3 Value Stock Picks for Long Term Investors by Hedge Fund Managers
The founder and portfolio manager of the Acquirers Fund, Tobias Carlisle said, “However it is measured, value is mired in an extended period of underperformance. Depending on how it is measured that underperformance begins in 2005 or 2014,” according to Business Insider.
According to Carlisle, in 2005, value portfolios assembled around price-to-earnings value ceased to outperform stocks - widely held and popularized stocks with perceived strong growth potential. In 2014, value portfolios structured around price-to-cash-flow value started to lose their luster against their glamourous counterpart.
He indicated the underperformance of both portfolios based on data collected by Nobel laureate Eugene Fama and his colleague Kenneth French.
Carlisle said “the reason value has underperformed recently is because cheap stocks have gotten cheaper. … Prices have fallen relative to fundamentals.”
The billionaire hedge-fund manager and founder of AQR Capital Management, Cliff Asness said “investors are simply paying way more than usual for the stocks they love versus the ones they hate and doing it in a highly diversified way up and down the cross-section of stocks.”
“Historically, the presence of unusually cheap value stocks has preceded higher-than-average future returns for long-only value portfolios,” Carlisle said. He indicated that “Opportunities like this are rare. … The best returns to value strategies have all emerged from the times value has underperformed.”
Asness also said “we think the medium-term odds are now, rather dramatically, on the side of value, … this is where long-term investors make their bones.”
Although both investors see the potential in this value opportunity, Carlisle mentioned “there’s no reason value can’t get cheaper and the spread widen. If that happens, the opportunity continues to improve, but it will underperform while it does so.” That is why patience is key.
Carlisle picked three stocks to purchase in the coronavirus-induced market panic.
The first stock is Berkshire Hathaway. “Warren Buffett’s diversified conglomerate trades as cheaply today as it did at the bottom in 2009. … Buffett has been selling some of Berkshire’s holdings recently, but the company has a bullet-proof balance sheet and massive cash flows,” Carlisle said.
The second is Markel, a “mini-Berkshire Hathaway run by a Buffett-like value investor and operator in Tom Gayner”. Carlisle explained that “book value has compounded at 35% a year over the last decade. With a market cap below $12 billion, it is 30 times smaller than Berkshire, so should be able to take advantage of many more opportunities.”
The last one is Charles Schwab, “one of the largest and most recognizable names in broking and asset management”. Carlisle said “Schwab has a strong balance sheet, solid fundamentals, and top-line growth above 10% yearly for the last three years. It’s cheaper than average for better than average.”