One of the greatest value investors of our time held forth the other day for a small group of listeners. There were no CNBC cameras, no arenas packed with faithful followers, and no talking lizards.
Just a conference call. Four people asked questions and it was over in less than an hour. It wasn’t mentioned anywhere in the financial press and nary a peep from the blogosphere.
The occasion was the quarterly conference call for Pzena Investment Management (NYSE:PZN). The firm’s founder and namesake, Rich Pzena, had some interesting things to say about the bargains he’s been seeing lately.
Here are few highlights from the call:
On Current Valuations
There are good reasons to believe that the excess returns of the past are available once again to the value investor. In fact valuation data suggest that this may be one of the most opportune moments in a generation to construct a portfolio of deeply discounted businesses, many of which are leaders in their respective industries.
We believe equities in general are more undervalued than at anytime in the past 30 years, and the most undervalued segment is one of the most attractive relative valuation levels in almost 40 years.
Let’s contrast this opportunity with where we stood at the end of the last powerful anti-value cycle that ended in March 2000. The absolute valuation of the cheapest quintile of our investment universe today is 0.6 times book value versus 1.3 times in March of 2000, or approximately 52% lower.
So, not only has the broad equity market fallen in value, but there has been an extraordinary and rapid decline in the valuation of value stocks. This opportunity is also reflected in the valuation of our own portfolios. At approximately 5 times price to normalized earnings, our portfolio is at the cheapest valuation level in our history.
What Others Are Missing
There are typically two things that create the good side of the deep value cycle. One is valuation extremes and we clearly have valuation extremes. And two is the realization that the world is not as bad as everybody thinks it is and this is where you got the most debate, all right.
