Value stock investor experts advise that the long run strategy is going to win out.
Andrew Wellington, Chief Investment Officer, Lyrical Asset Management
Andrew Wellington is the Chief Investment Officer of Lyrical Asset Management LP, which he co-founded with his longtime friend, Jeff Keswin.
He has been a value investor for over a quarter century.
After spending five years in management consulting, in 1996 Mr. Wellington joined Pzena Investment Management as a founding member and its first research analyst.
Five years later, in 2001, he joined Neuberger Berman, where he went on to run their institutional mid-cap value product.
At Neuberger, Mr. Wellington’s investment performance improved his fund’s three-year Morningstar rating from three stars to five stars, while product AUM tripled from $1.1 billion in 2003 to $3.3 billion in 2005.
After Neuberger, he spent two years in activist investing at New Mountain Capital.
Mr. Wellington graduated summa cum laude and as the top graduating senior from the University of Pennsylvania’s Management & Technology Program in 1990, earning a Bachelor of Science in Economics from the Wharton School and a Bachelor of Science in Engineering from the School of Engineering.
His value stock investor advice is simple: good beats bad.
“When we founded Lyrical, our goal was to generate the highest returns we could over the long run.
We didn’t have to be value investors.
We could invest anywhere we thought would generate the highest returns.
But looking at the data, the cheapest stocks are where you find the highest returns, and so we are value investors.
We look for our investments in the cheapest 20% of the market, the cheapest quintile.
This is now my 30th year as a value investor, so I’ve been doing this a very long time.
Over the first dozen years or so of my career, I was sifting through this cheapest quintile of the market, and I began to observe a few things.
I noticed that I was a lot more successful as an analyst when I analyzed a good business than when I analyzed a bad business.
When I analyzed a good business, things tended to work out a lot more often.
The real world is unpredictable, and all kinds of unexpected things would happen.
But good businesses found a way to adjust, adapt, be resilient, and still end up making about the same earnings I projected it to.
Bad businesses were the opposite.
A lot of things could go right, but if only one or two things went wrong, I ended up with earnings much worse than I projected, and that made them much harder to get right.
And so that was one observation — that good businesses tend to work out a lot better than bad businesses.”
His value stock investor methodology leads to Ameriprise:
“Despite not owning any banks, financial services is currently the largest sector exposure in our portfolio.
How can we have such a big exposure to financials without owning any banks?
Well, we have found many great businesses that provide services that are financial, but don’t have the huge tail risk that banks have, and are thus much more analyzable.
And that brings us back to Ameriprise.
Ameriprise is in the wealth management business with about 10,000 financial advisers.
They are also in the asset management business, primarily consisting of Columbia Threadneedle.
Rather than lending money and hoping to get it back like a bank does, Ameriprise takes in money from clients and charges them fees on it, so it doesn’t have the tail risk that a bank does.
Ameriprise has been a very well-managed company.
If you go back to the dawn of the financial crisis, the end of 2007, before the crisis started, they’ve compounded their earnings at over 15% a year since then.
And yet, over that same period of time, the S&P 500 has only grown its earnings at about 5.5%.
So, this is a company that’s growing two to three times faster than the S&P 500.
And yet the S&P 500 has a multiple of over 20 times earnings, and Ameriprise has a multiple that is less than 14 times earnings.
We like getting two to three times the growth of the market for a huge discount.
On the other hand, while it’s had this great growth rate for over 15 years, and it’s had a low multiple for over 15 years.
The market has not recognized this great earnings stream yet.
So, it’s taken a lot of patience, but just because we haven’t gotten the multiple expansion doesn’t mean that it hasn’t been a worthwhile investment.
Because the earnings growth has been so good, the stock has still been able to do very well without that multiple expansion, and we can continue to patiently hold on to it.
Our thinking is that if they continue to grow their earnings faster than the market and their multiple doesn’t go up, well, that’s a good outcome.
But the market should be greedy and selfish and recognize that it can get a bargain and get this great earnings growth at a much cheaper price, and that should drive the multiple up over time.
And if that happens, then it’s an even better outcome.
Just because re-valuation takes a long time doesn’t mean that’s a bad outcome.
It’s suboptimal. You always have a better outcome when re-valuation happens quickly.
But this is the importance of owning good businesses that can compound their earnings.
The only way you really lose on any investment is you get the earnings wrong or you get the price wrong.
The way you get the price wrong is you pay too high a multiple for a stock, and even if over time you get good earnings, the multiple compresses and hurts your return.
Another value stock investor, and one the Wall Street Transcript has interviewed before, is Scott Hood, CFA, CFP.
“By sticking to cheap stocks we take away the risk of overpaying, and it just comes down to the underwriting risk of getting the earnings wrong.”
Scott Hood, Chairman and Portfolio Manager, First Wilshire Securities Management
Scott Hood serves as the Chairman and Portfolio Manager at First Wilshire Securities Management Inc.
He joined First Wilshire as an analyst in 1993, was promoted to Chief Executive Officer in 2001, and became Chairman in 2019.
Mr. Hood is a Chartered Financial Analyst and a member of the CFA Institute.
He is also a CFP professional.
He serves as a board member of The Mount Wilson Observatory and The Sierra Madre Mountain Conservancy.
Mr. Hood holds a Bachelor of Science from The Stern School of Business at New York University.
“If it’s a severe undervalued situation, it can correct pretty fast, and I’d say every year that goes by things move quicker.
Whereas you could find something that was cheap and it could stay cheap for a little longer, it can happen a little sooner now, there’s maybe a little more information moving around or being discovered sooner.
So, if it’s a quick turnaround and the stock goes up a lot, then it can move into an overvalued position sooner.
When we buy, in a typical case, the one or two analysts that cover the company don’t like it, something’s gone either sideways or down, and after some research we might become sufficiently comfortable that things are turning around and the market is punishing them too much.
Sometimes it’ll take years before we get into a stock.
Sometimes it could be a week or two if we really find something undervalued.
And then we slowly acquire it.
You have to be very careful in your trading — we have internal trading, one dedicated trader with backups and technology — to not spook the market when we’re getting in or out.
We try to hold our cards close to the vest.
The typical pattern of stock ownership for us would be something that’s trading under 10 p/e with over 10% growth, and people don’t realize the growth and business power yet.
And later, once it starts trading a lot above its historical p/e, the industry p/e, once the analysts have all come back and said “we love it,” we tend to move out of it into something else cheap and misunderstood.
One change we’ve made over the last 20 years is we might hold it a bit longer even though it’s gotten back to a decent valuation.
We’ve found that companies can run a lot more.
So, as long as we are really confident in the coming quarters’ operations of the company, we might wait another few quarters before we fully get out of the stock.
Actually, a lot of companies will trip up again, and we’ll come back into them years later.
One we’ve had is IMAX (NYSE:IMAX).
You’ve heard of the company IMAX that does the movie equipment and production to produce the highest quality movie experience.
We owned it at one point — actually I think we were one of the top owners of IMAX many years ago — and it was a real turnaround situation.
We got out of it about eight years ago, and then got back into it last year.
So, the same ideas can keep coming around, and if we’ve owned them before, we generally have a fairly high level of knowledge of the company and can get back up to speed quicker.
We’re always looking back at what we’ve owned.
If it comes back into our buying range, we can do it again if everything lines up.
IMAX was a funny case, because you had COVID hit; people didn’t go to theaters, and people learned how much better it was to be at home and not in a sticky theater seat.
But if you do go to a theater, you’re going to want to see the best, something you can’t get at home.
If you’re going to make that trip to the theater and the cost and effort of it, it better be special. And IMAX is a completely different experience.
There was a bad film slate coming out of COVID, and also due to the strikes, and so the material was weak.
The stock was really down.
Then there was a great slate coming, and then they had “Oppenheimer.”
“Oppenheimer” was a beautiful movie on IMAX. Less than 2% of the screens that “Oppenheimer” was being shown on were IMAX screens, but they did over 20% of the revenues.
That shows you the power of the brand of IMAX. They’re global, and they have a big backlog.
But the point is, you watch companies.
The decision to get in is certainly based on valuation and what you know about the company.
And then once you’re out, you keep following them, and you might get another chance.
We might own something twice in a 10-year period, and each time we own it we get in knowing more, and we learn more as we go through the cycle with them.”
Read all the interviews with value stock investors in the current 2025 Value Investing Report, exclusively in the Wall Street Transcript.
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