In our newsletters, I’ve commented on several occasions about the similarities that we are seeing between now and 2000. One of the major similarities is that glamour stocks such as Amazon, NVIDIA, Tesla, etc., are trading at valuations that are nearly impossible to justify, while other out of favor, yet profitable, companies can still be found trading at discounts to tangible book value.
In 2000, tech-focused mutual funds and index funds were the rage, while value stocks had underperformed the previous few years. This led magazines such as Barron’s to articulate that they were of the belief that the great value investors, such as Warren Buffett, had simply fallen too far behind the curve to be successful. In 2000, the bubble popped and while the Nasdaq dropped by a staggering 75%, many value investors made fortunes over the next few years, as value stocks reverted upwards toward their mean valuations.
Today we see many of those same trends developing. Investors that were too risk averse to own stocks at much cheaper valuations, such as 2008-2011, have piled into index funds despite the stock market being at one of its most expensive levels in history. Value stocks are out of favor, with many market pundits forecasting the end of industries such as retail, banking as we know it, etc. It is very difficult to predict the timing of when markets will correct themselves, but the value to price ratio for market participants buying the indices are getting worse and worse with each day.
Concurrently, we are able to buy many deeply undervalued and profitable companies at discounts to tangible book value, and/or at less than 10 times earnings, and/or at dividend yields greater than 7%. These are highly attractive opportunities, which we would jump on regardless of the overall market valuation. The fact that there is such a vast disconnect between growth and value augurs very well for our future investments. Below is an article, which discusses these factors in more detail. As always, if you need anything at all, please don’t hesitate to contact me directly at 805-886-8140!
“These are highly attractive opportunities, which we would jump on regardless of the overall market valuation.”