Value investors seem to be everywhere

Your Money

April 04, 2004|By Tom Petruno

The search for real value in the stock market is supposed to take you away from the crowd, but what do you do when the masses believe that traditional value stocks are the place to be?

That has been the judgment of the crowd for the past few years, and it's making life increasingly difficult for veteran value hunters. Of course, value is in the eye of the beholder. A stock might be judged to be a value when it sells for a relatively low price compared with underlying earnings per share, or compared with some measure of the intrinsic worth of the company's assets. However they measure it, many value hunters say they cannot find what they are supposed to be looking for.

Berkshire Hathaway Inc. Chairman Warren Buffett, a renowned value investor, says the perceived shortage of attractive stocks has been a barrier to putting cash into the market for quite a while.

"In recent years, we've found it hard to find significantly undervalued stocks," Buffett lamented in his 2004 letter to shareholders. To which Berkshire shareholders, and others who own value-focused funds, might reply: "Whatever it is you're doing, just keep doing it."

This year, the average mutual fund that owns large-capitalization value stocks is up about 0.4 percent, according to Lipper Inc. The average large-cap "growth" fund, by contrast, is down 0.5 percent.

Large-cap value funds also top large-cap growth funds over the past year, three years, five years and 10 years, Lipper data show. Morningstar Inc. comes up with similar numbers.

As for Berkshire Hathaway, its class A shares are up 11 percent this year.

The supremacy of value over growth - the latter an investing style that usually centers on buying shares of the fastest-growing companies - extends beyond the big-stock universe. Value also has been the better sector, by far, among small-cap and mid-cap stock funds.

Over the past five years the average small-cap value fund has gained an annualized 15.9 percent, compared with 5.8 percent for the average small-cap growth fund, Lipper data show.

No wonder the investing public is piling into value-oriented mutual funds. Those portfolios and other more conservative funds (such as stock-and-bond-mix funds, and funds that blend value and growth stocks) took in the lion's share of net new cash from investors in 2003, according to Financial Research Corp.

Heavy cash inflows to any market sector can make strong performance a self-fulfilling prophecy, at least for a while. That may be helping to keep value stocks flying: As value-fund managers take in more cash, many tend to buy more of what they already own in classic value sectors such as banking, energy and heavy industry.

But company, in this case, is misery for many value-stock managers. Their style often is described as hunting for issues that are undiscovered or underappreciated, or both. The idea is that, once the rest of the market comes to know what the value manager knows, the stock will be worth a lot more.

If what they own already is popular or well appreciated, the chance of market-beating long-term performance is lessened substantially, according to John Spears, who helps manage the Tweedy Browne American Value mutual fund. His value discipline centers on searching for companies whose stocks are priced well below the net "enterprise value" of the business.

Spears defines enterprise value as what a knowledgeable investor would be willing to pay for the entire firm, knowing that the price would have to be reasonable enough to make sure the investment would pay off in the long run. That focus necessitates "looking at stocks as something more than gambling chips," Spears said.

Tom Petruno is a financial columnist for the Los Angeles Times, a Tribune Publishing newspaper.

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