August 2018 Update

Our value stocks performed well in July. Notable performers include Canadian natural gas companies and US pipelines, along with AGT Foods which received a management buyout offer only weeks after we purchased shares. At the same time, glamour stocks began to unwind from peak territory as I’ve been expecting for some time. Notably, Facebook and Netflix each sank over 20% after falling short of their earnings expectations.

With value stocks finally seeing positive momentum and glamour stocks missing their marks, I believe we are witnessing the beginning of the most important shift in investor psychology since 2008.

Over the last ten years, expensive glamour stocks have massively and uncharacteristically outperformed their cheap value counterparts by a wide margin. This stands in sharp contrast to market history and common sense, where the cheapest stocks earn the best return, not the most expensive. At this point the vast majority of investors have become enamoured with the glamour trade, making it ripe for a turn.

The principal catalyst for this turn, for value to outperform glamour going forward, is higher interest rates.

Glamour stocks have little cashflow today, with most of their cashflow anticipated in the future. Higher rates make glamour stocks less attractive because they shrink the value of all that future cashflow, causing a lot of pain for stock holders who must, in turn, lower their expectations.

For value stocks we observe the opposite. Since the cashflows and asset value of cheap value stocks is immediate and in the present, value stocks become relatively attractive and tend to produce strongly positive returns as investors seek out safer habours.

Cheap value stocks today are found in all the usual places: amongst the unloved, the ignored, the downtrodden, and the disappointed. Here we’ve purchased companies for 50 to 60 cents on the dollar including precious metals producers, energy producers, food processors and distributors, and bricks and mortar retail. With patience, we’ll realize full value on our companies and earn a good return for our efforts. But patience isn’t easy, if it was, it wouldn’t be so rewarding.

It goes without saying that I think the experience of glamour stock investors henceforth will be less rewarding – more akin to technology investors following the year 2000. Chasing trends without fundamental company research has never been a path to long term success.

In a world of glamour investors, value is the underdog. Growing up I always enjoyed rooting for the underdog, and still do. Not only was there more satisfaction in the win, but the payoff was always better too. Our portfolios are heavily aligned to benefit from our emerging value underdogs and I anticipate significant upside ahead for our holdings.

Interesting links

More on value versus growth investing

A look at global housing leverage


Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth