look at where the bargains are, and that will show you where the great profits will be in the weeks and months ahead.

Steve McDonald: I was trained in value investing. When I first started in the business in ’91, that’s what the entire focus of our firm was – value investing. It’s neat to hear it coming back. Alex, it’s always a pleasure to have you on.

Alex Green: It’s great to be here, Steve. Thanks for having me.

Steve McDonald: It’s my pleasure. And for everybody here at the Market Wake-Up Call, take a look at value investing. I’m telling you, it’s the next run in this market. And I’ll see you next week.

[End of Audio]


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