Market perceptions can change unexpectedly – and share prices follow
As value investors, our job could be characterised as aiming to buy good businesses with some form of poor market branding and then waiting patiently for market perceptions to change
One day, some years from now, my son may wonder why he got into so much trouble when a toy he threw mid-toddler-tantrum smashed the screen of our television – after all, was the destruction of tellies not considered a rock ‘n’ roll badge of honour in the 1970s?
Should such a conversation arise, I may well point him towards the relevant chapter in Rory Sutherland’s excellent new book, Alchemy.
Subtitled The Surprising Power of Ideas That Don’t Make Sense, one of the book’s themes is changing perceptions and, at one point, it brings up the scenario of being at a party and briefly needing a little space to yourself.
Wander off from the throng to stare out a window alone for a few minutes and you are just going to look odd; do so with a cigarette in your hand, however, and you end up appearing cool and aloof (although not so much these days with the stigma of smoking).
As might be expected from a man who has enjoyed a long and successful career in advertising, Sutherland goes on to argue that perception – for which one might also read ‘brand’ – and context are hugely important considerations in most walks of life.
Here on The Value Perspective, we have certainly found that to be true of investing and the stockmarket.
After all, identifying unloved businesses that have the potential – thanks to strong balance sheets and low levels of debt – to survive until the market decides it loves them once again is an integral part of value investing.
What we continue to find curious, though, is not the good companies that are unloved because they are going through a tough time but the good companies that are unloved because, well, they just are.
Some companies are just unloved
Take as an example global pest-controller Rentokil, where neither our assumptions of what the company can make through the course of a market cycle nor its actual earnings have changed so very much over the past six or seven years.
Nevertheless, Rentokil has seen it share price steadily tick upwards over that period as the market has continued to evolve its perception of the business.
And then there is Swedish telecoms equipment maker Ericsson. Go back 18 months and investors could hardly have been less interested and yet, even though the company is broadly making the same earnings and facing the same challenges as it was then, the US’s black-listing of Chinese rival Huawei has changed the market’s perceptions and Ericsson is now rated in a completely different way.
A few years back, here on The Value Perspective, we noted how opinion on the much-ridiculed Skoda cars was turning around before, in an investment context, warning of the dangers of overpaying for companies just because they are already viewed as strong brands.
As value investors, our job is the opposite – to buy good businesses with some form of poor market branding and then wait patiently for market perceptions to change.