These are tricky times in the stock market, so it pays to look to the best stock-fund managers for guidance on how to behave now. Veteran value investor Bill Nygren belongs in this camp, because the Oakmark Fund OAKMX, -0.67% he co-manages consistently and substantially outperforms its peers.
That sounds trivial. But this inherent optimism helps you as an investor more than you might think. It means you’re more likely to buy when markets are fearful. Warren Buffett of Berkshire Hathaway, for example, is famously optimistic about the U.S. economy and its future — one reason behind his investing success.
2. Price matters Nygren’s attention to value keeps his optimism from getting him into trouble when markets are running hot. “The price you pay is just as important as the quality of the business you are buying,” he says. In the auto sector, for instance, this means favoring General Motors GM, +0.14% over Tesla, despite the big decline in Tesla stock. GM simply looks too cheap considering its potential, Nygren says. Tesla recently traded at a forward price/earnings multiple of 47, versus General Motors trading a multiple of 6. GM’s market cap is 12% of Tesla’s. But GM plans to have an electric-vehicle production capacity rivaling Tesla’s by 2025.
In other words, higher rates drive a preference for near-term cash flow, and value stocks usually produce more of that. Here’s a colorful way to think about it. “The P/E ratio is an indicator of the ‘duration’ of a stock,” Nygren says. “High-multiple stocks behave like long-term bonds when interest rates go up.”
One of these adjustments is to back out Alphabet’s $8 a share in cash. Nygren also takes venture-capital investments out of the income statement and puts them on the balance sheet where he thinks they belong, as business investments. He’s referring to Alphabet’s investments in areas such as artificial intelligence and Waymo autonomous driving. This boosts earnings over what Alphabet reports using Generally Accepted Accounting Principles and lowers the P/E multiple.
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