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Valuation Edge™ – Investment Style Twaddle

While the debate on the merits of Value vs. Growth investing continues, we believe the debate is irrelevant. John Holt’s article: Investment Style Twaddle recently highlighted many of the problematic issues in the value/growth paradigm. In short, naive ratios are insufficient to properly frame whether a stock, regardless of its growth prospects, trades above or below its intrinsic value.

As a result, relying on historical trends in those ratios are often misleading. For example, the quantitative value investing world has been crying in its soup about how over-valued “growth” stocks have been for years, relative to “value” stocks, we have adamantly disagreed.

The charts below compare the intrinsic value of growth and value stocks relative to their traded prices. Until July of 2020 growth stocks have traded within what we call “bounds of reasonableness”. Further, while value stocks have offered more upside than growth stocks, the upside has just not been that compelling. We now tend to agree that growth is now statistically expensive, but just barely, and certainly not as expensive as during the Tech Bubble. Further, while value stocks offer greater upside than their growth counterparts, we certainly would not advocate “sinning a little” on your long-term allocations at this point. In a recent interview with Christine Idzelis from Institutional Investors, Rafael Resendes emphasized those points.

Keep in mind, Intrinsic Value is derived from the intersection of economic profitability, capital investment, risk, and competition. Attempts to measure value by taking shortcuts from the detailed process required to estimate intrinsic value, are likely to fall short. We demonstrate this clearly in our recent asset pricing work.

Our Valuation Driven® investment approach provides unique perspective not available through standalone or composite cheapness metrics.

November 2020

Analyst Insights – Consumer Stocks Dying and Thriving During the age of Covid19
Jun Wang, CFA gives her thoughts on consumer stocks, Covid19 trends, the future for brick & mortar retailers, and recent shifts in consumer preferences. “No, physical stores are not dead at all. However, just like everything, the fittest survive. While some retailers have died or are struggling, many have thrived with a large physical presence. Costco, Walmart, and Target come to mind conveniently. Also, Home Depot and Lowe’s have flourished during the pandemic.”

Investment Style Twaddle
Charlie Munger once said, “The whole concept of dividing [indices] up into ‘value’ and ‘growth’ strikes me as twaddle.” We believe that current style methodologies were initially a good idea that became twisted over time and can misinform investors.

Market in Pictures – October 2020
Market in Pictures is our collection of charts, images, and posts that provide visual highlights of interesting happenings in the current markets. For October we’ve included topics like the South Sea Stock Price Bubble, Value Stocks, the shape of the current recovery, the largest companies in the world, and more.

Institutional Investor article featuring our Co-founder, Rafe Resendes
When measuring value vs. growth, our valuation driven investment approach provides unique perspectives. Mr. Resendes discusses how tech stocks are wildly overvalued and growth’s expensive turn.

Extraordinary Moves – November 9, 2020
A quick look at some of the huge moves in the market on news that a viable vaccine for Covid-19 is on the horizon.

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