Winning the competition in a given year indicates success for the investor. Consistently beating the competition for a decade and a half shows Bill Nygren is worth listening to.
oakmark fund manager Outperformed 97% of peers Last year was the latest in a series of outperformances, beating 99% of our competitors over the past 10 years and 98% of our competitors over the past 15 years.
Nygren, who has managed Oakmark funds since 2000, isn't using a magic 8 ball or AI-powered algorithms to beat other markets year after year. Instead, he uses good old value investing techniques that have proven reliable for decades, although they have evolved.
find value in the long run
In a recent interview with Business Insider, Nygren explained that he and his team were among the first to recognize that as the world changed, so too did the assessment of a company's growth prospects.
“We were one of the early value investors to focus on business value in defining what makes a stock cheap, rather than relying purely on GAAP metrics like P/E and price-to-book. I think it was,” Nygren said. “When I started in this business a little over 40 years ago, value investing was pretty much just buying stocks in the lowest decile of P/E ratio or price-to-book value and then waiting for them to revert to the mean.”
In the past, this method worked pretty well, Nygren said. In a world where physical goods were manufactured in brick-and-mortar stores, long-term stock returns were closely correlated to the value of the underlying assets, and a company's value was reflected neatly on its balance sheet.
In other words, when a company builds a car manufacturing plant to produce cars, investors clearly understand and understand the value of the plant, cars, labor, and all other costs of producing those goods. You can evaluate how much it will cost. The company's stock must have value.
But a large part of the economy has shifted over the years to another type of business: one based on the Internet, where there is no physical element that investors can easily convert value into.
“Today, growth is about brand value, customer acquisition, global infrastructure, and most of those expenses, brand advertising, research and development, new product expenses, that cannot be touched or felt. It could be worth nothing,” Nygren said. . “Conservative accountants say everything is on the income statement. And as a result, when we first launched the Oakmark Fund, sometimes people told me that GAAP didn't apply. This company is right because all these costs are really a long-term investment and when you adjust for it, you can prove how cheap the stock is. ”
This long-term focus allows Nygren to focus on companies like Alphabet that most investors would consider overvalued at their current valuations and see value that other companies don't. Ta. The tech giant is making an unusual number of investments in advanced technologies and products that would be huge assets on the balance sheet of a typical third-party venture capital firm, but most investors don't think of Alphabet when they look at it. Nygren pointed out. .
“We are struggling to adjust our income statements and balance sheets for these changes,” Nygren said. “And for a company like Alphabet, when you make that kind of change, you go from looking like you're selling at a huge premium to the S&P 500 to selling a lot of value at a discount. to change.”
Nygren added: “It's obviously not a value stock, but with these adjustments it's selling at below market multiples. So if you don't own Alphabet, you think it's a below-average company. That's what I'm saying. And that's the type of thing,” he added. Thanks to the framework, names that are not common in the value investor space have become much clearer. ”
Two sectors to invest in now
It's no wonder that the average investor is having a hard time looking around the market and finding value right now. For the past few months, growth has been the name of the game. big tech profits It's understandable that good values are hard to find these days, considering the market's biggest stocks are climbing even higher.
But adopting Nygren's mindset of looking deeper for value can reveal some interesting opportunities. After all, market valuations are so high that everything that hasn't shot into the stratosphere over the past few months suddenly looks like a value investment.
“I think it's very unusual today to be able to put together such a diverse portfolio with companies that are less than half the market multiple,” Nygren said.
One area he is particularly focused on is the financial sector. Nygren noted that since the Great Financial Crisis, the financial industry as a whole has been disliked by many investors due to the opaque nature of its business, but last year's small bank crisis certainly didn't help. But that's exactly why the financial sector looks so attractive right now, and why it accounts for over 42% of Oakmark Fund's holdings.
“And I think value investors are a natural place for a lot of the financial industry because this industry typically trades around three-quarters of the S&P multiple,” Nygren said. . “No one disputes that most of these companies are blue-chip companies, but they say they're slightly below average, and their prices are usually even lower.”
Nygren said many of the banks and insurance companies that were hardest hit after 2008 also took the longer route to accumulate more capital and make higher-quality loans rather than pursuing corporate profits. He pointed out that the company is showing an attitude of trying to grow slowly by taking on this role. Safety sacrifice.
But Nygren wants to make clear that Oakmark Funds is not just focused on banks. He explained that the financial sector goes far beyond that and includes companies in the insurance industry, securities companies and exchanges. That's why among his fund's top 10 largest holdings are Capital One Financial (C.O.F.), Intercontinental Exchange (ice), and American International Group (A.I.G.).
Beyond finance, Nygren also sees a lot of value in the energy sector in 2024.
“I would say across the energy industry, as well as the financial industry, there are industries that have been underperforming in the stock market for a long time,” Nygren said. “While 2022 was a strong year, last year largely reversed that. The industry has been investing at significantly lower levels than in previous decades. , if you look at exploration spending, across the ENP sector, it's much lower than it was before, and we think that's a good balance between supply and demand in the industry.”
Mr. Nygren pointed out that over the past few years, ESG investing has gained attention, and investors' interest in the energy sector has waned. But as it becomes clear that green energy is not going to replace fossil fuels anytime soon, investors are coming back and finding high-quality companies trading at low price-to-earnings ratios.
“So we think this space has become very shareholder-friendly and very attractively priced,” Nygren said. “I would drop one of the names, Conoco Phillips (police officer), management has issued a 10-year forecast and expects, at current oil prices, to return approximately 150% of the company's current market capitalization to shareholders over the next 10 years, allowing for further production expansion. . It's about one-third. ”
