by Andreas Hohenadl, Euro on Sunday
WIf you want to be successful as a value investor, you have to be patient. Because at its core, this investment style is about discovering value where others don’t see it. “Buy a dollar, but don’t pay more than 50 cents for it,” said Warren Buffett, arguably the world’s most famous value investor.
It takes time for the 50 cents to actually become a dollar in the end. Time when a company can develop and other investors discover that they may have been too pessimistic. Or time for the economic or monetary policy framework to change and for certain sectors or industries to come into focus.
The framework for investors has changed very significantly in the past few weeks – and a new reality seems to prevail on the stock exchanges: out of highly valued growth companies and into inexpensive, sometimes beaten down, substance stocks. This can be seen when comparing two sub-indices of the world stock barometer MSCI World.
Overshadowed by Growth for a long time
Is this really the prelude to a longer-lasting counter-movement? In the past year, value stocks – despite strong phases – did not succeed in outperforming growth stocks. What stock market traders experienced was a head-to-head race of investment styles. After all. In the years since the financial crisis of 2008/2009, value stocks have been almost constantly inferior to the broad market and even more so to the competition from the growth camp. Over the past ten years, the MSCI World Growth has performed around twice as strongly as its value counterpart. Growth stocks were clearly on the bright side. However, investors had to buy their potential with ambitious valuations.
They did so and created an almost unimaginable concentration of capital, especially in a handful of technology stocks from the USA. For example, Apple’s stock market value has risen from $700 billion to $3 trillion within three years. “Apple is currently more valuable than any major European stock market index – whether it’s the British FTSE 100, the French CAC 40 or the German DAX 40,” says Hendrik Leber, founder of the fund boutique Acatis and value investor of a modern type.
A development that the expected turnaround in interest rates and other factors could now put to a temporary end. “All domination has an end,” says Olivier de Berranger, chief investment strategist at the fund company LFDE. “Scientific studies show no long-term benefits from investing in the most expensive stocks – on the contrary.”
One day, according to the investment strategist, there will have to be a rebalancing. “For some, particularly the US and Chinese tech giants, this could be triggered by current political pressures to limit their dominance and thus their appeal to traders.”
Conversely, this does not mean that all expensive or innovative companies will now be penalized. However, the changes in the market environment have given some long-neglected stocks a chance, according to Berranger: “The hour of ‘fairness for all’ in valuations may have come.” For investors, this means that value stocks have the potential to catch up this year – across the board. Anyone who thinks investing in individual stocks is too risky can participate in the comeback of value stocks via funds.
Oil sector experiences high demand
Sectors that depend on overall economic development are currently the focus of attention. This mainly affects companies in the consumer discretionary, financials and energy sectors. Peter Frech, Manager of Quantex Global Value, says with regard to the oil sector: “Despite the increasing stigmatization, the industry will not disappear overnight. On the contrary. At the moment, the corporations are experiencing high demand, but are hardly investing in new production projects.” With his fund, Frech currently has more than 20 percent invested in oil and gas companies.
The fund manager also finds tobacco stocks interesting. “Due to the hype about sustainability, we see almost irrationally low prices in the sector. Many overlook the fact that companies are continuing to grow with new products such as e-cigarettes or so-called nicotine pouches,” says Frech.
Basically, his stock selection is based on quantitative screenings of company data worldwide. He pays particular attention to the free cash flow return. “Many other key figures, such as the price-to-book ratio, have not worked in recent years,” he says. What also doesn’t work is always buying only the cheapest stocks. This also brings companies into the portfolio that have real problems. Cheeky calls such companies unflatteringly “cyclical scrap” or “turnaround ulcers”. For the Swiss, good value investing means rotating between two investment approaches. Depending on the economic cycle, he either buys classic value stocks or strengthens quality companies at a fair price. The latter has become popular thanks to US investor Warren Buffett.
Asset manager Hendrik Leber also sees himself as a follower of Buffett. But he emphasizes that he has transferred its investment principles to the present day. This means that, for him, physical assets are not necessarily the key factor in determining the value of a company. He is much more concerned with the intellectual capital of a company and the profit opportunities that result from it. In addition to shares in the consumer giant Procter & Gamble, there are also shares in the chip specialist NVIDIA and the medical technology company Intuitive Surgical in his portfolio.
If you want to focus on European value stocks, you can finally use a Deka ETF, which uses a bundle of key figures to regularly filter out the 20 companies with the greatest potential to catch up on the European stock exchanges.
INVESTOR INFO
The value fund of the Swiss investment boutique Quantex has been available in Germany since 2015 and has shown strong performance not only since the beginning of the year, but also over the long term. The secret of success lies in a rotation of two value approaches: If the economy begins to turn around, rather cheap cyclical stocks come into the portfolio. As the cycle progresses, à la Buffett, more quality companies are bought at a fair price.
Hendrik Leber describes his investment approach as “Value 2.0”. With his global equity fund, he follows Warren Buffett’s investment ideas, but with a more modern interpretation. For him, a large stock of physical goods does not necessarily make a substance company. The substance can also be found in the innovative power, know-how and logistics of a company. Even with higher P/E ratios, stocks from such companies can be undervalued for Leber.
The value theme can also be played very successfully with the help of an ETF. With the Deka index fund, investors invest in the 20 “purest” value stocks in Europe. In order to determine this, six fundamental key figures such as the price-to-book value ratio or dividend yield are analyzed on a regular basis. The stocks of the airport operator Fraport and Zurich Airport or the plant manufacturer Nel Asa and the drive technology group Rolls-Royce are currently in the top ten of the portfolio.
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Image sources: TippaPatt / Shutterstock.com, Natee K Jindakum / Shutterstock.com
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