Equities

U.S. equity: Why the odds may favor value stocks

December 18, 2024 - 1 min read

Partner, Portfolio Manager and Chief Investment Officer – U.S. – Harris | Oakmark

US Equity: Why the odds may favor value stocks

I think it's an unusually attractive time to be a value investor today, because we're starting with such a wide spread in valuations between those handful of companies that have driven the S&P 500, mostly mega-cap technology companies and everything else.

The S&P 500 today sells at a PE multiple in the low 20s, which is about twice as high as the PE level that we have in Harris Oakmark large cap strategies today. That spread is unusually wide, and we think tilts the odds in the favor of the value investor.

One of the nice things for a value investor today, because the S&P has been so concentrated in large cap technology companies, the cheap stocks are spread out across most of the other industries.

So, I think there's an unusual opportunity to put together a very well-diversified portfolio today in low PE stocks across lots of industries.

It's not just bank stocks and oil stocks that look cheap, but consumer durables, health care, media companies. The stocks available at low PES are distributed across most industries outside of technology.

Patience is key for long-term investors

I think the biggest challenges for value investors remain the same year after year after year. The nature of being a value investor is you're buying what's out of favor, the companies other people are worried about. The benefit is you get a much lower price because others are worried about those companies.

So the value investor has to step in when others aren't willing to, and to be patient and allow enough time to pass for the market to reprice the companies that are currently out of favor.

Uncovering quality companies at pre-bull prices

The S&P 500 has hit new all-time highs many times this year. And investors, we think, are too worried about that. It's not all that unusual for the market to be at a new all-time high.

In fact, it happens about every other year that the market hits a new all-time high. And we've gone back and checked the records and investors would actually have performed much worse had they sold the market every time it was at a new all-time high, than if they just bought and held.

And I think the other thing that makes it less worrisome today is the ability to construct a portfolio that's valued so differently from the S&P 500. Yes, the market is at a new all- time high, but it's been driven there by about 20 large technology companies.

The rest of the market is priced nothing like that. And it's almost like you're able to buy the rest of the market at pre-bull market prices.

What might 2025 have in store for value investors? We asked Harris | Oakmark CIO–U.S. and Portfolio Manager Bill Nygren to share his thoughts about where he is seeing bright spots and why he believes it is an unusually attractive time to be a value investor. Hear more about the following in U.S. equity:

Why there is a wide spread in valuations between a small number of mega-cap technology companies that have driven the S&P 500^® Index – and everything else.
How the S&P 500^® today is selling at a price-to-earnings (P/E) multiple in the low 20s, which is about twice as high as the P/E level in Harris | Oakmark large-cap strategies.
Why low P/E stocks are available across most sectors and industries outside technology, including bank, oil, consumer durable, healthcare, and media companies.
Why the biggest challenges for value investors remain the same every year: having patience, holding investments, and allowing enough time for the market to reprice companies that are currently out of favor.
Why value investors can now construct a diversified portfolio that's valued so differently from the tech-driven S&P 500^® Index – at close to pre-bull market prices.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the author and Harris Associates L.P. as of November 2024 and are subject to change without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

CFA^® and Chartered Financial Analyst^® are registered trademarks owned by the CFA Institute.

Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.

Concentrated investments in a particular region, sector, or industry may be more vulnerable to adverse changes in that industry or the market as a whole.

The price to earnings ratio (P/E) compares a company's current share price to its per-share earnings. It may also be known as the "price multiple" or "earnings multiple," and gives a general indication of how expensive or cheap a stock is. Investors should not base investment decisions on any single attribute or characteristic data point.

The S&P 500^® Index is a widely recognized measure of U.S. stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

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