Last week concluded a nationwide tour for the disciples of famous value investors, such as Warren Buffett and Ed Lampert, that has become an annual tradition in finance circles.
It included a stop in Omaha, Neb., for the much-publicized
annual meeting. Then it was on to Los Angeles for the Value Investing Congress, followed by the
meeting in Pasadena, Calif., where Buffett's right-hand man, Charles Munger, took the stage.
While these events give luminaries such as Buffett and Munger a chance to speak directly with their shareholders, they also provide a forum for like-minded gurus to exchange ideas on the many strands of investment strategies that originated with the kind of securities analysis pioneered by the late Benjamin Graham and David Dodd. For instance, the Value Investing Congress last November gained notoriety when Pershing Square Capital manager Bill Ackman unveiled his controversial plan to restructure
in order to unlock hidden real estate wealth.
Value investing is based on the idea that the market's share prices of a given company often fail to reflect the underlying value of its business, and stocks can therefore be bought at depressed prices. Using discounted cash-flow analyses and other variables to find out how much a business is really worth, those prudent investors who stumble upon such opportunities should, in theory, enjoy outsized returns when the hidden value in a business is finally realized by others.
Along with careful analysis, such investing also demands a rare brand of courage in order to stand apart from the crowd; this adds a certain level of irony to the recent gatherings where value-oriented investors appear to be finding strength in numbers.
"Not long ago, this might have been a conference for growth and momentum investing," Dan Loeb, manager of Third Point, said at the Value Investing Congress.
Known as a strident shareholder activist who sometimes refers to chief executives as CVDs, or chief value destroyers, Loeb represents the new breed of value investors who are increasingly wielding aggressive proxy fights against underperforming managers in order to win higher returns for shareholders (and themselves).
Loeb's comment was an acknowledgment that value investing has come into fashion after the Internet bubble days of the late 1990s inspired many investors to write off Buffett as an old man who had lost his relevance. The Oracle of Omaha got his vindication in 2000 when shares of his holding company began a sharp rally on the same day the
began its free fall.
"That was the only time that Buffett has offered to buy back shares in Berkshire, because he knew how cheap it was," says Whitney Tilson, managing partner with T2 Partners. "Of course, he never actually got to buy any shares at those prices, because the stock rallied so strongly after he made the offer."
Tilson believes Berkshire is undervalued again now. It's his firm's largest holding.
Since the days of Buffett's vindication, investors have swarmed around value plays such as
, the company cobbled together by Lampert. Having publicly expressed his admiration for Buffett, Lampert now runs the businesses of Kmart and Sears under the umbrella of his new holding company in order to maximize returns on capital rather than seek the sort of top-line growth that's necessary to keep pace with competitors such as
Not coincidentally, Lampert's efforts at Sears really began when he bought Kmart in bankruptcy after most investors had left the company for dead. His ability to adopt a contrarian view and see the potential in Kmart has elevated Lampert to a position as one of the most highly respected hedge fund managers in an intensely competitive industry. So, where should contrarians look now?
Mark Sellers, a managing partner with Sellers Capital, says he's looking toward large-cap growth companies with a strong management team and competitive edge. Such safe havens have been widely ignored recently as investors have flocked toward booming sectors such as energy and commodities, chasing high returns.
Sellers says the stars are aligned for a major shift in market psychology, and "big and boring" companies like
Johnson & Johnson
, which are all trading near 52-week lows, stand to benefit. His goal is buy at the point of maximum pessimism and sell at the point of maximum optimism.
"Investors tend to put all their money in sectors that have been going up for a while already," Sellers says. "They project today's conditions into the future, which means they get burned when there is a shift."
Sellers points out that the Dresdner Kleinwort Wasserstein Fear/Greed Index is up at around 2, signaling that investors are feeling greedy. It's at the same level it was at when the market reached peaked in 2000 and when the strong rally of 2003 ended. Meanwhile, the CBOE Market Volatility Index has been in a steady decline since 2003, approaching its all-time lows.
"The probability that volatility is going to shift gears and start to rise sometime in the next year is very high," says Sellers.
He particularly likes
these days. Sellers sees the stock, which has dropped almost 43% since the beginning of 2005, as approaching a period of maximum pessimism.
In late March, Citigroup analyst Richard Gardner downgraded Dell to sell from a buy rating, sending the stock down 5% in one day. Last week, Dell ratcheted back expectations for its fiscal first quarter amid slowing PC sales. By Friday, the stock had reached a 52-week low of $24, compared with a 52-week high of $41.99 last July.
Sellers reads pessimism from sell-side analysts as a bullish indicator, and he also monitors online chat rooms about stocks to get a sense of investors' sentiments. Recent postings have been virulently bearish, with one nameless participant even going so far as to add a message titled "Dell = Enron = Dellron."
Such missives leave value investors like Sellers energized.