Bill Nygren (Trades, Portfolio) is a value investor who's been accoladed by Morningstar as fund manager of the year. He prefers to invest in companies for the long term, choosing ones he believes are trading at a substantial discount to true business value. The firm focuses on free cash flows, intelligent investment of excess cash and a high level of manager ownership.
On Jan. 21, Nygren appeared on CNBC's "Halftime Report" to discuss his favorite value stocks.
Nygren recently sold down one third of his Apple (AAPL, Financial) position. Last year, all you had to believe was that Apple was at least an average company. Apple doubled over the past year and is now trading at a premium to his valuation model. Nygren is thus recycling the capital into things that are cheaper.
Some pockets of the market are getting excessive and some conditions remind him of 1999. Money is flowing out of value funds and into growth funds. The price-earnings spread between the "loved" companies and companies no one cares about is getting very large.
One holding Nygren loves is Ally Financial (ALLY, Financial), a company that finances car purchases. It sells at seven times earnings and is buying back a lot of its stock each year. People worry that the average car loan is between five and six years now, forgetting that over the past 30 years the average age of cars on the road is up by 50%. Some names are up 30% this year in 12 trading days.
Nygren believes Alphabet (GOOG, Financial) (GOOGL, Financial) and Netflix (NFLX) are value stocks. At Apple, GAAP does a pretty good job of describing the company. At Netflix, GAAP accounting does them a great disservice.
A name like Alphabet has a lot of cash on the balance sheet. It has other bets that cost a lot of money but are driving tremendous value; for example, YouTube alone could be worth $400 per share. Google, its search business, is valued at the market multiple or less.
GAAP accounting does Uber (UBER, Financial) a disservice as well. Nygren looked at it but couldn’t get there on the valuation. It is entirely possible names like that can be valued even though they aren’t cheap on price-book or price-earnings.
Nygren continues to believe General Electric (GE) is cheap. The stock trades at about $12 on earnings that are depressed for this year and next.
It is hard to find a space that is more unloved than energy at the beginning of 2020. In this sector, it is important to look for companies where management is doing a good job on capital allocation. In the Permian basin, companies are doing a good job of growing and returning cash to shareholders.
Nygren is not surprised on where the market is. The market seems reasonably priced to him as a whole, but the unloved sectors are not priced at all consistent with an elevated market. This is clearly reflected in the firm's over 30% weighting in the financial sector:
Disclosure: No positions.
Read more here:
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