Bill Nygren: The Bull Case For Value Investing

Bill Nygren’s recent presentation offers a compelling argument for the resurgence of value stocks in today’s market. “I think today’s a really interesting time for value stocks, really because it’s been such a poor time for them for most of the past decade,” he observes.

“The result of that is that valuation spreads today are unusually large. And the percentage of the S&P 500 multiple you have to pay to buy good businesses, especially outside the technology sector, is unusually low.”

One common misconception about value investing is that it requires sacrificing quality. Nygren dispels this notion, stating, “Sometimes people think when you buy value stocks that means you have to sacrifice on quality. What we try to do at Harris Oakmark is to buy good businesses that are high-quality businesses when they’re out of favor and cheap.”

He emphasizes the importance of this approach in uncertain economic times: “I think that’s especially important when the economy is as uncertain as it is today. You need to make sure that the business that you’re buying, that you think is cheap, is high enough quality, that it’s going to survive most any economic environment we could be forced to endure over the next several years.”

The current opportunity set for value investing is remarkably broad. “One of the exciting things about the opportunity set for value investing today is how broad based it is,” Nygren notes.

“A lot of times value is just in one or two sectors. But today, if you move away from technology, most everything in the market looks unusually attractive.” He highlights the diversity of sectors offering value: “So we’re finding value not just in some of the traditional value sectors, like financials or oil and gas, but also in media, in technology, consumer nondurables, consumer durables.

Even today, some health care names are also starting to look attractive to us.” This breadth allows investors to build a diversified portfolio without overpaying: “So you can put together a pretty well-diversified portfolio and not have to pay anything like the S&P 500multiple.”

Nygren also critiques the changing risk profile of the S&P 500 Index. “I think one of the most interesting things about today’s market has been how much the character of the S&P 500 Index has changed in just the past couple of years,” he says.

“Investors have gotten used to the idea that a passive investment in the S&P 500 is a very well-diversified investment and relatively low risk. And it has been through most of the past couple decades.”

However, the concentration of mega-cap growth stocks has altered this dynamic: “But the dominance today of a handful of mega-cap growth technology companies has dramatically increased the risk profile in the S&P 500 and I think has made it a much less appropriate benchmark for individuals trying to figure out whether they are on track or not to meeting their long-term financial goals.”

For investors seeking to mitigate risk and enhance returns, Nygren offers a clear recommendation: “I think an investor today, who has some of their assets in the S&P 500, [would] be well served by taking advantage of the opportunity to add to the diversified value component in their portfolio and potentially is not only decreasing risk but could be increasing the return potential of their portfolios.”

You can watch the entire presentation here:

Bill Nygren – Is now an unusually attractive time for value stocks?