Value vs. Growth: Looking Beyond the "Spots"
At a glance, cheetahs and leopards may seem like two very similar animals. The same can be said for value and growth investing, but looking beyond the “spots” reveals several critical distinctions.
In the African Savanna, it takes strength and resilience to survive. The same is true of the asset management industry, and there are a number of parallels to be made between the creatures that inhabit the wild grasslands and the fund managers that fill the investing space. By examining the behavior of two wild cats – the cheetah and the leopard – we can help explain some of the important differences between value and growth investing. When you look at the two animals, it’s easy to be confused about which is which. At first glance, cheetahs and leopards are similarly sized, and both have similar spotted coats. But look beyond superficial appearances and you’ll find quite a few differences between these two species.
Perhaps the most important distinction is how the two animals hunt. Cheetahs are the fastest animal on earth, relying on sheer speed to catch their prey. They hunt in broad daylight and are most successful on wide-open, unobstructed areas of land. To us, cheetahs sound an awful lot like aggressive growth or momentum investors.
Please don’t confuse us for cheetahs (even if some of our “spots” look the same)
As value investors, we see ourselves as leopards. Leopards hunt at night, using camouflage and stealth to assess their prey. Leopards are willing to hunt from trees, tall grass, and underbrush – and they’re not afraid to wait for long stretches of time until they find the right opportunity. And when it finally comes time to strike, leopards favor ambushes and surprise attacks.
The leopard’s patient, systematic method of hunting is reminiscent of our quality-at-a-discount (QuaD) investing approach. At Weitz Investment Management, our team regularly tracks companies for months or years before making a purchase. When the time is right – that’s when we pounce. We’d also like to note that leopards are truly resilient creatures that enjoy much longer lifespans than cheetahs in the wild. Similarly, QuaD investing, intelligently applied, is a durable approach that never goes out of style.
Appearances Can Be Deceiving
In another case of just looking at the spots, we’d like to examine two companies where we found value, despite two completely different classifications.
JP Morgan is the consensus long among large banks – the stock “everyone” owns in the sector. JP Morgan is classified by Morningstar as a Large-Value stock. We first bought shares in March 2019 for less than $105 per share at a time when investors were worried about what a flat-to-inverted yield curve might mean for the economy and bank earnings. These were valid concerns for the short term, but they had little bearing on JP Morgan’s franchise value or long-term earnings power. With dividends, the stock delivered strong returns in the months after our purchase. JP Morgan was a clear case of value hiding in plain sight.
On the other hand, Salesforce – one of the world’s most successful software as a service (SaaS) companies– is classified as Large-Growth by Morningstar. SaaS stocks have been absolute stock market darlings. When Salesforce bought data analytics leader Tableau, many investors thought the company had gone “ex-growth,” and dumped the stock. But we saw an opportunity, and in August 2019 we bought shares at an average cost of $146. After following this premium-quality company for several years, we were finally able to add it to our portfolio on our terms. As investors realized Tableau’s strategic fit, the stock drifted higher.
The experiences of the securities discussed in this section are not necessarily representative of the Adviser’s stock purchases over time. They are included to further illustrate the point laid out in the main article of a disparity between labels and reality.
Value vs. growth
Of course, animal metaphors aside, value and growth investing are – in many ways – joined at the hip. A growth investing strategy focuses on a company’s future potential, even if that company’s stock currently costs more than what it’s currently worth. In other words, growth investing is like buying a dollar bill for two dollars, with the hopes that it will one day be worth three.
Growth potential (or lack thereof) is a critical component of our assessment of intrinsic value. But the hallmark of value investing is in identifying disparities between a company’s present price and its potential future cash flow. We look for stocks that are priced for less than their actual worth. Value investing is about finding a dollar bill that can be bought for 80 cents – or less.
It’s simple, but it’s not easy.
If it were easy, everyone would do it. Where we truly set ourselves apart is in our ability to identify companies with strong leadership and outstanding long-term prospects. We think like business owners, and when we evaluate stocks, we take a research-driven approach to determine what a rational, private buyer would be willing to pay for the whole company. We focus on creating high-conviction, actively managed portfolios that emphasize growing, and protecting, capital.
Unlike growth investing – which is heavily influenced by human behavior, economic events and current sentiment – our value investing philosophy is built on the belief that a company’s intrinsic value is not determined by market events and news headlines. We analyze the current headwinds and tailwinds affecting stocks in our investable universe, but we’re not interested in making decisions based on macro-economic predictions. We believe that when you collect quality stocks at a discount – good things happen.
But all of that’s not to say we turn up our noses at growth. Companies with rapidly growing free cash flows are worth more than slower growers – when the cash flow is generated in a capital efficient manner. We love growing companies (and own some great ones), but we leopards are careful about the price we pay for our prey. It’s all about buying businesses at a discount to their intrinsic values.
At Weitz, we firmly believe in our value-based approach to investing. We don’t want to chase hot performance. We will always rely on focused research and discipline to wait for the right opportunity to strike, just as the patient leopard waits for its prey. As Warren Buffett (another leopard) said “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.”
opinions expressed are those of Weitz Investment Management and are not meant
as investment advice or to predict or project the future performance of any
investment product. The opinions are current through the date of publication,
are subject to change at any time based on market and other current conditions,
and no forecasts can be guaranteed. This commentary is being provided as a
general source of information and is not intended as a recommendation to
purchase, sell, or hold any specific security or to engage in any investment
strategy. Investment decisions should always be made based on an investor's
specific objectives, financial needs, risk tolerance and time horizon.
Holdings are subject to
change and may not be representative of a Fund's current or future investments. As of 12/31/2019, the following securities constituted a portion of the net assets of the
Weitz Funds indicated: salesforce.com, inc. (CRM): Value Fund (2.7%); JP Morgan
Chase & Co. (JPM): Value Fund (3.7%), Balanced Fund (1.8%).