There’s a world-famous value manager who stopped buying stocks in 2007 and started to hoard more and more cash. He was not predicting the Financial Crisis or the Credit Crash that would lead to a 60% drop for the S&P over the next two years. He simply couldn’t find enough stocks to buy that fit his value parameters.
Didn’t matter, it had the same effect on his returns as if he would have predicted the fall of Bear, Lehman, AIG, etc. He came out looking heroic vs the the rest of value manager peers, who had gone into late 2007 packed to the rafters with bank stocks and homebuilders.
The worst thing I could say about the current moment in the US stock market is that value managers are struggling to find cheap stocks. The S&P 500 currently sells for a fair market multiple historically and a rich multiple considering what the growth picture currently looks like. Even the bulls are struggling to make the case that it’s cheap. The Russell 2000 index of small caps sells for almost 20 times next year’s profits, a cartoonish multiple that can only be justified if growth expectations truly begin to ramp.
In the meantime, many famous value managers are husbanding their cash – either because they can’t find compelling values or because they foresee better opportunities ahead.
According to Bloomberg, it’s becoming a trend:
The $1.1 billion Weitz Value and $980 million Weitz Partners Value funds each have cash stakes that are close to 30 percent. At the $10.6 billion Yacktman Focused fund, cash has crept up from 14 percent a year ago to 19 percent. The $1.3 billion Westwood Income Opportunity has about 16 percent in cash, more than double what it had at the start of the year. Cash makes up about 28 percent of assets in the $8.9 billion IVA Worldwide Fund, up from 10 percent a year ago, and is 33 percent of the $508 million GoodHaven fund, up from 19 percent a year ago.
Those are some seriously contrarian positions. The average diversified U.S. stock fund has less than 5 percent in cash, according to Morningstar…
There’s no big macroeconomic prediction fueling the move of these value managers into cash. Just some simple investing discipline as managers pare positions in stocks they bought at deeply depressed prices. The Leuthold Group reports that the median price-earnings ratio for large-cap value stocks is 13 percent to 25 percent above its long-term historic norm; large-cap growth stocks trade at an 8 percent to 10 percent discount to their historic norm.
“After taking profits on stocks that have risen close to what we believe is their value, we aren’t finding enough mispriced securities to redeploy that cash into,” says IVA Worldwide co-manager Charles de Vaulx.
There are many differences between now and late 2007 before the crisis – but the current state of valuation is as clear as a bell. We’re not cheap here and would benefit greatly from either a real correction in stock prices or a revenue growth spurt to justify current valuations.
Which will it be?