From Pzena Investment, the 4Q commentary states “excess returns based on low valuation in emerging markets are more than double those in developed markets over the last 22 years… [We] postulated that broader spreads in emerging markets may be the source of the more substantial value effect in emerging markets.” The article proved that market valuations have been converging with emerging stock valuations the over the past 20 years (Fig. 2). The data from emerging stock valuations came from the “cheapest quintile of emerging markets”. This is another way to look at value-investing trends.
Richard Pzena was featured in Outstanding Investor Reader’s Digest (2008): “Surviving the Cycles”. The article summarized Pzena’s track record, “Through December 31, 2007, Pzena Value Service has a compound annual return of 13.0% net of fees for the 12 years since inception (in 1995) versus 10.9% for the Russell 1000 Value Index and 9.3% for the S&P 500.” Pzena’s practical decisions kept his firm from sinking during the dot-com internet crisis. First, understand that 20% declines are “inevitable” (page 2). Getting past the crisis, Pzena talked about investing styles that gives great long-term returns: exploit the emotion of market and “using momentum investing”; and buy at low price-to-cash-flow and wait for the price to catch-up with the market using value investing. Using the two strategies of momentum and value, the growth of Pzena’s lowest priced quintile from 1968 to 2007 (Chart 1) showed eight meager 20%-downs and an overall overpowering 200-fold positive trend. (“Surviving the Cycles” was written during the financial bubble of 2007.)
Should we predict and avoid the 20%-downs?
Richard Pzena thinks not. He said “riding through them is the smarter way to be. But to do that, you need to have some kind of system or process that doesn’t allow the emotions of the moment to influence what you’re doing. Behave rationally and tune out the noise.”
In another observation during the 40-year period, Pzena gave two examples where momentum strategies outperformed value strategies before the recession and the reverse for after the recession (page 5). Pzena’s explanation, “explain it by saying that as you get late in an economic cycle, the investment community at large starts worrying about the next recession, and they start fearing what will be negatively impacted by that recession — and they want to get out. And so they do. And where do they want to put their money? [They put it] into what’s working — the momentum stocks. Why? It’s because investors become complacent — because the economy is strong and things are going well. And then they start to make up reasons why all these stocks they’re plowing their money into will not be impacted by the next recession.”
If we use Pzena’s perspective, investors are heading towards valuation strategies in response to many volatile momentous events such as bankruptcy, bail-outs, and bottom-out prices.
Pzena’s $10.55 billion portfolio holds shares in 127 companies, and 30% of the weightings are in the financial sector.
Top Six Holdings of Richard Pzena
Rank Company Weightings Share Volume
No. 1: Northrop Grumman Corp. (NOC), 3.9% 7,211,594 Shares
No. 2: Tyco Electronics Ltd. (TEL), 3.44% 14,529,085 Shares
No. 3: The Boeing Company (BA), 3.26% 6,222,950 Shares
No. 4: Allstate Corp. The (ALL), 3.2% 11,021,685 Shares
No. 5: J.C. Penney Company Inc. (JCP), 3.1% 12,047,707 Shares
No. 6: Omnicom Group Inc. (OMC), 3.07% 8,119,752 Shares
Richard Pzena bought new shares in some of his high yield stocks below.
Immucor Inc. (BLUD)
Immucor is an international in vitro diagnostic company dedicated to automating manual processes in the hospital/donor laboratory. Immucor Inc. has a market cap of $1.47 billion; its shares were traded at around $21.06 with a P/E ratio of 18.47 and P/S ratio of 4.9. Immucor Inc. had an annual average earning growth of 40.8% over the past 10 years. GuruFocus rated Immucor Inc. the business predictability rank of 4-star.Immucor Inc. reported 2Q profit of $19.7 million, or $0.28 a share, from $17.3 million, or $0.24 a share, in the year-ago period. Revenue increased to $82.6 million from $73 million in that same period. The company announced Dr. Paul Mintz will be joining its board of directors.
Richard Pzena bought 387,040 shares in the quarter that ended on 12/31/2009, which is 0.07% of the $10.55 billion portfolio of Pzena Investment Management LLC.
Freddie Mac (FRE)
Freddie Mac is a stockholder-owned corporation that supports homeownership and rental housing. Freddie Mac has a market cap of $791.02 million; its shares were traded at around $1.22 with and P/S ratio of 0.06. Freddie Mac had an annual average earning growth of 40.3% over the past 10 years.Freddie Mac sold $3.5 billion of notes and a total of $5.5 billion of 3-year notes earlier this month. This week, for 30-year fixed mortgage rates fell below 5% at 4.97%. The U.S. central bank’s $1.25 trillion buy-back program is set to expire March 31, 2010.
Richard Pzena owns 375,550 shares as of 12/31/2009, which accounts for 0.01% of the $10.55 billion portfolio of Pzena Investment Management LLC.
Fannie Mae (FNM)
Fannie Mae is the largest non-bank financial services company in the world. Fannie Mae has a market cap of $1.13 billion; its shares were traded at around $1.01 with and P/S ratio of 0.05. Fannie Mae had an annual average earning growth of 35.6% over the past 10 years.Fourth quarter of 2009 lost $16.3 billion, or $2.87 a share on $11.9 billion in credit damages and $5 billion in write-offs—compare with a higher loss of $25.2 billion, or $4.47 a share, in fourth quarter of 2008. Fannie reported a total loss of $74.4 billion or $13.11 per share for 2009, compared to $59.8 billion or $24 per share for 2008. Fannie says it needs $15 billion more in cash to bail-out losses. Since 2008, both Freddie and Fannie have spent $136.8 billion in government funding. The government plans to cover their losses throughout the next two years for well beyond $400 billion. Current reports show Freddnie and Fannie owns $5.5 trillion in mortgage debt. Everyone’s waiting for mortgage reform. The House Financial Services Committee will meet March 23 to begin legislation plans.
Richard Pzena owns 239,250 shares as of 12/31/2009, which accounts for less than 0.01% of the $10.55 billion portfolio of Pzena Investment Management LLC.
Morgan Stanley (MS)
Financial service giant, Morgan Stanley has a market cap of $41.12 billion; its shares were traded at around $29.41 with and P/S ratio of 1.76. The dividend yield of Morgan Stanley stocks is 0.68%. Morgan Stanley had an annual average earning growth of 27.3% over the past 10 years.Morgan Stanley hired previous Merrill broker David S. Lynn to its company. Also, recent chairman of Citigroup will be joining Morgan Stanley as the vice chairman of financial institutions. In Beijing March 4, the company plans to sell its $1 billion or 34% holdings in Chinese investment bank, China International Capital Corporation.
Richard Pzena owns 5,419,581 shares as of 12/31/2009, which accounts for 1.56% of the $10.55 billion portfolio of Pzena Investment Management LLC.
Valero Energy Corp. (VLO)
Independent refinery operator, Valero Energy Corporation has combined throughput capacity of approximately two million BPD, making it one of the nation's top refiners of petroleum products. Valero Energy Corp. has a market cap of $11.04 billion; its shares were traded at around $19.57 with and P/S ratio of 0.16. The dividend yield of Valero Energy Corp. stocks is 1.02%. Valero Energy Corp. had an annual average earning growth of 35.9% over the past 10 years. GuruFocus rated Valero Energy Corp. the business predictability rank of 4.5-star.SEC reporting showed the executives of Valero Energy received $10.9 million in 2009 which was higher than the $6.6 million in 2008. The company commences its plans to shut-down the Corpus Christi, Texas plant to match lower demands for petroleum. Valero plans to sell $1.25 billion in debt-notes. The oil company lost $1.4 billion or $2.51 per share for 4Q on falling gas prices for 4Q. For the full year, Valero lost $1.98 billion or $3.67 a share. The company bought 2 ethanol plants for over $200 million.
Richard Pzena owns 6,975,630 shares as of 12/31/2009, an increase of 23.3% from the previous quarter. This position accounts for 1.12% of the $10.55 billion portfolio of Pzena Investment Management LLC.
Source:
http://www.pzena.com/
“Surviving the Cycles”
4Q Commentary
3Q Commentary
2Q Commentary: Is It Over?
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