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Bill Nygren: Trees don’t grow (that high) to the sky

In this Q2 2024 update to investors, Bill Nygren and the team at Oakmark Fund give their perspective on the current growth stock dominated market environment. They remain convicted in their value approach despite short-term underperformance compared to growth indexes. Here is a short summary of the key points:

  • Growth stocks, especially giant cap tech companies, significantly outperformed value stocks in the first half of 2024. The Oakmark Fund, a value-oriented fund managed by Harris Associates, underperformed the S&P 500 by 9 percentage points.
  • The Oakmark team believes the current wide valuation gap between growth and value stocks is unsustainable. They draw comparisons to the dotcom bubble in 2000 and expect mean reversion over time, potentially accelerated by corporate actions like share buybacks and issuances.
  • The Oakmark Fund’s portfolio is heavily tilted towards value stocks, with an average forward P/E of 11 compared to 15 for the Russell 1000 Value index and 21 for the S&P 500. They see this as an attractive opportunity despite recent underperformance.
  • To no big surprise, they maintain a long-term, value-oriented investment philosophy. While acknowledging the fund looks wrong in the short-term based on recent growth stock momentum, the managers express excitement about the portfolio’s low relative valuations and expect this to lead to outperformance in the future, as seen after previous bubbles deflated.

For high-priced growth stocks to continue outperforming, they must either maintain their growth rates long into the future or maintain their high relative P/E ratios. Oakmark uses a longer time horizon than most value investors, but we won’t underwrite either above-average growth or an above-average P/E beyond seven years. Our belief that many growth stocks today are fully valued could be proven wrong if these businesses can sustain their advantage for longer than businesses have in past technology transformations.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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