Value Investing and Covid

On May 2nd, The Heilbrunn Center for Graham & Dodd Investing hosted Webinar featuring a panel of seasoned investors discussing the current environment. Speakers featured:

Mario Gabelli (CBS ’67), Chairman & CEO, GAMCO Investors, Inc.,
Ross Glotzbach (Princeton alum), CEO & Head of Research, Southeastern Asset Management
Paul Hilal (CBS '92 / Harvard U), Vice Chairman at Aramark
Thomas Russo (Dartmouth / Stanford), Partner, Gardner Russo & Gardner LLC,
Kim Shannon (Univ of Toronto), President & Co-CIO, Sionna Investment Managers Inc.

Key Takeaways:

  • "Worst-case scenario off the table" but expect continuation of speculative bets.  

    • Mr Russo expects further uncertainty near term as “emotions dominate when there is incomplete information”). Fear Of Missing Out is a factor.

    • Mr Hilal believes that the world has avoided a Covid worst-case scenario based on positive data points on reversal of infection rates and promising medical advances. Post Covid, he expects a "new normal with tweaks" - Companies will adjust their operations rather than a make fundamental changes in their business models.

    • Ms Shannon does not believe that the market has hit the bottom. She expects a continuation of the pre-Covid speculative bets, as investors chase yield in a low rate environment.

  • Liquidity crisis averted; "duration bubble" ahead.  The market’s reaction has been on liquidity.  For investors, losing a few coupons is manageable as long as there is liquidity to sustain companies during this period.  However, the use of leverage/calling on credit facilities lead to a "duration bubble" down the line ("tenor of the debt").  

  • Attractive Sectors:  Distressed and renewables (Gabelli), small caps (Glotzback), energy sector (Shannon), international companies as opposed to U.S. based. 

The Future of Value — Continued under-performance (vs Growth) and eventual comeback
Value investing has experienced a long period of under-performance compared to growth strategies.  This trend is expected to continue due to the persistent low rate environment which has made growth companies look more attractive.  [Note:  In Discounted Cash Flow valuation, a multiplier is applied to a company's terminal cash flow to calculate it's value. Growth companies are valued higher than value companies which tend to be more mature.]

Historically, in the periods following bear markets, value tends to outperform growth. Ms Shannon believes that “we are in the middle of a shift” and people will eventually return to traditional ways of investing.

Other points to note:  

  • The wave of bankruptcies and distressed situations indicates that many corporations may have been managed improperly. Companies that appeared fine a few weeks ago are now facing bankruptcy.

  • Indexation has caused the market to be increasingly driven by a few companies (large caps/big companies can account up to 20% of the index).

  • The independence of Fed may be at risk as it plays a crucial role in sustaining markets and valuations.