Shannon Zimmerman: I get emails from investors in your funds because I'm the analyst who covers them here at Morningstar, and people are sometimes confused and say, "Wait a minute, Oakmark is a value shop. Nygren is a value investor. What's Apple doing in a portfolio? What's eBay doing in a portfolio? Why does he have this much in tech? These aren't traditional areas that are associated with value investing."
Because you know I have discussed this, I have a sense of what the answer to this question is, but how can it be that a value investor in value funds like yours are in these sectors that are so nontraditionally associated with value?
Bill Nygren: Well there was a time back around 2000 when technology stocks were all selling at 50, 80, or 100 times earnings, when advisors and investors were begging us to please own just a few of them. And we didn't own anything in technology, and people got the mistaken idea from that that technology was just a sector we would never purchase. We had nothing against the companies. There are a lot of good technology companies, but when you pay 50 to 100 times earnings, an awful lot has to go right for you to make money as an investor.
You fast-forward a decade, and a company the quality of Apple exits cash. It was available for less than 10 times earnings when we purchased it. The stock has done incredibly well, but the earnings have done just, as well. Even today with Apple stock just below $600 a share when you subtract out the cash that they have on the balance sheet and look at the earnings from the operations, investors are asked to pay only about 10 times earnings for Apple.
Zimmerman: It's quite remarkable.
Nygren: If you just talked about the statistics and you said, a cash-heavy balance sheet, 10 times earnings, investors would say, "Yes, that's where a value manager belongs."
The fact that we happen to get rapid growth and we aren't having to pay for it, to us that's a bonus rather than a red flag.
Zimmerman: Is it fair to say that growth versus value is a distinction without a difference for you and your colleagues at Oakmark?
Nygren: I think so. I think so many investors think of growth and value as a continuum, with value at one end and growth at the other end, and we think about it very differently than that. We think about growth as being one of very many attractive features that a company may or may not have.
A business may be nicely cash-generative. It may have low cyclical risk. It may have better organic growth or less organic growth. Typically, investors get really excited about high organic-growth companies, and they bid up multiples to levels, for when we analyze it, we say the likely outcome is even if the company does well, the investor won't.
Sometimes there is so much skepticism about historical growth continuing as there is with Apple today and has been with Apple for the past five years, that even though a company has unusually high historic growth, it's P/E multiple doesn't reflect that. When that happens we love to get growth in the portfolio. We just don't want to have to overpay to get it.