Value Investing Is Coming Back
Investors are now seeking companies whose true worth isn't recognized.
By Jerry Helzner
Investment managers are generally divided into two distinct camps. On one side are those who are willing to pay a premium for shares of companies that have the potential to grow quickly. Their philosophical opposites are the managers who seek low-risk stocks at bargain prices. Simply stated, these two groups represent the age-old argument pitting growth against value.
Focus on value
Through most of the 1990s, the growth players had the upper hand, as all types of unproven technology, biotechnology and Internet companies saw their stocks soar into the stratosphere based on the hope that these companies had superior potential for future growth. When the growth boom collapsed in March of last year, stock investors finally began to return to the long-neglected value sector.
I'll explain the basics of value investing and tell you why value stocks can be a haven during periods of slowing economic growth.
Ferreting out bargain stocks
Value investors invest in companies that possess undervalued tangible or hidden assets with true worth expected to eventually be reflected in the stock's market price.
Those who search for undervalued stocks are likely to primarily immerse themselves in the study and evaluation of individual companies. Just as the corporate takeover expert examines a company in detail to obtain an estimate of its overall worth, the stock market value player tries to find stocks that have greater potential for gain than immediately meets the eye.
For example, some companies own real estate that's carried on the corporate books at many millions of dollars less than its current market value. Motion picture and media companies often own vast film libraries and television syndication rights that have the potential to bring in a steady stream of income.
Look for real assets
The value-conscious investor will usually avoid stocks of companies that have businesses based purely on concepts or ideas, such as biotechnology companies, fledgling high-tech outfits and anything related to the Internet. Instead, the value player is looking for something more tangible. Maybe a company that holds a dominant position in a niche business, or that has well-known, brand-name products that give the firm valuable marketing clout that it can use for future product introductions.
Attractive and potentially exploitable assets come in many forms. It's up to the canny value investor (or securities analyst) to discern the extra value that others fail to notice.
You'll need to be patient
Sometimes the value player has to wait for a catalyst that unlocks a company's true worth. In some cases, that catalyst is a high-priced takeover offer from a rival company or the threat of a takeover.
Several years ago, ITT Corporation broke itself into three separate companies because it feared that its low stock price presented too tempting a target to potential acquirers. ITT shareholders who had held onto the stock through the lean times were handsomely rewarded when news of the breakup sent the stock to new highs.
Slow and steady does it
The "growth vs. value" debate will go on, but like the race between the tortoise and the hare, the slow, steady approach should win in the long run.
JERRY HELZNER HAS WRITTEN MORE THAN 50 ARTICLES ON STOCK INVESTING FOR
BARRON'S. HE HAS BEEN A REGULAR STOCK MARKET COLUMNIST FOR OTHER BUSINESS PUBLICATIONS AND WAS A MEMBER OF THE EQUITY RESEARCH DEPARTMENT OF A MAJOR REGIONAL BROKERAGE FIRM. HE'S ALSO AN ASSOCIATE EDITOR FOR
Optometric Management, Issue: August 2001