Yes, value will finally be back, although some beaten-down stocks likely will remain that way. Or so said a group of value investors in a webcast.
“Value will have an explosive upside,” said John Rogers, co-CEO of Ariel Investments, which hosted the forum. He recalled that the dot-com bust of 2000-2002 allowed value stocks to do very well, after years of being disdained.
Moderator Mellody Hobson, Ariel’s other co-CEO, asked the group whether passive investing, which is the clear investor preference nowadays, would ever recede in favor of stock picking. The folks present are by nature stock pickers, which is the nature of value investing. They, on balance, argued that their preferred method would do well in the oncoming recession,
Of course, this bunch was talking their books, and value adherents are forever predicting a turnaround for their beloved investing style. But it’s also true that value, in the dumps for years as growth-oriented tech stocks soared, comes back eventually. The eight money managers on the panel tackled some of the industries that are on their backs and weren’t afraid of knocking some of their prospects.
Asked whether the FAANGs—or tech behemoths Facebook, Apple, Amazon, Netflix, and Google, via its parent company Alphabet—are invincible, Bill Miller, chairman of Miller Value Partners, pointed out that many of them “are not terribly expensive and have performed well.” Miller, whose funds own some of these high-flying tech giants, noted that Amazon for many years was undervalued. “The market didn’t see that.”
If they agreed on one thing, the group mainly did not like working from home. Hobson asked whether they preferred being in their offices or on home lockdown. “This is a big question” for money managers, she said.
Bricks-and-mortar retail got a big raspberry, with some exceptions. “It’s not doomsday” for all of these companies, said Staley Cates, vice chairman of Southeastern Asset Management. “But I’m not a fan.”
Noting that the US had an over-abundance of shopping malls, Hobson pointed out that “we really over-built those malls.” David Herro, CIO of international equity at Harris Associates, said “luxury stores still have a place, although we just don’t need all that space.” The one problem is that so many traditional retailers can’t compete with online merchandisers, said Daniel O’Keefe, founding partner of Global Value fund at Artisan Partners.
What about airlines, which have gone from nicely profitable to money bleeders thanks to the sudden lack of travelers? O’Keefe said their current distress would result in at least one carrier going out of business, to the benefit of stronger competitors. To him, that means Southwest Airlines will be a big winner. “They have a strong balance sheet and don’t travel internationally,” he said.
Asked about the disconnect between the economy (doing poorly) and the stock market (recovering), Mario Gabelli, founder of GAMCO Investors, replied that the market was bent on predicting the future. And the economy will come back, he said, albeit in a W pattern, with another dip ahead before things are on a steady path of improvement.
Reacting to news that uber-investor Warren Buffett was selling his shares in Delta Airlines and United Airlines, Miller said he owned them both. “But all the bad news is priced into the airlines stock,” he added.
Media stocks, which have had a rocky time, fit the classic definition of value plays, according to Rogers. In particular, he said the newly combined ViacomCBS had been singled out for punishment. The stock has fallen by half since February. “They’ve gotten crushed, but their content is powerful,” he said.
By the same token, Miller said the movie theater chain AMC Entertainment, closed up during the lockdown, would be back. Since March, he said, the stock has tripled. That’s from a low base, to be sure. It now changes hands for less than $6.