The end of Buffett’s value strategy?

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“For some reason, people are more focused on price rather than value. Price is what you pay. Value is what you get.” – Warren Buffett

The stock markets continue to pull away from the real economy in June. The Nasdaq index has already tested an all-time high, with the S&P500 and Dow pulling up. Is it possible to find undervalued companies today and does value investing strategy even work?

When managing capital, I combine a value investing strategy with a search for promising fast-growing companies. But today we will talk about a classic example of a value strategy.

Value Investing, the brightest representatives of which are Warren Buffett and Peter Lynch, is looking for undervalued companies. The market ignores them, so the value investor can buy shares cheaply and earn when they return to fair value.

I keep hearing that the value strategy no longer works because of the general availability of information. However, this is not true, and there are undervalued value stocks in any market, both declining and rising.

Let’s look at how the stock price has changed against the S&P500 index (SPX) since 2015:

Индекс S&P500 вырос на 41%, тогда как акции компании упали на 24% 

The stock has been well ahead of the index since 2015, but its value began to fall in 2018. At the same time, its financial performance continued to improve:scale_1200 (2)

As we can see, over 5 years, revenue and book value have almost doubled. The growth of earnings per share was more modest, but it does not correspond to the decrease in the value of the share, thanks to which, incidentally, the dividend yield has grown. Moreover, the company sends a part of its profit to buy back its own securities.

The company’s undervaluation is also evidenced by active stock purchases by insiders (management and key employees). The dark green candles (Buy) on the chart show that insiders bought shares with their own money (without using corporate options):

scale_1200 (3)

The undervaluation of the company was noticed by the market, the prices exceeded the minimum values of late March by 2 times, but there is still a long way to the highs. According to our estimation, the fair value of the company exceeds the current one by at least 2 times.

Despite the two-month rally, fundamentally inconsistent with the current state of the economy, there are still profitable investments for long-term investors in the US stock market.





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