When we think about what is in this difficult-to-eat bone pile, most of the time we see risks. However, I see opportunities and ‘franchise rights’
Joel Greenblatt, co-founder of Gotham Asset Management
With the rise of AI and increasing expectations of the Fed pausing interest rates, growth stocks have regained their upward trend. Currently, Microsoft (MSFT.US) has a price-to-earnings ratio (TTM, as of April 19th) of 31x, while Apple (AAPL.US) has a ratio of 27x.
So, are tech giants still worth investors’ attention? According to Joel Greenblatt, a well-known value investor and Chief Investment Officer of Gotham Capital, Google (GOOGL.US) can be a part of investors’ portfolios based on free cash flow valuation. In fact, there are also other tech companies that are worth buying.
Greenblatt points out, “Growth is a part of value, all types of investments are value investments.” Amid the current “two-tier market” situation, Greenblatt recently told Investors Chronicle, “It’s similar to the market in 2000, history will rhyme with the same tune, and I see some great opportunities now.”
Tech Companies in the Buy Zone: Opportunities for Investors
As the world moves towards a lighter asset direction, there are opportunities for investors in technology companies that have shown strong growth and long-term potential. According to renowned investor, Joel Greenblatt, companies like Google are currently in a relatively cheap zone, making them a good choice for investment portfolios.
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Google is relatively cheap. Recently, they faced their first challenge from the search industry, but they have excellent franchise rights. As part of an investment portfolio, Google is a good choice
Joel Greenblatt comment on Google
In today’s world, Apple and Google are both growth and value companies. Thirty years ago, the S&P’s capital return rate was about 20%, now it’s almost 70%. This is important because if a company wants to achieve 5% growth, management needs to invest 25% of earnings based on a 20% return rate. With a 70% return rate, only 7% of earnings need to be reinvested to achieve the same 5% growth.
Greenblatt argues that some technology companies’ free cash flow yields have entered the buy zone. However, people are often hesitant to take a bet on cheap companies because they face problems, and most fund managers want to make money in 1-2 years. They think, “The company’s shortcomings are too obvious. I don’t want to buy now, and I don’t want to wait for a long time to make money.”
“Investors tend to avoid companies with obvious and pressing problems,” Greenblattsays, “For those active allocation-oriented fund managers who want to profit in the short term, this is a systematic bias.”
Investors tend to avoid companies with obvious and pressing problems
Joel Greenblatt
Greenblatt’ strategy is to look for simple investment opportunities, as Buffett said, “We should cross a one-foot hurdle rather than a seven-foot hurdle.” However, such opportunities are rare, and even when they appear, investors may find it difficult to discover them.
“Sometimes investors need to keep turning over rocks to find cheap companies, which is not easy. Based on the current environment, I think the cheap opportunities are in banks. We cannot understand the specific balance sheet situation of banks, which is a leverage business, like a black box. There are many problems involved, such as whether the bank has the ability to raise funds at a low cost or whether it has established a moat in certain specific markets. When we think about what is in this difficult-to-eat bone pile, most of the time we see risks. However, I see opportunities and ‘franchise rights’.” said Greenblatt.
Cash Flow Valuation Method is Making a Comeback
In the world of investing, there is always a split between what’s hot and what’s not. The current market has some similarities to the year 2000. Some stocks may be in a bubble, while other long-neglected companies may present opportunities. Greenblatt shared an experience from his past investments, where his fund experienced losses in 1998 and 1999 before skyrocketing by 115% in 2000 when the market was down by 10%.
Greenblatt emphasized that they did not do anything different during those three years, but rather the work they did in 1998 and 1999 paid off in 2000. He believes that there are patterns in the market where some stocks rise while others fall, creating a “binary” environment. Although he does not think that we are experiencing a second internet bubble, he still sees opportunities within the market.
“Every investment is a value investment because growth is a part of value,” Greenblatt said. If you missed out on investing in stocks that outperformed the market, you may not be able to exceed some average returns, but you can still beat the risk-free rate with lower risk.
Currently, Greenblatt is purchasing a large number of company stocks to achieve average returns. In the United States, his strategy is to adjust the weights of their investment portfolio daily, ensuring that they hold the cheapest 20% of stocks, such as the largest 1,400 stocks in the country.
Greenblatt also highlighted the cash flow valuation method, which has helped them discover many opportunities. Although this type of investment has not outperformed the S&P 500 in the past decade, Greenblatt believes that this method is making a comeback and will show significant advantages in the next 2 to 4 years.
Every investment is a value investment because growth is a part of value
Joel Greenblatt, co-founder of Gotham Asset Management