Joel Greenblatt (Trades, Portfolio) is a hedge fund manager and a professor of value investing at the Columbia Business School. He is perhaps best-known as the author of a book called "The Little Book That Beats The Market," in which he explains simple value strategies that average investors can follow.
In a recent interview with Bloomberg, Greenblatt was asked to comment on the future prospects for traditional value investing, which seems to have fallen by the wayside in recent years.
Value in the doldrums?
When asked about the divergence between "value" and "growth" stocks, Greenblatt said that traditional value is indeed undergoing a slump at this time:
"It really depends on how you define value. We define it as "figure out what a business is worth and pay a lot less," so under that definition of value, it'll never go out of fashion. That's what stocks are - they're ownership shares of businesses that you are trying to buy at a discount. Traditional value investing, low price-book, low price-sales investing - beaten down stocks based on certain metrics - that has worked over decades, but hasn't worked over the last few years or so. The [outlook for traditional value stocks] is very close to where we were before the Internet bubble, although I don't think we're quite there."
Greenblatt was also quick to point out that he believes that some of the big technology companies that have been driving the benchmark indices like the S&P and NASDAQ higher are "some of the best businesses in history." In other words, he doesn't seem to think that companies like Amazon (AMZN, Financial), which has more than doubled its market capitalization since March of this year, are that overvalued.
What he does think, however, is that tech as a sector is being dragged upwards by the big names, and that there are a lot of "technology-adjacent" companies that probably don't deserve the valuations that they have today. But until the market resets and revalues these smaller growth companies, Greenblatt doesn't expect the traditional value stocks to come back up.
What might the catalyst be for such a resetting? Greenblatt thinks that the eventual resolution of the ongoing pandemic might be the event that finally starts to reward cheap businesses with strong balance sheets. As long as there is a lot of uncertainty in the business world, fiscal and monetary policymakers are likely to continue to artificially support companies by whatever means necessary. In such an environment, there is less incentive to find solid, defensive companies with low levels of debt, because funding is so easily available. When (and if) the government finally begins to roll back these market-supporting measures, there will be more of a reason for investors to do thorough due diligence.
Disclosure: The author owns no stocks mentioned.
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