The "value" crowd, those investors who look for winning stocks among the disappointing, the downtrodden, and the unloved, had become objects of derision, even pity. That's how long and how badly they have trailed growth investors. Now, as the bear market grinds on, they are showing again that their low-risk approach can work wonders (chart).
So you might expect plenty of gloating. I did, in fact, hear a bit at a recent Gabelli Asset Management conference featuring many of value's leading lights. Yet far more striking was the sense of worry that most stocks, even after the past year's trip south, remain too high. "How many people here think we're through with this market crash?" asked Bruce Greenwald, a Columbia University finance professor. Only a few in the group tremulously raised hands. He agreed: "We've got a long way to go."
So if you still have cash to invest, what do you do? Greenwald suggested companies in remote, unlikely spots: "Obscure is good," he said. "Undesirable is good." Such stocks are more likely to be trading below the intrinsic value of their businesses. Few expectations are built into their prices.
BIG GAINS. No one at this meeting owns more obscure stocks--or is more obscure himself--than Seth Klarman. You haven't seen him on CNBC. It's unlikely you ever will. A decade ago, Klarman wrote an investment book, Margin of Safety. But now, he warns, "it's out of print, so don't bother trying to find it." Klarman is president of Baupost Group, a $2.5 billion pool of private money. What you would find in his portfolio are such stocks as Wabtec (WAB) (formerly Westinghouse Air Brake) or hotelier Wyndham International (WYN) or steel processor Olympic Steel (ZEUS). A private fund Klarman runs gained 22% in its most recent fiscal year, ended last October, vs. 6% for the Standard & Poor's 500-stock index.
The fallen angels of technology aren't drawing many of these managers' bids--yet. The exception is Bill Miller, who runs more than $20 billion for Legg Mason. He tried to explain why his persistently market-beating portfolios own more Amazon.com (AMZN) than anyone save CEO Jeff Bezos. Much as Miller made big money on Dell Computer (DELL) and America Online (AOL) a couple of years back--two stocks that stretched the definition of value investing into some intergalactic zone--he thinks his long-suffering Amazon stake eventually can return fiftyfold. How? If Amazon can turn profitable via continued growth in such higher-ticket items as consumer electronics.
In the value crowd, that's a decidedly minority opinion, and Miller's thesis on Amazon was challenged sharply by Greenwald for, among other failings, being the conventional wisdom. More common is the approach of Boyar Value Fund manager Mark Boyar, who mostly ignores tech stocks because, he says, product and pricing cycles turn too fast to permit persuasive analysis of a tech company's balance sheet. Unlike, say, real estate, the value of tech company assets shifts too quickly to pin down. But when a tech company passes away, it can create rare opportunities. Hummingbird Value Fund's Paul Sonkin, who focuses on microcaps, has been buying such liquidations as MotherNature.com. "It's a technology stock," he says, laughing, "with no technology." But it has cash to give shareholders as it sells its remaining assets.
If value investors today are in a spot to do some gloating, it's only because they stepped up to buy in 1999 and 2000. "Anybody who thinks that now's a good time for value is missing the whole point," Klarman told me later. Instead, he says investors should think about taking profits on their most appreciated value stocks. Good point: The market hasn't stopped to ask whether a stock's owner is a value or a growth investor before cutting it down to size.
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