PM: How the definition of value has changed

PM: How the definition of value has changed

PM: How the definition of value has changed

Value investing has taken a battering in recent years but one of its leading exponents believes a long-term creative and contrarian approach reaps rewards.

Harris Associates oversees the highly-rated Oakmark International Natixis Class and the Oakmark Natixis Class mutual funds and believes that after a long spell of underperformance, value is set for a resurgence.

Client portfolio manager Danny Nicholas explained to WP how, in his opinion, the firm separates itself from the pack. Its thesis is rooted in patience, seeking investors who will allow them a minimum five years for the process to work.

He also delved into the concept of value, highlighting that its definition has changed over decades; from the net investing of the 1940s, to Graham and Dodd’s security analysis, which Warren Buffet picked up and ran with, to the computer-based indexes and PE ratio approach.

Nicholas said that now most of our economy is service orientated where a lot of the assets are not on the balance sheet.

He said: “So many people are just fishing in low PE stocks using a traditional 80s, 90s or 2000s definition of value but we think value has changed over time.

“We’re contrarian because we’ll own Buffet’s Coca-Cola, which is a moat business that you can taste and feel, but we’ll also own an Apple that has a moat that is sustaining or we could also own a business that is growing their moat, which is Alphabet.

“Alphabet has a higher multiple currently but we think if you just looked at their core business of search, it’s treading at half of their state multiple and growing at 20%. So it’s a value in our opinion, which is not consensus because we own some high multiple stocks as a value manager.”

Nicholas said the idea is to take a private equity approach and look at all the “lottery tickets” Alphabet is using its earnings from to invest and grow over time like YouTube, which it has chosen not monetize.

He explained: “What we’re doing is taking a creative approach and figuring out, what would YouTube be worth? We look at the viewership hours and the engagement and we take what a value manager would use to price a cable owner and we put that on to YouTube and you can get to about $200 a share. We think it is undervalued by the current PE ratio.”

By paying low multiples and analyzing cyclical businesses with good cash flow, Nicholas believes it gives them an edge. “But everything is on the table as long as we buy it at a margin of safety,” he said. “It’s a different approach and that’s why we have outperformed.”

Harris prides itself on this contrarian approach, which Nicholas expands on by highlighting its strategy on Japan. The firm was overweight the country in 2011 after the earthquake, going to twice the benchmark rate.

He said: “Eighteeen months later, Shinzo Abe gets elected and the market goes up 80% and now everyone likes Japan. That’s when we’re selling. The view of Japan now is that shareholder stewardship is improving but we would actually say it has a really long way to go, and we’re underweight Japan based on valuations and quality of management so we’re contrarian on that.”

 

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