The Golden Era of Value Investing is Back – September 23, 2022

Does Warren Buffett feel deja vu in 2022?

In the 1960s, growth stocks staged a huge rally, with 50 of the top growth companies in cutting-edge industries like technology and pharmaceuticals becoming so popular they were dubbed the “Nifty 50.”

The Nifty 50 were considered “sure things,” leading to investors willing to pay up to 50 times the earnings to own the shares, under the belief that those innovative companies would continue to grow at a fast rate forever.

In 1969, Buffett found nothing of value to buy, so he dissolved his mutual fund and sat on the sidelines.

But the party finally ended in 1973 with the Arab Oil Embargo, another example of recession followed by inflation rippling through world stock markets.

When the sell-off ended, the Dow Jones had fallen 45% in 2 years.

Suddenly there were a lot of value stocks and Warren Buffett was back in the game, this time as CEO of Berkshire Hathaway.

In a now-infamous 1974 interview with Forbes magazine, Buffett could barely contain his vertigo.

Forbes asked him how he felt about the market opportunities after the big sale, and he replied, “Like an oversexed guy in a harem. This is the time to start investing.”

Buffett spends $51 billion diving back into

In the Forbes interview, Buffett talked about how 1974 reminded him of the early 1950s, when the Great Depression bear market finally ended and stocks were cheap.

“Look, I can’t build a disaster-proof portfolio. But if you’re just worried about corporate profits, or panic, or depression, these things don’t bother me at these prices,” he said in 1974.

Sounds familiar?

Buffett has been mostly on the sidelines for most of the past decade, building a massive $144 billion cash position at Berkshire Hathaway. His last mega deal was when he spent $26 billion to buy the Burlington Northern Railroad in 2009. He famously didn’t even buy new stock in the March 2020 coronavirus crash.

But suddenly, in 2022, with stocks down from their double-digit highs, Buffett’s Berkshire Hathaway deployed $51 billion of treasury cash in energy stocks.

Energy was the best performing sector in 2021 and remains on top again in 2022; but, in another link to the 1970s, it was also one of the best of the 1970s.

Continuous. . .

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3 signs that the golden age is returning

Buffett may have been giddy about stock-buying opportunities in 1974, but it turned out that the rest of the decade was also a golden age for value investors.

There are 3 signs that US stocks could be returning to another golden age for value investors this decade, as follows:

1) P/E ratios are falling

After topping 20 in 2021, the S&P 500 is now trading at 18x. That’s still well above the single-digit P/Es of the late 1970s, which is why so many strategists think stocks may fall further.

But, future profits for individual industries have plummeted into the single digits. For example, companies that are drilling for and producing oil and natural gas are trading at only 5.3 times future earnings as an industry. That is very cheap.

2) Dividend yields are rising

Along with cheap valuations usually comes increased dividend yields. Not just 2% or 3%, but it yields more than 8%. Dividend aristocrats, those companies that have increased their dividend payouts for more than 20 years, are at their lowest point in a stock market sell-off; So not only do they increase your dividend, but the yield increases as the stock gets cheaper.

It was easy to get juicy dividends in the 1970s when those valuations fell.

3) Dollar Cost Averaging Jobs

In Berkshire Hathaway’s 1978 letter to shareholders, Warren Buffett discussed his strategy of increasing his stock positions in his insurance portfolio as the bear market continued to rage.

“We’re not concerned if the market rapidly appreciates higher securities that we believe are selling at bargain prices. In fact, we prefer the opposite as, in most years, we expect to have funds available to be net buyers of securities,” Buffett wrote.

Dollar cost averaging works on value stock bulls because Street is always late to the party in value stocks, so valuations remain depressed for some time. It’s easy to add to your position and still get in at an attractive price.

Buffett pulls out the 1970s playbook

We are already seeing Buffett and Berkshire Hathaway mimicking the strategy of the 1970s.

Berkshire has begun deploying its cash hoard in cheap companies with record free cash flows, such as Chevron and Occidental Petroleum.

If stocks continue to cheapen this fall, we’ll likely see Berkshire’s dollar cost average become what it considers the most attractive companies. It has already increased its stake in Occidental to 27% this year. What else will you buy?

While the stock market generally lagged behind until 1981, top value managers like Buffett and Fidelity’s Peter Lynch became investment legends as value investing took off.

New investment legends will also be created in this decade’s value stock rally.

Are you ready to take advantage of value stock opportunities?

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good investment,

Tracey Rynieck

Equity strategist Tracey Ryniec is the editor in charge of the Insider Trader and Value Investor portfolios.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by the editors of the Zacks Investment Research newsletter and may represent the partial closing of a position.

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