New Era Value Investing: A Disciplined Approach to Buying Value and Growth Stocks

241 Pages·2003·1.38 MB·English

by  Nancy Tengler

NEW ERA VALUE
INVESTING
RELATIVE VALUE DISCIPLINE
This book describes an innovative investment strategy called
“Relative Value Discipline,” which provides a framework for in-
vesting in traditional dividend-paying value stocks, as well as
undervalued growth stocks. The graphic below illustrates how
the stock selection process works step by step to winnow a
thousand large cap stocks down to a focused portfolio of
twenty to thirty holdings.
Investment Universe
• Large cap U.S. stocks
• Approximately 1,000 companies
• Market cap over $3 billion
Divdend-Paying Stocks Low-Yielding Stocks
in Traditional Value Sectors in Growth-Oriented Sectors
Screened using: Screened using:
Relative Dividend Yield Relative Price-to-Sales Ratio
(RDY) valuation model (RPSR) valuation model
Focus List
• Approximately 100 companies
• Low price versus historical company average
Twelve Fundamental Factor Analysis
Qualitative Factors/Quantitative Factors
• Buggy Whip (product obsolescence) • Positive Free Cash Flow
• Niche Value (market leadership) • Dividend Coverage and Growth
• Top Management • Asset Turnover
• Sales/Revenue Growth • Investment in Business/ROIC
• Operating Margins • Equity Leverage
• Relative P/E • Financial Risk
Portfolio Construction
• Rank each Focus List security based on both qualitative
and quantitative analysis
• Focused portfolio (usually between twenty and thirty holdings)
• Highest confidence picks
• Calculated sector bets versus S&P 500
NEW ERA
VALUE INVESTING
A Disciplined Approach to Buying
Value and Growth Stocks
NANCY TENGLER
John Wiley & Sons, Inc.
Copyright © 2003 by Fremont Investment Advisors, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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have used their best efforts in preparing this book, they make no represen-
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contents of this book and specifically disclaim any implied warranties of
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Library of Congress Cataloging-in-Publication Data:
ISBN 0-471-26608-6
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
CONTENTS
PREFACE ix
ACKNOWLEDGMENTS xv
CHAPTER 1 Is It Really “Different” This Time? 1
CHAPTER 2 A Short History of Fundamental Analysis and the
Dividend 13
CHAPTER 3 The Development of Relative Dividend Yield 21
CHAPTER 4 The Challenges of the 1990s 33
An Historical View of U.S. Productivity 37
CHAPTER 5 The Twelve Fundamental Factors of RDY and RPSR
Research 51
Qualitative Appraisal 53
Quantitative Appraisal 61
CHAPTER 6 RDY Case Studies 85
Oil Stocks 86
Pharmaceutical Stocks 88
Classic Fallen-Angel Growth Stocks 90
Consumer Stocks 93
Bank Stocks/Financials 97
RDY Failures—Terminally Cheap Stocks 100
v
vi CONTENTS
CHAPTER 7 RPSR Case Studies 105
RPSR and the Technology Bubble 106
The Intersection of RDY and RPSR 120
CHAPTER 8 Constructing a Value-Driven Portfolio 129
Merged Companies Combining High-Growth and Slow-Growth
Components 141
New Companies with Too Short a History 142
CHAPTER 9 What Is Value Investing Today? 145
CHAPTER 10 Seven Critical Lessons We Have Learned as
Disciplined Investment Managers 153
1. Wall Street Tends to Take Current Trends and Extrapolate Them
Out to Infinity. 154
2. It Is Rarely “Different This Time.” 154
3. Market Workouts Are Often Great Investment
Opportunities. 156
4. At Turning Points, Go with Your Discipline—
Not Wall Street. 157
5. Investment Managers Need to Challenge Their Beliefs
Every Day. 161
6. Use the Availability of Data and the Always-On Financial Media
to Your Advantage. 162
7. It’s All Relative. 162
APPENDIX A New Era Value Composite 165
Disclosure 165
APPENDIX B Estee Lauder—Twelve Fundamental Factors:
Estee Lauder Companies, Inc. Valuation Factors 169
Qualitative Appraisal 170
Quantitative Appraisal 173
CONTENTS vii
APPENDIX C EMC—Twelve Fundamental Factors:
EMC Valuation Factors 181
Qualitative Appraisal 182
Quantitative Appraisal 189
APPENDIX D Walt Disney—Twelve Fundamental Factors: The
Walt Disney Company Valuation Factors 197
Qualitative Appraisal 198
Quantitative Appraisal 208
INDEX 215

PREFACE
Most books on equities investing are written during the ad-
vanced stages of bull markets when the public’s interest in the
subject is peaking. This book was written almost two and a half
years into a wrenching bear market by a portfolio manager
whose investment performance has not been particularly good
in this exceptionally challenging market environment. This
begs two questions: Why now? Why me?
The answer to the first query is easy. As a died-in-the-wool
value investor, I believe in buying cheap and selling dear. Rela-
tively few stocks are truly cheap during the latter stages of a
bull market, whereas there are plenty of great fundamental
bargains toward the end of a bear market. Bear markets are a
perfect time for investors to pick off great companies at low
valuations. What better time to introduce a value-driven in-
vestment discipline to investors?
The answer to the second query is a little trickier. I’ve spent my
entire seventeen-year career as a value manager for large compa-
nies, municipalities, mutual funds, and individual investors. My
quest for value has resulted in a focus on discipline both from a val-
uation and fundamental research standpoint. The Relative Price-
to-Sales Ratio (RPSR) strategy detailed in this book has not been
especially effective over the last eighteen months. Is this a cause
for concern? We think not. The most important thing when em-
ploying a discipline is consistent implementation. RPSR has
identified cheap high-quality companies, and the market will
eventually follow. The discipline works because the market cy-
cles; if investors remain constant it will come back our way. Rel-
ative Dividend Yield (RDY), our original valuation discipline, has
ix