Bill Nygren (Trades, Portfolio) has been a manager of the Oakmark Select Fund (OAKLX, Financial) since 1996 and the Oakmark Fund (OAKMX) since 2000 as well as the Oakmark Global Select Fund (OAKWX, Financial) since 2006. He was director of research at Harris Associates from 1990 to 1998.
Nygren appeared at the Ben Graham VI annual conference and gave a talk on June 19. He started by laying out the firm’s principles for investment:
- Buy at two-thirds of intrinsic value.
- Invest in companies expected to grow earnings per share over time (he wants 7-8% growth).
- Invest with companies with management that think and act like owners.
Except for the second one, these are not unusual principles. It is the growth factor that stands out to me. This likely helps the firm to avoid a number of value traps. It also helped them to identify some of the best performers of the last decade as “value” plays: Netflix (NFLX, Financial) and Amazon (AMZN).
Investing with management that think like an owner is important because Oakmark typically owns companies for five to seven years. Often a strategic decision has to be made over that timeframe; they want someone who thinks like an owner to make it.
Nygren doesn’t like CEOs who maximize their time at the helm and size of the business in order to maximize compensation.
Buying below intrinsic value or with a margin of safety is nothing new in the value investing world. However, to do it well, your analysis needs to be great, and that’s where a lot of shops fail.
Their mix of principles and strong execution leads to portfolios that are all over the place, if you try to categorize them with a Morningstar-style box. They are invested in Citi (CIT, Financial) and Ally Financial (ALLY, Financial), which are more traditional value plays in finance, an industry where value investors tend to be heavily invested at the moment. But they are also in TE Connectivity (TEL, Financial), News Corp. (NWS, Financial) and in the aforementioned Netflix and CBRE Group (CBRE, Financial) because they are adept at identifying value beyond the balance sheet.
That brings me to the next point that Nygren extensively talked about: a change he’s observing in value investing. I find this a fascinating subject, as I’m most comfortable with the more traditional value school. I rely heavily on balance sheets.
Nygren believes GAAP accounting is great for tangible assets. Today, intangibles make up the majority of assets of companies and are not as accurately reflected. With the correlation between book value and stock prices greatly diminished, value investing via price-book is now suboptimal. As the economy changed to an asset-light economy, there are fewer companies where GAAP accounting is doing a good job of showing value.
Finally, Nygren finished with an interesting investment case, Alphabet (GOOG, Financial)(GOOGL, Financial). I love the Alphabet. I’ve owned it from time to time. It is one of the few growth stocks that I’m always interested in. But here’s why Nygren thinks it is great:
Everyone knows it's a great search business. Alphabet is ostensibly trading around 20x earnings. The market is around 16x. So, Alphabet seems slightly more expensive compared to the average company, and it is probably slightly higher quality. There doesn’t seem to be mispricing at first glance.
But Nygren suggests looking at the assets that aren’t monetized yet. Alphabet is trading around $1150 per share. But YouTube could be worth $400 per share. There is $200 in cash per share.
If Alphabet would put Autonomous driving and artificial intelligence in a venture fund, the reported earnings would be $5 per share higher. That would be about $50 per share.
Nygren believes they are paying about 12x for search or significantly below a market multiple. I think it even equates to 11x at this time. That must be a bargain because no one is arguing that search isn’t at least as good a business as the average business in the S&P 500.
Disclosure: No positions.
