The sun is finally shining on value investors who braved the great market meltdown of '08. When the world hit the "sell" button on just about everything, they bought the lost and unloved victims at bargain-basement prices.
Some value funds more than doubled last year as the TSX advanced 35 per cent and the MSCI World Index crept up by 10 per cent.
And for many value-fund managers, the party is far from over. "Prices aren't as cheap as they were last March but then the world was panicking last March," Bill Kanko says. His $236-million Hartford Global Leaders Fund gained 23 per cent last year thanks in part to the sale of Atlas Copco. Shares in the Swedish industrial equipment maker doubled in the course of the year.
He says other holdings in the fund - such as eBay, which rose 150 per cent from the March, 2008, bottom - have yet to reach their potential. "Relative to where we think interest rates are, and relative to growth over the next 10 years, the companies we own are still pretty attractive."
Like most value investors, Mr. Kanko judges individual companies not by the whims of the broader markets but by the merits of their balance sheets - things such as cash flow, debt and management. "What we try to do is have a view of a company in terms of growth looking out five or 10 years - or even longer, what the margins are going to be, and hence what the earnings power of that business is going to be."
Times are even better for Canadian value investor Irwin Michael, who manages the $860-million family of ABC funds that includes the aptly named Dirt-Cheap Stock Fund, which grew in value by 63 per cent in 2009.
"They're no longer dirt cheap," says Mr. Michael, who maintains Canadian equities still have another 10 to 15 per cent upside potential in 2010. He's holding on to small- and mid-cap stocks such as industrial products maker Canam Group, which jumped 68 per cent in the three-month period after the March, 2008, low. "It's still trading below book and breakup value," he says.
Mr. Michael says what didn't kill many companies in the 2008 meltdown has made them more able to withstand future downturns. For now he says the current slow and steadily recovering economy allows good companies to thrive because financing is cheap. "With interest rates at generational lows, companies are strong enough and able to fund out their liabilities to an extended period at incredibly attractive interest rates," he says.
For value investors such as Mr. Michael potential earnings determine what makes companies worth their trading price. A popular tool for measuring the value of a company is the price-to-earnings ratio - the current stock share price divided by earnings per share. During the March, 2008, market lows the average stock on the TSX was trading at eight or nine times earnings estimates. Right now the TSX is trading closer to its 25-year average of 15 times earnings. According to the PE ratio, stocks trading below 15 times could be bargains.
Unfortunately, earnings for even the best companies are subject to the ups and downs of the broader economy. That is the fundamental flaw of value investing as well as the fundamental advantage. Nearly every sector in every country was negatively affected by the 2008 meltdown and another dip likely won't discriminate.
© 2007 The Globe and Mail. All rights reserved.
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