Value Library
The following is an
excerpt from the ABC Perspective - October 2000 - Pg. 3
Value Investing:
Where Have All the Value Investors Gone?
It is very lonely today
to be a value investor. It seems that few are willing to admit
that they follow the tedious approach of exhaustive balance
sheet analysis and the frustration of not being in sync with
today’s wave of growth/momentum investors.
Quite frankly, it is far
easier now to buy an indexed portfolio or to gravitate to a
growth/momentum investment style to keep pace with the crowd.
Moreover, with Nortel’s 30% weighting of the TSE 300
benchmark index, many investors find it far easier to resign
themselves and become a closet indexer. Certainly this
strategy would have been successful over the past two years as
the supercharged Nortel took off in price, to the detriment of
value investing. Now the question is: where do we go from
here? I have a few thoughts.
I find it confusing that
serious investment analysts, armed with MBAs or CFAs, can
better manage a portfolio by simply buying a market index
while refraining from the hardcore investment analysis that we
were taught early in our careers. However, we are not
suggesting that all portfolio managers are passively managing
money by purchasing an index or modeling a portfolio on a
number of TSE 300 heavyweights. Rather it seems to me that
many analysts and portfolio managers have capitulated to what
is in fashion and have loaded up on Nortel and other high
technology and biotechnology winners of the past 12-18 months.
Now this observation is not to take anything away from these
stocks’ past success. Instead I would like to point out that
with the market’s preoccupation with these securities and
the flight of value investors to other styles, numerous
opportunities have presented themselves with few takers. Let
me explain.
With the switch toward
growth and momentum investing, many investors are not paying
attention to dirt-cheap equities trading at big discounts to
book and net asset values or low cash flow and earnings
multiples. Many of these companies are ripe for a catalyst. A
good example is Crestar Energy, an ABC Funds' holding. Crestar
Energy was an out-of-favour, senior oil and gas producer that
traded at an extremely low cash flow multiple and at a
discount to its net asset value. Many analysts acknowledged
that Crestar was incredibly undervalued, however the stock
continued to languish. But Gulf Canada Resources Limited has
just provided a catalyst with its takeover offer for Crestar.
There are many
undervalued common shares, like Crestar, in today's market
place. They are dirt-cheap and they are languishing. They are
ripe for a merger, takeover, reorganization or privatization.
Any type of catalyst could catapult their price upward. The
key to successful investing is the combination of discipline
and patience. We strongly believe that value investing will
once again come back into fashion.
Irwin A. Michael, CFA
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