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cover of episode Talk Your Book: Valuation Still Matters

Talk Your Book: Valuation Still Matters

2025/6/2
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Animal Spirits Podcast

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Don San Jose
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Michael Batnick
作为 Ritholtz Wealth Management 的管理合伙人和研究总监,Michael Batnick 是一位知名的投资专家和播客主持人。
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Scott Blasdell
Topics
Michael Batnick: 过去,价值投资意味着寻找那些估值低于其现金储备的公司。但如今,这种机会已经很少见。现在的价值投资组合与过去相比已经发生了很大变化,更多地关注蓝筹股和质量。现在通过ETF购买一篮子廉价股票变得非常容易,这在以前是难以想象的。 Don San Jose: 股票估值仍然很重要,尽管市场可能受到资金流动的影响。多元化投资是关键,尤其是在市场波动时。摩根大通提供全方位的价值产品,并由经验丰富的团队支持。我们专注于寻找价值基准中的优质公司,并将估值与质量相结合,以避免价值陷阱。 Scott Blasdell: 为了使价值投资有效,需要展望未来,对公司未来六到七年的收益进行建模。这有助于避免长期输家。较高的利率通常有利于价值股,但这种影响可能不会每年都显现出来。我们通过财务和非财务指标来评估质量,并关注管理团队的资本配置能力。我们也会剔除那些质量最低的公司。

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The discussion starts by revisiting the evolution of value investing, contrasting historical approaches with modern strategies. The panelists discuss how the availability of ETFs and changes in market dynamics have altered the landscape of value investing and the importance of diversification in today's market.
  • Value portfolios today differ significantly from those of 20 years ago.
  • The rise of ETFs has made accessing value stocks easier.
  • Diversification is crucial, as seen in instances where value stocks outperformed growth stocks.

Shownotes Transcript

Translations:
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Today's Animal Spirits Talk Your Book is brought to you by J.P. Morgan. Go to jpmorgan.com to learn more about the J.P. Morgan Active Value ETF. That's ticker JAVA, J-A-V-A. It's jpmorgan.com to learn more. ♪

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Back in 2016, when I was writing my book and doing research on the chapter of Ben Graham, I think I was reading articles that he wrote in Fortune. I think it was Fortune in like the 1930s. And there used to be companies, listed companies on the stock exchange that were trading at a lower valuation than cash they had on the balance sheet.

So in a hypothetical world, had you just bought this stock or bought all the stock and then took the cash and liquidated whatever assets it had, you could have made money. Yeah. He's bought a bunch of those, right? The cigar butt approach? Yeah. So I think those disappeared probably like-

Buffett was doing that. They probably disappeared in the 60s or 70s, certainly. By that point, they were gone. So that style of value investing, long way behind us. That stuff doesn't work anymore. So we actually spoke about this today with Don and Scott, that the value portfolios of today, forget about 50 years ago, they look different than even 20 years ago, substantially so. It's also cool to think that you can, I remember reading the Ben Graham stuff too. And then I read early in my career, I read What Works on Wall Street by Jim O'Shaughnessy.

And he was talking about building a portfolio of 50 names and finding the ones that are cheap based on price to book and price to earnings and price. And he had this whole, all these different metrics. And I remember thinking, like, if I tried to model this and do this on my own, I would never be able to do it. And this was before...

free trades and before ETFs. And now the fact that you can just buy, if you're wanting to buy a basket of cheap stocks, you can just do it in the ETF. Professionally managed. Yeah, it's pretty remarkable. Professionally managed, it's kind of amazing. So on the show today, we talked to Don San Jose, who's a managing director and

and CIO of the US value team at J.P. Morgan. And then Scott Blasdell, who is also managing director and portfolio manager responsible for large cap value portfolio. So J.P. Morgan has a whole suite of value portfolios up and down the income spectrum and up and down the market cap spectrum. And yeah, the point you made was just that a lot of the companies are more blue chip these days that tend to be cheaper. And I don't know if that's a baby in the bathwater thing, but it does seem like...

a lot of the biggest NASDAQ 100 type stocks have gotten more and more expensive and a lot of the other names just really haven't. So I don't know if you call that Dow stocks or blue chips or whatever, but there's a lot of stocks out there that still seem reasonably priced that just probably wasn't the case, I don't know, 20 years ago or something. Anyway, here is our talk with Scott and Don from JPMorgan.

Scott and Don, welcome to the show. Thank you. Good to be here. Yeah, thanks for having us. So just this past week, I was actually looking at the J.P. Morgan Guide to the Markets. And that presentation always has a good job of showing valuations across broad spectrums, price to book and price to sales and price to earnings and all these different... And then it kind of shows it against the historical averages. And I want to make a case for you. I'm not saying I believe this case, but I want to hear your sort of rebuttal. And it seems like for the past...

five, 10, 15 years that valuations just haven't mattered very much at all. And it seems like flows have sort of trumped valuations in a lot of areas of the market. And I just want to hear your take that, yes, valuations actually do still matter.

I'll start off and Scott can certainly fill in after that. But I think valuations still do matter. When you look at where stocks are trading, the Russell large cap value benchmark is trading at a 30% discount to growth.

versus a typical 20% discount. I mean, you've got PEs for the benchmark around 16, 17 times. That compares to about 25 times for the Russell large cap growth. And maybe what's different is

versus the last five years that you mentioned, you're just seeing better earnings breadth these days. I think we all know the MAG7 really has shown that the earnings growth is there and people have gravitated towards that. But I think in the last four quarters, you're starting to see some earnings breadth beyond just the MAG7. Yeah.

I think another thing beyond maybe evaluation is just diversification matters. And I think you've seen a couple times in the last year where there are times where

Having a diverse portfolio really has distinct advantages. Maybe one of the more recent ones would be DeepSeek Monday, where the MAG-7 did sell off, but value names actually did quite well. And you saw something similar last summer when we saw sort of a soft CPI print. And maybe beginning in July, right up through the election, again, value names did pretty well. There are a lot of...

for investors looking for a value-oriented strategy, why should they consider yours? Yeah, so I think a couple things here at JPMorgan Asset Management. I think, first of all, we have full breadth of products across the value platform. You can really view us as a one-size-fits-all. We've got everything from an equity income fund, a large-cap value fund. We have small, mid-cap value funds,

And I think what is pretty consistent across all of those is that they're backed up by a portfolio management team and dedicated research analysts, all with decades of experience. And so when I look across the U.S. equity platform here at Asset Management,

We've got over 50 analysts. About a third of them are dedicated to value, which means they're just looking at those value stocks. And I think that's really important when they're paired up with value-focused portfolio managers. And so the analysts...

experience, the portfolio managers partnered with those analysts really makes a difference. I think the question might have been poorly worded, so forgive me. I guess, specifically on the strategy, what is different about what you're offering? Or tell us about the strategy versus what they can get from the Russell 1000 Value Index, for example. Sure. I think one of the other hallmarks of what we do is it's active management.

And so I think what we're really focused on is more of the quality names within the value benchmark. Obviously, all value managers are thinking about valuation, thinking about value. But what we do is combine that valuation value.

with a quality focus. And so I think there's a reason that you need to do that. It's really not just finding the best opportunities, but also avoiding those value traps. And so valuation alone doesn't tend to be a great indicator of

of a great stock always. You need to do the research. It goes back to those analysts that I mentioned. And so that does tend to go back to our differentiator and competitive advantage, having that deep knowledge behind every investment decision. The value trap idea is interesting to me because I think one of the hardest questions to answer is, you know, what's priced in to a stock? And

I think a lot of people have been saying for the past, at least for this cycle, that listen, the tech stocks are overvalued, but they're overvalued for a reason because they're higher quality, right? And stocks that have lower valuations have those lower valuations for a reason. And obviously, the difference is just the expectations and what is priced. So how do you consider something like that in terms of the stocks we own are much cheaper, but the market is missing something on the expectation? How do you understand what actually is priced into those numbers?

Yeah, I can weigh in here on that subject because I started 25 years ago as a real estate stock analyst here at J.P. Morgan. And our approach, what distinguishes J.P. Morgan, and I think what you really need to do to make value investing work, is look far out into the future. So part of what we're doing, we're modeling company earnings out six, seven years, and

It's not like we're going to get the future that far out perfectly correct in our estimates. But what thinking that far out does do for you is that it helps you avoid some of the secular losers that Don was mentioning, which can be the value traps. So, you know, for example, I just was at a presentation talking about the wine industry and the...

Turns out most wine drinkers are over 40, and as they get older, they're going to be drinking less wine. We all drink less as we get older. That just makes it harder for someone. Speak for yourself. Okay, well, we're talking averages here. Michael's an outlier. Yeah.

Yeah. But the point being that there's just some headwinds to that business that kind of make it harder for a company in that business to do well over time. And if you're looking out six, seven years when you're modeling companies, it forces you to ask those questions about the long-term trends. So versus passive investing, you're going to own everything. We can weed out the ones that have those secular headwinds. When you're discounting cash flows-

Interest rates are a big component, obviously, to the discount rate. So is that something that people just say, like I did? Or do you really believe it? Like, do higher interest rates favor value stocks? Because a lot of the conversation for the past decade was, yeah, free money. You know, doesn't matter if you get your money back today, five years, 20 years, what's the difference? And we'll just go out and take more risk. Do you buy into that at all?

I do. I mean, I think it's just a matter of math that, yeah, typical growth stock, a lot of the payoff is far out into the future. So higher interest rates will, everything else equal, make near-term cash flows more valuable. So that will tend to favor value stocks. You certainly saw that

in spades in 2022 when we had the beginning of the post-pandemic inflation and then the spike in interest rates, the growth stocks got crushed. But then you didn't see it in 23 and 24. This is true. So I'd say that it's definitely valid principle, but it works over long periods of time, maybe not every year.

How do you think about competing against the algorithms and just competing against simple rules-based formulas that say, we're going to buy all the stocks that trade under this and trade below this and have numbers that do this? How do you think about the qualitative aspect of value investing when it's easier than ever to just calculate these things? It's not the Ben Graham days of calculating these formulas yourself. It's much easier to just put these into a formula and have them spit out a list of stocks.

well i'd say you know again this is where looking far out into the future gives us an advantage because if they're just you know looking at uh published numbers maybe by the sell side the sell side's going out maybe one year maybe two years max and um they're not thinking about long-term growth rates they're not thinking about what we call normal earnings what a company should earn at a normal part of the cycle and

We have a lot of evidence that our approach of looking far out into the future does make a difference to returns. What are you looking at exactly when you think about quality? So are you looking at

some metrics like return on equity or assets, or are you thinking about quality in the non-financial term? Like, oh, it's a quality business. Yeah, I think, Michael, it's a little bit of both. I think there's definitely financial characteristics you're going to look at, whether it's return on equity, return on invested capital, leverage on the balance sheet, all those things you can look at and sort of make a quantitative judgment. Okay, this is quality.

But then you have to step back and say, what are the qualitative things? Consistency over time, what's the company's ability to deliver pretty outsized returns through a cycle? And just maybe maintain profitability levels that are either above peers or above industry norms. You're looking at things like the management team. Do they have a long-term track record of success?

Are they able to execute on the ups and the downs of the cycles? And then are they able to allocate capital in the right way? Whether that's acquisitions, buying back their own stock, paying a dividend, or even reinvesting in the business. There's not one way that defines quality when it comes to capital allocation. But you do need to think about how a management team does that. And then sort of to Scott's point,

We're looking at those things over the long haul, just because you have a high ROE one year, or maybe you did one good acquisition in the past year. That doesn't mean your quality. You really got to just look over the long term.

Don, you mentioned the diversification piece before, and I totally agree with you that there have been times in this cycle, even though the big tech stocks and S&P 500 and NASDAQ 100 have sort of dominated this past cycle. There's been countertrend rallies, and you've seen, especially earlier this year, other types of stocks did

much better. I'm curious how you think about diversification within your own fund in terms of weighting the positions and having enough stocks to be diversified, but also have enough concentration to try to outperform the index.

Yeah, I think across value, I think most portfolios have roughly 80 to 100 stocks in them, some a little bit more. But that tends to be where, from a diversification standpoint, we get there through the number of names. But then from a sector standpoint...

People are going to look at each sector and decide to overweight and underweight specific ones depending on both their macro views and what they're finding on a bottom-up perspective. And so that's going to vary portfolio manager to portfolio manager. So for instance, we're very overweight industrials because we find that we're finding...

Lots of opportunities there. They've gotten beaten down over the last year. We want to add a little bit of cyclicality to the portfolio. So, you know, that's where in more recent times we've been looking to add. Scott, I'll let you talk about sort of what you're doing in your portfolios. Yeah, maintaining diversity, diversification is not such a

There's a bunch of rules that we have as managers that ensure that we remain diversified. So, for example, I have position limits, number, the percent of a stock that I can have in the portfolio versus its benchmark weight, for example, will be regulated depending on the strategy by various amounts. Also, sector weights will be, you know, supposed to be kept within certain ranges. And that's one of the ways that, you

simple ways you can use to maintain the diversification. But I will take larger positions in some sectors when there's particular opportunities and underweight sectors where I'm having trouble finding good opportunities all the time. So that's one thing you do at the sector level. And then in addition to that, you're looking within sector for the best stock ideas.

Have value portfolios – I have a second part to this question, but I'll ask Ellis this first. Have value portfolios changed over the years in terms of composition of quality and what they look like? Because I'm looking at your portfolio and there's a lot of – I'm searching for other than quality. There's good names in here. These aren't like junk stocks. And back in the day –

Scott, you're bald like I am. And Don, you have gray hair, so you guys have been around for a while. We've been around, yeah. But back in the day- Wine drinker, after all. You used to be able to build portfolios of value stocks that traded probably below 10 times earnings that were just maybe thrown out with the bathwater. And along came algorithms and the embarrassment premium went away because you had all of these quantitative investors

And maybe management has gotten better over time. But this does not look like, I guess, what I would think is like a traditional value junkie portfolio. There's good names in here.

I know. It can be kind of a surprise for people. And I think that because, you know, yeah, there is that connotation of value of really just buying anything. But really, there's so many losers that you need to avoid, I think. You know, we talked about wine drinkers, but I mean, there's any number of industries where the Chinese have decided that that's what they want to expand into, whether it's steel, aluminum, you know, solar panels, you know, where...

Right now, they're really stepping up their investments in petrochemicals, where the odds are just so against you because there's a big cost advantage that they have. So, yeah, I could pay less than 10 times for a steel company, but do I really want to? Where am I going to be in five years? So I think that...

I have seen some analyses that, you know, suggest that certainly on the small cap side, the small cap universe is, has just gotten, uh, less quality over the years. You know, there's, um, there's more leverage. Um, so that, that could be part of it. But I, I think when, when we're looking again, when we're looking out and looking at what is sustainable in terms of a company's earnings and cash flows and, and, and looking for at least some growth, you, you, you, uh,

weed out the lowest quality names that maybe, you know, 30 years ago, people would have been more open to. So part two of the question is, um,

I don't see Nvidia in this portfolio, but I do see Microsoft and Amazon, which traditionally people think of them as growth stocks, but certainly the case could be made that their value. I mean, you guys do because it's the portfolio. So what's the case? You don't have to get specific on them per se, but what is the case for including companies like that in the portfolio? Well, that's, I know it's kind of funny because I'm responsible for the Amazon. Amazon, surprisingly,

surprisingly, is cheaper than Walmart. You know, we had Walmart in the portfolio for a while. But if you look at Amazon on EBITDA, it's like, you know, 11 times, which, and, and,

Even the forward PE I saw is below Walmart, which is kind of wild to think about. And the forward PE, which rarely happens. And if you look over – if you look ever since Amazon went public, I mean, the PE has gotten down to as low as about 30 times earnings. So it's never been a –

quote unquote value stock on PE. And yet, right, it's been a great investment. And right now it's about 33 times or something like that. So what happens with Amazon is that they invest so much of their free cash flow into new businesses all the time.

And that investment depresses earnings. So yeah, you're making a bet that their current investments are going to pay off more times than not they have. I mean, look at how they've grown AWS and made a success of so many things. Now, they're replacing UPS and FedEx with delivery and the business keeps evolving and getting stronger. So

We would say that, you know, based on what we're seeing for the future, but also looking at valuation metrics from the past, it's actually a value period right now. Are there any sectors that stick out to you that are like, man, we're just finding so many cheap stocks in this sector? Or is it just almost, is it mostly just ex-tech stuff? Like, where are you finding cheap stocks these days? Well...

Well, we could talk about HMOs if you want. You know, we, where we, you know, there's just a swirling controversy right now. And, and part of it is just the Trump administration has said a lot of things, talk about getting rid of healthcare middlemen that have, for example, that have cast a cloud over the whole sector. So right now I'm seeing a lot of, of,

controversy in that sector and a lot of inexpensive companies, even if you're not ready to wade into UnitedHealthcare, which is particularly in focus right now. I mean, I think Cigna is very cheap. They don't do any Medicare Advantage and trading at 11 times earnings that we think still has very good growth opportunity going forward. So

So that would be one area. I don't know, Don, if you want to chime in. Yeah, I mean, I think there's also opportunities in financials. I think right after the election, you saw just a lot of euphoria over deregulation, the fact that there was going to be more M&A, more IPOs, just general capital markets activity.

really starting to pick up. And then obviously this year, that's sort of been put on hold for a bit. You're starting to see some M&A come together. You're starting to see some IPOs start to file again. And so I think when we look at financials and banks in particular, where credit still looks pretty good, there's opportunities to pick and choose amongst those banks as well.

So Bank of America and Wells Fargo are two of the biggest holdings. And it's been a long time since Wells Fargo, the stock, was performing well. So I looked at these a couple of months ago and I was like, holy moly, even Citigroup, no offense. But a lot of these stocks are performing really, really well. Do you think this is expectation of capital market formation? Is it a healthy consumer? I know not all these banks do the exact same thing, but what do you think is contributing to the strength in these names?

I think a lot of the financials have benefited in anticipation of deregulation by the Trump administration. We haven't really, you know, we've heard a lot of rumors about it. When you say deregulation, is that inside the banking system or broader or just leading to more M&A? Like, what does deregulation mean for the banks? Well, for example, one thing would be, I don't know if you've heard of the Basel III endgame, but there were, you know, under the Biden administration, there was- Is that the new Mission Impossible movie? Yeah.

Well, under Biden, it was kind of impossible to avoid. But it turns out under Trump, it's likely that capital requirements will not be raised at least as high as was contemplated initially under the Biden administration. So that's one way. And if banks are not required to retain as much capital, then they can use the funds to buy back stock instead. So that would be one way that it matters. I think another thing that

folks are looking for and we're already seeing a pickup in mergers and acquisitions but uh you know we have over 4 000 banks in this country uh there's there's a lot of reasons uh

whether it's technology spending or just meeting the costs of higher regulation, where we should be pushing for economies of scale and mergers, but it was really impossible under prior administration. So if there's some relaxation of M&A rules for banking, then I think you're going to see a lot of deals announced. And that's typically good for sentiment and should ultimately help earnings for the whole sector if we get some economies of scale.

A lot of value investors over the years have said, you know, I ignore everything that's macro. I ignore politics. I just focus on the financials. And you've mentioned policy a couple, policies a couple times now. Yeah.

Yeah. How do you build that into your models? Because obviously you have to pay attention to it because it could impact specific companies and specific sectors more than others, but it's also ever-changing. And sometimes it seems like this is going to be a death knell for this sector, but then wait, things change in a week. So how do you try to model that out when things are changing seemingly so quickly? Yeah, that's a great question. Because when we're looking at earnings for companies, yeah, like I said, we're looking at long-term. And so you tend to discount earnings.

near-term policy changes. On the other hand, some things like capital requirements for banks are so important, it could really move the long-term earnings for a bank up or down. So you have to pay attention. What I typically do is when it comes to, and I do spend a lot of time thinking about top-down issues

you know, when it, when it comes to a controversy, you know, a political controversy or something else, uh, just a couple of years ago, we had a bank crisis, you know, with Silicon Valley and the value of commercial real estate, um, uh, threatening balance sheets of many banks. Yeah, that was like a four day bank crisis. That was terrible. Well, I mean, it seemed, it seemed bad at the time, but then it's one of those things that just sort of washed over. It turned out it was a, it was a fantastic opportunity, which is, you know, what we, what we concluded it, you know, that

Typically, what you have to do is just say, okay, is everyone else discounting this already? If you see evidence, if it's like six months after the crisis, typically by then people have absorbed whatever the controversy is and factored it into valuations. I'd say that it's really...

You know, just getting a sense. And I think when you do as much modeling as we do of company earnings, you get a pretty good feel for when something really dramatic has been discounted into a stock or not. And that's really kind of the art of it. Having gone through a bunch of crises definitely helps in this business.

Scott, this is maybe a hard question to answer, but are you more likely to sell a stock on the way up because you feel like it's fully valued or the risk reward becomes asymmetric at that point? Or are you more likely to sell a stock as it's going down because the thesis is wrong, it's no longer quality, it falls out of favor, whatever? Yeah, I guess I should say that it's the first. I mean, we only buy stocks that go up. But I think you definitely...

I definitely tend to be trimming things and, you know, we're ranking all the stocks using a, a,

a ranking system that we have here every day. And so, yeah, as something gets more expensive and unless I can find a good reason to raise my long-term estimates, I'll be tending to sell it. But yeah, then you also have situations where, yeah, typically if a company, you know, the thesis isn't working out or management does something you didn't expect that you don't like, be like, okay, that's not what I thought, you know, time to move on. So I'd say that those things

Those kinds of negative surprises don't tend to happen as often. I mean, it can be very painful when they do, but yeah, it tends to be more, you're just trimming things that have done okay. Buffett's old maxim is our favorite holding period is forever. What ends up being, what ends up being your guys' favorite holding period? You know, obviously you want to just buy and hold something and hope that it keeps going up and that's great, but what tends to be your holding period for the stocks in your portfolio?

should i start yeah i it um i manage a couple portfolios here you know we have i have i have um

One, large cap value, which has a pretty high turnover rate, usually like, I don't know, 120% or so. So pretty short period of time. It's because I'm looking at rankings every day. And as stock prices bounce around, you're trimming and adding pretty often. Then another strategy I have, much more quality-oriented portfolio, where...

Your hope is to just hang on to the winners until they become truly unjustifiably expensive. And in that portfolio, the turnover is closer to 50%. Yeah, I think, and especially as you go down cap on some of the small and mid-cap portfolios where

turnover can be 20% or less. So you're really looking to own this thing for three to five years minimum. And if you own it for eight to 10 years, that's actually not really a surprise either. But right around that five year tends to be kind of the most common sort of timeframe that will hold a stock. So guys, for people that want to learn more about the JP Morgan active value strategy, where do we send them to find more resources?

You can certainly go to our JPMorgan Asset Management website, find some materials there. We've got

Plenty on there in terms of fact sheets, historical performance, and just kind of slide decks on sort of portfolio construction, a little bit more about the team process and philosophy. And then, you know, certainly helps to be on shows like yours. So thank you again for having us. I appreciate it. Don, Scott, thank you. Okay. Thank you very much. Thank you.

All right. Thanks again to Scott and Don. Remember to check out jpmorgan.com to learn more about all their different value strategies and the JPMorgan Active Value ETF. Email us, animalspirits at thecompinews.com for more.