Sunday, May 23, 2010

New Era Value Investing: Chapter 9

As the chief investment officer at Fremont Investment Advisors, Nancy Tengler employed the value approach she describes in her book, New Era Value Investing.

Various low P/B or low P/E indexes have been created in order to separate out value and growth stocks. However, separating out stocks based on a single metric can lead to misleading results. Tengler argues that investing in second-rate companies in slow-growth industries that trade at justifiably low P/E ratios does not constitute value investing. Instead, buying the best companies relative to their peers and their own valuation history is a more legitimate value-oriented strategy.

Furthermore, most companies will shift between value and growth categories repeatedly, making it difficult to pigeon-hole them into one particular style. Tengler illustrates this point using examples of defense stocks (which have gone from growth to value to back again depending on war policy) and technology stocks (which went from growth to value after the bubble of the late 90's).

Tengler discusses Buffett's purchase of Coke as a great example of there being a blend between growth and value. While Coke has been a growth stock for most of several decades, it has run into its share of temporary problems that made investors reduce its P/E ratio. This is a great example of a value purchase, even though the P/E was high enough to scare off investors who look only at P/E ratios.

Tengler argues that it doesn't matter whether a company is considered growth or value across a few metrics. What's important to investors is that it is a strong company that trades at a discount relative to its own history and relative to its peers. Whether that company is a growth stock or a value stock, it is attractive and should be purchased.

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