Finding value in have and have-not stocks

The opportunity to find value in stocks depends less on geography these days, says John Goetz of Pzena Investment Management in New York.

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A few years ago, there were deals to be had based on where a company was based.

“We could buy a business that had a European domicile that was an identical twin of a business in the United States, and was trading at 40% less just because it was in Europe and people [had] a negative view of Europe,” said Goetz, portfolio manager and Pzena’s co-chief investment officer, in a mid-March interview. He co-manages the Renaissance Global Value Fund.

In 2015 and 2016, he was “pounding the table on emerging markets,” which were being ignored before taking off last year.

“Today I would say the opportunity for value in big geographic distinctions is not as wide as we’ve seen it maybe three years ago. The valuations are closer around the world,” he says.

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“What’s happened and really is shifting is the industry differences in valuation.”

The shift in value between have and have-not stocks was notable in 2017, he said. The FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) soared, while the shares of companies thought to be becoming obsolete dropped.

“Now the emerging opportunities are in these one-off cases,” Goetz said. “This company’s going to go to zero or Amazon’s going to take over the world.”

“In 2017, you’d think you were in the second year of a global synchronous recovery, which would have been good for value,” he added. “What happened was this limited set of stocks took off and explained the majority of the stock market price movements.”

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In response, Goetz said his firm is taking positions in companies that “have fallen out of favour like drug distribution, pharmaceutical, some consumer staples (grocery stores in the UK) and finding opportunities in tech where people think you are being disrupted instead of the disruptor.”

Goetz gave the example of Oracle as a company perceived to be disrupted by the transition to cloud computing. He sees an opportunity for Oracle to transition their business model to cloud computing.

“That’s just an example even in tech where the opportunity appears based on a misperception of the future,” said Goetz.

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