Very often I hear people speak of stocks being “dead money.” These stocks are blue chips that have been trading relatively flat for the better part of 10 years now. These stocks range from technology companies, to conglomerates, to pharmaceutical companies. A few examples of stocks that I have seen being called “dead money” are Pfizer, Microsoft, GE, HP, Intel, Cisco, Abbott, Merck, and many other large blue chips that are trading at prices roughly the same (or lower) as was seen in the early 2000s. While many people flock to multi-billion dollar blue chips as safe havens, or value investments, investing in many of these companies mentioned above was far from making “value” investments.
Value investing is a method of investing that looks at the fundamentals, rather than technicals, of a company. Multiple ratios are considered when searching for value, including Price over earnings, price over book value (or tangible book value), price over cash flow, enterprise value over assets, and price over sales. Investing in companies when these ratios are lower than historical averages, or lower than comparable companies is a very simple method for value investing. Another way to find value stocks is to invest when dividend yields are higher than historical average yields.
Value investments in the early 2000s
A common theme with many of the companies mentioned in the first paragraph is that the price to sales and price to book ratios of those named companies were trading well above historical averages. Therefore, the only way to see stock appreciation from those valuations was for the growth story of the 1990s to continue into the 2000s. Two things come to mind following the previous thought: the first is that this is not value investing, that is speculative growth investing, and secondly, we obviously didn’t see the same growth in the 2000s that we saw in the 1990s. Even though we have seen top line growth with many of the companies mentioned, we didn’t see the amount of growth that is needed to further propel growth stocks. This has led to stagnant, or even falling prices the again mentioned stocks.
What about P/E, though?
Earnings fluctuate much more than revenue, book value, or assets. Any by earnings, you can take your pick between operating income and net income. COGS, SG&A, and the effective tax rate can fluctuate wildly within a span of 5 years. Debt and interest costs can also change rapidly within the span of a few years, depending on what management is doing. Energy costs go up, energy costs go down. Tax rates go up, tax rates go down. High earnings can make a P/E ratio look incredibly attractive in one year, but just a couple years down the road, earnings can crash, causing an attractive looking stock to quickly look like garbage. So while P/E should definitely be considered when making an investment as a value investor, it should hardly be the only (or primary) metric of consideration.
Dead Money no longer
Many of these blue chips are finally trading at reasonable, or even historically low, valuation metrics. It took these companies the better part of ten years to finally hit these metrics, but that is more so attributed to the high valuations of the early 2000s than slow growth. Many of these companies have been growing revenues 5, 10, or even 15% over the past ten years, even though the stock price has been flat. They have also been growing their dividends over that time frame. An investment in a basket of these mentioned stocks will likely yield returns that are far better than the S&P 500 over the next decade (or two). And I can assure I am putting my money where my mouth is. I’m currently invested in MSFT, WMT, INTC, ABT, and TEVA. All of these companies pay a healthy and growing dividend, are growing their top lines at a respectable rate, and are trading at historically low valuations. If you consider yourself a “value” investor, I’d consider following suit.