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Fund Times

Where Oakmark's Nygren, FPA's Romick Are Finding Value

Two of the fund world’s pre-eminent stock-pickers, Bill Nygren and Steve Romick, share their views on the market and valuations, and discuss notable recent investments they’ve made.

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This analyst blog is part of our coverage of the 2015 Morningstar Investment Conference. 

The second day of the conference wrapped up with a broad-reaching discussion with Oakmark’s Bill Nygren and FPA’s Steve Romick, and moderated by Morningstar’s global head of manager research Jeff Ptak.

Where Are Valuations and Values Today? 
Both managers are bottom-up investors, but when pressed for their market-level view neither see stocks as unreasonably expensive. Nygren says it is important to have the right starting point in thinking about valuations. If you see the market of six or seven years ago as normal, then yes, a triple from that level leaves things looking very pricey. But if you, like Nygren, think 2008, 2009 was a generational buying opportunity, then things don’t look as elevated. Nygren says that P/Es are in line with historical averages. Romick also sees stocks as relatively attractive, given the current interest-rate environment.

Neither seemed to think the Shiller P/E ratio was the right way to look at the market. Nygren says that it is unlikely to see an event as severe as the Great Recession every decade, so pricing one in to valuations is extreme; meanwhile, Romick said the measure doesn’t take the current rate environment into account. 

Nygren said that the distribution of P/E ratios is much tighter than he has seen before, meaning there are some high-quality companies that are trading at reasonable prices (and conversely some low-quality ones that look expensive). One example Nygren gave is his investment in Inc (AMZN), which he sees as mispriced. He believes management’s willingness to lower prices in order to grow the business is a prudent long-term move and that the market putting a price/sales ratio below that of bricks-and-mortar retailers misunderstands the business’ eventual ability to improve profitability. 

Nygren is also still a fan of the financial sector, given that continued stigma around the big banks is causing many investors to not take a serious look. On energy, Nygren has taken a stake in  Apache Corporation (APA) and  Chesapeake Energy Corp (CHK) but doesn’t expect to take on much more exposure. He thinks that oil prices will come up, but given how exposed those firms are to prices, he thinks he will get a big return from that move without having to commit additional capital to the sector.

Even though he sees the market as being reasonably valued, Romick doesn’t think we are in a target-rich environment. He is focusing on high-quality firms that will be able to compound their earnings over the years. He is currently shying away from any firms that will be hard-hit in a rising-rate environment, such as those with high rates of leverage. Romick agrees with Nygren that there are some values in financials, but he was more skeptical of energy firms to deploy capital profitably over time.

Do Share Repurchases Get a Bad Rap?
Earlier in the conference, Jeremy Grantham posited that one of the things holding back the economy is that firms are using excess cash to repurchase shares instead of investing in capital expenditures. This panel had a different take. Nygren thinks that firms aren’t investing because they aren’t supply-constrained, and there just isn’t enough demand to justify new plants. So in many cases repurchases might be the best use of capital. And yes, sometimes managers may regret the timing, but firms often make all sorts of bad capital decisions at different parts of the cycle like opening a plant that never meets expectations. But because share repurchases are so public, they end up being the decision that gets bashed, rather than the other poor uses of capital.

Romick thinks that on average share repurchases haven’t been done well, but that they can make sense at the right price.


Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.