In this edition of Analyst Insights, Cathy Lloyd talks about what she looks for when evaluating opportunities in Technology and Communication Services, how the COVID-19 pandemic has impacted the industry, and discusses growth opportunities for tech companies beyond 2020.
I've been thinking about this lately as I've watched the Federal Reserve try to rekindle our economic fire amid the COVID-19 pandemic. In campfire cookery terms, the virus has been like a once in a hundred year downpour that soaked the woodpile -- wet wood doesn’t burn well. Fortunately, the Fed has trillions of dollars of industrial strength lighter fluid. When combined with the dry kindling that is the U.S. Congress’s fiscal stimulus, the economy could soon be cooking again. With our portfolio trading at less than 14x depressed 2020 estimated earnings, we feel very well positioned for recovery.
In this edition of Analyst Insights, Derek Derman frames the impact of the COVID-19 pandemic on the Financial Services sector, highlights how banks and insurance companies are much stronger now than during the financial crisis, and discusses some of his highest conviction investment ideas.
I’ve been investing for almost 40 years now, so I’ve lived through many booms and busts, however, I’ve never seen anything quite like the COVID Crash. It took just 20 days for the S&P 500 to fall the 20% required to put us in a bear market. For the first time since 1997, stock market circuit breakers, designed to slow selloffs, were triggered three times in six days. We’ve experienced unprecedented day-to-day volatility: in March, the S&P 500 moved up or down by at least 4% in eight consecutive sessions, eclipsing the old record of six days in 1929. The pace of change is unprecedented.
The global spread of the Coronavirus (COVID-19) is creating panic in financial markets. We appear to be in a period of maximum uncertainty characterized by a rapidly expanding list of questions, but few, if any, answers. Over the coming weeks, it seems likely that patient counts may dramatically increase in the U.S. and create some short-term pressure on economic activity. As patient counts rise, the American media will predictably stoke public fears of an intractable pandemic. Contrary to these fears, we see encouraging reasons to believe that an effective therapy could be approved within the next few months. We also believe the fatality rate in the U.S. could be much lower than in China, where smoking is more prevalent.
At roughly 11x estimated earnings, the companies we own continue to be priced at attractive absolute levels and at historically wide discounts to the market despite offering market-like earnings growth prospects. Whether we compare ourselves to broad market indices (S&P at 18x, Russell Value at 15x) or to other value managers (Peer average 15x), we offer differentiated portfolios of what we believe are incredibly compelling investment opportunities.
In this edition of Analyst Insights, Akash Ghiya explains the pillars of our investment thesis in the Energy sector, reviews the sector’s 10-year history, and discusses the key issues on investors’ minds in 2019.
As Mike Tyson famously observed: “Everybody has a plan until they get punched in the mouth.” For the last few years, Value investing has felt like being in the ring with the former champ. Successful long-term investors know they will have to take a few punches along the way because there is simply no way to get every stock pick right. The issue is not about getting punched: it’s about how one responds to the blow.
We believe the market has set up a rare opportunity for value investing. The valuation gap between growth and value stocks is at historically high levels, similar to that last observed during the dot-com bubble of 1999-2000. For investors who've benefited from the strong rally in growth stocks, history suggests it may be prudent to reallocate profits toward value stocks, where valuations are much more reasonable and future returns are potentially more favorable.
The key to investment success this year has been simple: buy the most expensive stocks and avoid the cheapest ones. That’s not what we do at Poplar Forest and our investment results reflect our continued commitment to a value-based investment process. While we’re concentrating on stock prices relative to long-term normalized earnings and free cash flow at the company level, investors currently seem to be focusing on short-term macroeconomic factors. The pre-occupation with recession and risk is understandable, but I believe it has been taken to an unreasonable extreme.
