Transcript: Value Stocks — Rich for Opportunity in 2018?

Transcript: Value Stocks — Rich for Opportunity in 2018?

[Richard S. Pzena, Chairman, CEO and Co-Chief Investment Officer, Pzena Investment Management]

We're coming off one of the worst relative performance years for value investing in a long time. In the United States, value underperformed growth by something like 17 percentage points. You rarely see a discrepancy like that. Same thing happened in emerging markets, which was led by a lot of the big tech companies in China. And so the performance deviated sharply. So that's led to big, big spreads in valuation between cheap stocks and expensive stocks. When you look more broadly at the market there are a lot of companies that are rich for opportunities.

[Energy]

Energy - the supply side is far more critical to the equation than the demand side. And if we adopt electric vehicles, yes oil demand will gradually erode, but oil supply erodes very rapidly if you don't drill new oil wells. So, the demand side is much less critical even though that's what everybody focuses on. So, there are times when we believe that oil will never be valued at a reasonable valuation ever again, and maybe it pays to go in at that price because you can buy it when the liquidation value of the existing oil and gas reserves is worth more than what the share prices are traded at.

[Old technology]

Old technology - like software companies where it's valued as if the franchise is going to erode because they're not the winner in cloud, yet they're actually growing their cloud volume. And while the outcome is uncertain as to whether they're going to be successful, the stock is priced as if they're going to be unsuccessful. And Microsoft was a great example of how you can be successful when everybody thinks you're going to lose.

[Impact of U.S. tax cuts]

My personal belief on tax cuts is that it's a short-term issue, not a long-term issue. So as a long-term investor, when you think of whether the companies will retain the benefit of tax cuts, it's really not clear. But I think most people when they're evaluating tax cuts, they're saying, well, are the companies going to get richer, and all history suggests that that's not correct. In the long run, those lower tax costs get competed away in the marketplace and they inure to the benefit of the consumer. So, really what we're looking for, are there American companies that are competing with non-American companies where this is a relative advantage?

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