Liverpool’s period in the wilderness is over – now what about value’s?
Liverpool may now be basking in the glory of its first top-flight title win in 30 years but value investors’ ongoing experience is closer to the club’s 1953/54 relegation season. So what happens next?
On the evening of 25 June, when Liverpool were confirmed as the 2019/20 Premier League champions, one commentator referred to the end of “30 years of hurt” – that stalwart of football clichés being wheeled out in reference to the three decades that have passed since the club last won the top-flight title. Here on The Value Perspective, we can empathise – if only with the seemingly interminable wait Liverpool fans have endured.
It may not have been three decades for us – thank heavens – though, at times, value investors might be forgiven for thinking it has felt like it. Indeed, far from the sort of elation Liverpool’s fans have been enjoying over the last few weeks, the recent experience of value investors has had rather more in common with one of the club’s biggest lows – relegation to English football’s second tier at the end of the 1953/54 season.
Regular visitors to our site will be under no illusions that value has endured an unusually long period in the wilderness, with precious little in the way of outperformance relative to growth investing over the last 10 years or so. To ring the changes, then, here is a different way of illustrating how tough things have been for value investors over the last few years – and why they still have cause to believe in better times ahead.
Based on SocGen’s calculations of share price versus five-year average earnings, the following chart plots the valuations of the cheapest and most expensive stocks in the market. We have then sorted the companies into valuation buckets on a composite of different measures: if the dots are to the bottom right, growth is relatively less expensive than value at that point in time; if they are to the top left, growth is relatively more expensive.
Let’s now look at the journey of those valuations over time. In the following chart, the blue dots represent the valuation journey in the dotcom boom years from 1997 to 2000 while the red dots represent the more recent valuation journey we have seen from 2017 to today. Watch it a couple of times and it will become clear the way valuations have progressed in the last few years looks remarkably similar to the dotcom boom.
Few value investors will need reminding what a tough time that was – and we have just had to relive it all over again. So if value investors have just had to endure the equivalent of Liverpool’s 1953/54 relegation, is there a value equivalent of Bill Shankly taking over at the club and leading it to promotion, three First Division titles, two FA Cups and its first success in Europe – the UEFA Cup win in 1973?
Well, we could extend the chart a few more years to see what happened to the relative valuations of growth and value after the dotcom boom turned to bust in early 2000 but that story is pretty well-known. Suffice instead to affirm that, here on The Value Perspective, we take a lot of comfort from looking at the cheap valuations themselves.
Think of companies, if you like, as being worth the sum of their discount – owning a portfolio of businesses with double-digit free cashflow yields means there is a lot of room for us to be wrong and still make money. Investors who buy companies on very low free cashflow yields, and where the growth expectations embedded in the share price are very high, are putting themselves in a far less comfortable position in the coming years.
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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