“Investors are digging deeper for value” a Wall Street Journal headline informed us recently and, while you might think we would be pleased with such a sentiment, here on The Value Perspective, we actually found it odd.
That is because the piece it accompanied seemed to find it hard to envisage any of that value could still be found in the world of equities.
Instead, the article made much of how professional investors were buying into currencies, such as the Japanese yen and the Swiss franc, and complicated financial instruments that could rise in value should inflation tick upwards.
At the same time, it highlighted how the cyclically-adjusted price/earnings ratio or ‘CAPE’ of the S&P 500 index showed US stock valuations to be at their highest level since 2002.
Since the CAPE is one of our own preferred stockmarket measures this is something of which we are keenly aware.
It’s still possible to find great investments
But we also know from experience it is still possible to find great investments – whether they are languishing in a sector being shunned by the wider market or are unloved by investors for more individual reasons – even when equity markets are expensive.
Examples from the relatively recent past would include banks in 2008, so-called ‘old technology’ stocks in 2011, mining and energy companies in the last couple of years and retailers at pretty much any time in the last decade – though particularly so at the moment now the wider market seems convinced Amazon is going to put them all out of business.
This holds as true for emerging markets businesses as it does for those in the developed world. As we discussed recently in the context of Chinese distillers in 2012 and Russian utilities in 2013, there will always be sectors that are sold off indiscriminately and which take the share prices of good businesses down alongside those of the not so good.
And if – and admittedly it is a significant ‘if’ – you are prepared to do your own company analysis, to swim against the tide of popular opinion and to invest with a time horizon of at least three to five years, which as it happens is all part of the job description for value investors, then you really should always be able to find businesses trading at a significant discount to what they are really worth.
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