In my career as a stock-picker and value investor, I considered dispersion as my friend. The higher the dispersion of stock prices and valuations, the more opportunities are available for the long-term investors chasing bargains of solid companies at momentarily depressed valuations. The foundations of value investing Benjamin Graham laid down in the beginning of the 30’s of last century has been a very successful strategy up to the financial crisis. Since, his strategy unfortunately became much less fruitful with value companies underperforming their growth counterparts by a large margin year after year. Some market pundits blame the underperformance of value due to certain sectors, that carry a heavy weight in the value indices, have fallen out of favor with Mr Market because of structural headwinds they are facing and therefore deserve low valuation multiples. Financials, deep cyclicals and energy stocks are good examples for this phenomenon. However, a deeper analysis lays bare the fact that value investing is much more than a bet on a return of financials, cyclicals and energy.
Christopher Potts, head of economics and strategy research at KeplerCheuvreux, has shown in a recent research piece an interesting graph illustrating the valuation dispersion within European sectors. Not only has valuation dispersion been on the rise since the financial crisis, but more importantly it has been on the rise within individual sectors.
Source: KeplerCheuvreux, The Strategic Frame No 58, 17th of February 2020
Not only certain sectors have taken the leadership in terms of valuation, it is within the individual sectors that the valuation gap has been widening between the perceived winners and losers. In healthcare for example, one of our more recent portfolio additions Fresenius ( that by the way came out with very reassuring quarterly figures this week ) currently trades a 13.8 times forward earnings. The stock has had a meagre 3% price return over the last 5 years ( source Bloomberg ). On the other side of the spectrum, one of our former portfolio companies Carl Zeiss Meditec that we sold long ago as our fair value was reached, trades today at 48 times forward earnings and its stock price appreciated by 350% over the last 5 years. Sky appears to be the only limit for the stock price of this excellent business. We however would not consider it an excellent investment at the current valuation. To us, the boring dialysis and hospital operator Fresenius is much more interesting.
As a conclusion, value investors find many opportunities in the current environment and not only in the labelled value sectors like financials. We continue to also identify them in the so-called growth sectors while investors focus all their attention and capital on a couple of perceived winners.
"The current dispersion is certainly the friend of the long term investor who has the patience to sit through the current growth fashion !"