On this week’s episode of Forward Guidance, we’re joined by Ryan Fitzwater, The Oxford Club’s Director of Research. We’re discussing how the value investing techniques pioneered by Benjamin Graham can be applied to a mature bull market.
I start by asking Ryan about the basic idea behind value investing. He explains that value investing is based on the idea of “appraising” a stock based on its fundamentals.
Just as a property appraiser calculates a house’s price by examining its foundation, roof, neighborhood, etc… a value investor examines a company’s fundamental metrics to calculate its intrinsic value. Then they try to buy stocks that are trading at a discount to their intrinsic value.
This approach was pioneered by the early 20th century investor Benjamin Graham, who developed a formula for intrinsic value. Graham’s success won him many disciples, including Warren Buffett.
Ryan explains that this approach is often contrasted with growth investing, which is an approach based on buying “hot stocks” that are taking off. But the data clearly shows that value investors perform better than growth investors do over the long term.
I then ask Ryan which metrics are used to calculate intrinsic value today. He explains that price-to-earnings (both trailing and forward), price-to-book value and price-to-sales are classic valuation ratios. Investors can ascertain value by comparing a company’s valuation metrics to its historical norms – or to other companies in its industry.
Next, we discuss one of the most successful value plays in The Oxford Club’s history. Ryan cites Alexander Green’s decision to purchase Toyota (NYSE: TM) in the aftermath of the 2011 tsunami and Fukushima nuclear disaster.
The destruction caused a sell-off in Japanese stocks – but it didn’t really change the outlook of multinational companies like Toyota. Alex told his subscribers to buy Toyota at the bottom of this crash, and two years later, they were up 82%.
The conversation then shifts to where to find value today. Ryan highlights telecoms like Verizon (NYSE: VZ) and financials as undervalued equities. He explains that the financial sector has a price-to-book value ratio of 1.4. That’s less than half of the S&P 500’s ratio of 3.
On a global scale, Ryan cites the Russian market as an example of an undervalued country. After a decade of economic and political turmoil, Russia’s stock market has a P/E ratio of 6.9 – well below the valuations of most Western markets.
Finally, I ask Ryan about the applicability of Benjamin Graham’s value investing techniques in this 8-year-old bull market.
According to Ryan, value investing is the best approach in a mature bull market. By focusing on stocks that are already trading below their true value, investors can protect themselves from a pullback in the broad markets.
He also notes that Alexander Green is working on a new presentation about the power of value investing – one that is perfectly suited to today’s market conditions.
Stay tuned for more.
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