Why Value Investing Is Never Dead

This candy giant backs up our research... Years in the trenches of value... Taking the ball and running with it... Value is back... 'All investing is value investing'... An Irving Fisher moment... Forget sentiment – do value... We're on a roll, and I'm not going to be shy about it... By we, I (Dan Ferris) […] [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] This candy giant backs up our research... Years in the trenches of value... Taking the ball and running with it... Value is back... 'All investing is value investing'... An Irving Fisher moment... Forget sentiment – do value... --------------------------------------------------------------- We're on a roll, and I'm not going to be shy about it... By we, I (Dan Ferris) mean Stansberry Research analyst/editor Mike Barrett and me. In the April 2024 issue of Extreme Value, we recommended shares of Kellanova (K) at an initial reference price of $57.58 per share (its April 4 closing price). If you've never heard of Kellanova, the company formed last year when cereal giant Kellogg spun off its snack-food brands. We told the fascinating story of Kellanova's innovative flagship brand – Cheez-It crackers – and showed that it was a well-managed, cash-gushing, consistently profitable company with a good balance sheet. In our view, that already made it a safer bet than most stocks. Then we ran the company through our price-implied-expectations valuation model and told subscribers the stock had an intrinsic value of $82 per share – meaning that it was trading for 30% below its intrinsic value and was an excellent and relatively low-risk buy. Kellanova's stock price went sideways after our recommendation and closed on the last trading day of July at $58.15 per share. Then the Wall Street Journal reported on August 4 that privately held candy giant Mars was in advanced talks with Kellanova and a deal could be imminent... The stock rose steadily after that and closed at $74.50 on Tuesday, August 13 – a 29% gain in about four months. First thing Wednesday morning, Mars announced an offer to buy Kellanova for $83.50 per share – 45% above our initial reference price. Kellanova stock is trading around $80 per share today and will likely move toward $83.50 as we get closer to the first half of 2025, when the deal is expected to close. Extreme Value subscribers are up about 39% in just four months. But there's something even more important than that big, quick gain in a relatively low-risk stock... And it's the reason why I'm mentioning this at all. Our valuation model pinpointed Kellanova's intrinsic value to within less than 2% of Mars' offer price... That's what gave us the conviction that Kellanova was a great buy back in April. Mars is a highly knowledgeable strategic buyer in the same industry. It knows better than probably anybody on Earth what Kellanova is worth. I'm not saying we know as much about Kellanova or its value as Mars does. But I am saying that our valuation model in the hands of my partner in crime, Mike Barrett, is very likely the most powerful tool in our company for determining the intrinsic value of a business. Mike came to us over a decade ago, having spent many years valuing private real estate properties. Mike described the work in a recent episode of the Stansberry Investor Hour podcast... I spent... a career valuing hotels and shopping centers and multirise office buildings and so forth. In the good old days, I would get a couple of bankers' boxes filled with – stacked with leases – you know, 40-to-50-page leases – that I'd have to go through and manually put into spreadsheets and understand what those cash flows – those contract cash flows – were going to be over the next five to 10 to 15 years, understand what the market rents were, and condense that all into a sense of what the future looked like for that particular property. There's no substitute for digging into the value of an asset like that. Mike has professional asset-valuation experience that most analysts simply don't have, even many who've studied finance for years... Well, not long after we hired him to help me with research and stock picking, I sent Mike a copy of the 2001 book Expectations Investing by Alfred Rappaport and [Investor Hour guest Michael Mauboussin](. Mike took the ball and ran with it, calling on the deep skill he'd developed over many years in private real estate markets. He adapted Rappaport and Mauboussin's price implied expectations model to our needs. And now we never make a new buy recommendation for Extreme Value subscribers without Mike running it through the model. I'm the lead editor of Extreme Value, but I have no qualms about telling you that Mike has forgotten more about intrinsic value than most people, including me, will ever know. He is Stansberry's resident intrinsic-value guru. We're not perfect stock pickers, but neither is anybody else. We're better than average, though, according to Stansberry's tally of our results, which we update every quarter. And at the core of our track record is a tool that helps us determine what a business is worth. More recently, we found three short picks that have gone on to plummet in the past several weeks. One of them has already fallen more than 50% since we recommended shorting it in the June issue of Extreme Value. We think all three are potential zeros. Some folks say value investing is dead. But they forgot to tell Mike and me, and our Extreme Value subscribers have seen a quick gain of nearly 40% as a result. To us and our subscribers, value is very much alive and well and working just fine. In fact, whenever you hear 'value is dead,' you know it's about to prove itself once again... On May 10, 2020, a Financial Times article asked: "Does Value Investing Still Make Sense?" In the article, reporter Robin Wigglesworth noted that: Value stocks have been pummeled even more than the broader market in the coronavirus-triggered sell-off, agonizing supporters of the investment strategy. Wigglesworth normally does a great job, but he got it wrong back then... including the idea that economist John Maynard Keynes was an early-20th-century value maven. Keynes was a speculator who abused leverage and was wiped out multiple times in his investing career. Like most sweeping denunciations of successful long-term strategies and businesses, Wigglesworth's was a perfect contrarian buy signal. In January of this year, Matthias Hanauer of New York-based asset manager Robeco reported in a piece titled "Value Investing" that "reports of my death have been greatly exaggerated." As Hanauer continued... In November 2020, the announcement of a successful Pfizer-BioNTech Covid-19 vaccine candidate results triggered the long-awaited comeback of the value factor. Since then, value has been mainly on the rise. Hanauer filled out the piece with 10 charts showing the resurgence of value and its long-term viability as a strategy. Value seems to have been unfairly targeted over the past several years. In a more recent essay titled, "The Strange Death of Value Investing," Tim Price of U.K.-based Price Value Partners pointed out that momentum and other strategies have periods of underperformance as well. Yet we never hear of their demise. When so-called experts tout the death of a strategy that has trounced most others over the long term... that smacks of the hyper bullishness we see at market tops. It reminds me of economist Irving Fisher's famous quote from October 1929... Stock prices have reached what looks like a permanently high plateau. Fisher made the remark about six weeks after the 1929 peak. Rather than being a reason for optimism, it was the mother of all sell signals. The Dow Jones Industrial Average fell 89% from its September 1929 peak to its July 1932 trough. So when anybody says value is dead or asks if it makes sense or any such thing, I dismiss the question out of hand. I just stick to figuring out what businesses are worth owning and at what price. And not only do I doubt value investing is dead... I doubt that much of what people do in the stock market can be called investing at all. Like many value investors, I agree in spirit if not in the letter of what Joel Greenblatt told Wigglesworth back in 2020... All investing is value investing. The rest is speculation. Blunt and iconoclastic as it seems, it's just an echo of what value investing patriarch Ben Graham wrote in his classic value tome, Security Analysis, in 1934: An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. Bank of America Merrill Lynch showed that value investing is definitely worth doing. The bank studied nearly a century of data from 1926 to 2015 and found that growth stocks returned 12.6% annually, compared with 17% annually for value-priced stocks. While growth performed OK, Graham, Greenblatt, Price, and I would probably all tell you that it didn't promise safety of principal. In other words, it garnered an inferior return with more risk. At best, growth investing is a speculation that a company will someday grow into a valuation that's overpriced based on today's performance. It's sometimes mixed up unfairly with momentum investing, which just means that if a stock has been going up, it should keep going up. These approaches can work, of course, but they're easy to get wrong., Value investing is just as much of a skill as those other two, but it's the only one that even attempts to keep your principal safe by establishing the value of an investment and paying a suitably large discount to that value. That's what we did with Kellanova. We thought it was worth $82. The market said it was worth $58. We believed that was too large a discount to last... and we recommended buying the stock. We saw the potential for "a satisfactory return" and trusted our valuation to provide our subscribers with "safety of principal." By Graham's definition, that's a true investment. If we didn't care about the valuation and simply thought the stock would go up because the business was expected to keep growing, there's no allowance for the safety of principal. Today, Nvidia (NVDA) is the poster child for speculation. Nobody who is buying knows or cares what it's worth. They know it's a great business that's growing a lot and they think that'll keep the stock price soaring. We'll see. To be fair about all this... I do struggle with the idea that your principal is protected when buying stocks... After all, we can cite more than one occasion during my 60-plus-year lifetime when markets went absolutely haywire and priced excellent businesses as though they were about to go bankrupt. The bear market of 1973 to 1974... the market slump of the early 1980s... the peak of the dot-com collapse (when Berkshire Hathaway traded 50% below its 1998 high)... and the 2008 financial crisis all come readily to mind. Astute value mavens will instantly argue that stock price and intrinsic value are often not the same, a fact which makes value investing possible. But that very fact – that the market can push a stock's price below its intrinsic value – suggests that the value won't prevent your investment from trading well below your purchase price. No matter how good your valuation work is, the market can easily turn against you... and possibly for a lot longer than you'd ever have guessed – even if you're ultimately proved right. We got off easy with Kellanova. The market corrected its mistake in four months. Sometimes it takes several months, or even a year or more. I'm OK admitting that value investing requires a faith that markets will recognize value in a reasonable enough period of time to make the strategy work. Honestly, though, I don't bother worrying too much about any aspect of value versus any other strategy... Value is never dead. Over time, it has worked well, and we have no reason to believe it won't continue to do so. But the ultimate reason I don't worry about being a value investor is that I know the biggest risk is not that I'll follow the wrong strategy for too long. Most of the risk in investing lies outside the long-term effectiveness of simple, workable, effective strategies. That's true whether you're an indexer, a value investor, or a pure momentum investor. All three work just fine. The real risk is not that they'll stop working. It's that you'll screw them up because you're an emotional human being. Most folks wind up selling when they should be buying, buying when they should be selling, and abandoning equities entirely when they should probably do nothing but stick to their time-honored strategy, whichever one it might be. Today, my value orientation tells me folks are ripe for a screwup... They're in "pay anything" mode again. The S&P 500 Index is about 2% from making new all-time highs. At 35.75, its cyclically adjusted price-to-earnings ("CAPE") ratio is getting closer to its peak of 38.58 in late 2021 – just before it fell 25% from January to October 2022. I have to wonder if the market will go through a larger correction before the CAPE eclipses the 2021 highs. I'm not saying another 25% drop is imminent. But the risk of such a performance is certainly higher than it was in the fall of 2022, when it bottomed out at 27. (And yes, I'll keep talking about CAPE until it's no longer in mega-bubble territory, so get comfy with it...) Just keep in mind that stocks – especially the handful of mega caps leading the market higher – get riskier and riskier the higher they go. I can hardly believe some folks actually think the market is in fear mode right now. The CNN Fear and Greed Index says "fear is driving the market" right now... With the S&P 500's price 2% from new all-time highs, all I can say is that tells me all I need to know about that indicator. Like virtually all sentiment indicators, it's noise and can't help you make good decisions. I keep telling folks to prepare for a wide variety of outcomes. Most of that work is done for you if you just find a good strategy – like Mike Barrett and I have done in Extreme Value – and stick with it for the long term. --------------------------------------------------------------- Recommended Links: # [Prepare for a New Wave of Volatility Heading Straight for U.S. Stocks]( If you play this common market anomaly wrong, you could see all of the market gains you've acquired over the past two years quickly slip away. That's according to Marc Chaikin, who called the COVID-19 market crash, the 2022 bear market, and the 2023 banking crisis. Today, he's back with a brand-new warning... and ONE specific move he recommends you make to protect yourself. [Find the full protection plan detailed here](. --------------------------------------------------------------- # [Moneyball, The Big Short, and The Blind Side...]( Our 2024 conference's keynote speaker, Michael Lewis, wrote THREE bestsellers that were all turned into Oscar-nominated movies. Come see him live in Las Vegas – plus all your favorite Stansberry, Chaikin, and Altimetry editors. [Save your seat here before tickets sell out](. --------------------------------------------------------------- New 52-week highs (as of 8/15/24): AbbVie (ABBV), Automatic Data Processing (ADP), Agnico Eagle Mines (AEM), Amedisys (AMED), iShares MSCI South Africa Fund (EZA), Fidelity National Financial (FNF), Intuitive Surgical (ISRG), iShares U.S. Aerospace & Defense Fund (ITA), Cheniere Energy (LNG), London Stock Exchange Group (LNSTY), VanEck Morningstar Wide Moat Fund (MOAT), Motorola Solutions (MSI), PayPal (PYPL), Regeneron Pharmaceuticals (REGN), ResMed (RMD), RenaissanceRe (RNR), Sherwin-Williams (SHW), Skeena Resources (SKE), Trane Technologies (TT), Veralto (VLTO), Viper Energy (VNOM), Consumer Staples Select Sector SPDR Fund (XLP), and Health Care Select Sector SPDR Fund (XLV). In today's mailbag, feedback on [yesterday's edition]( which cited the latest Uncle Sam inflation numbers... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Maybe [Corey] can explain why husband/wife both working [are] having trouble putting food on the table. Or perhaps volume shrinkage. For example, eggs, or Gatorade, which was $1, is now close to $2 with less volume... instead of quoting government untrustworthy stats (how many government employees were hired... our debt crisis) [and saying] all is well with the future markets." – Subscriber Michael N. Corey McLaughlin comment: Michael, I understand your points and I actually agree with them 100%. From personal experience, add two kids into the cost equation and careful budgeting is a must. However, we'll repeat what we said in the mailbag a few weeks ago when we explained why we quote government stats, even though we may not believe them. As we wrote in the August 1 Digest... We report what the Federal Reserve says about inflation and other things because enough investors in the market care, that it influences behavior. However, often, what the Fed says does not reflect reality for many people it claims to serve. Just because the inflation rate is lower than it was two years ago doesn't mean inflation still isn't happening. Even on an "official" headline level, there's also a big difference in compound growth between 2.5% and under 2% where inflation was most of the previous 15 years. The point is that enough investors in the market do care about these "official" stats – for better or worse. And when we're talking about market direction, I feel like I wouldn't be doing my job if I didn't consider what influence the government numbers have. Good investing, Dan Ferris Eagle Point, Oregon August 16, 2024 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open stock positions across all Stansberry Research portfolios. Returns represent the total return from the initial recommendation. Investment Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,376.2% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,342.7% Stansberry's Investment Advisory Porter ADP Automatic Data Processing 10/09/08 955.2% Extreme Value Ferris WRB W.R. Berkley 03/16/12 795.3% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 681.6% Retirement Millionaire Doc HSY Hershey 12/07/07 486.1% Stansberry's Investment Advisory Porter TT Trane Technologies 04/12/18 455.5% Retirement Millionaire Doc AFG American Financial 10/12/12 449.5% Stansberry's Investment Advisory Porter NVO Novo Nordisk 12/05/19 396.6% Stansberry's Investment Advisory Gula TTD The Trade Desk 10/17/19 381.5% Stansberry Innovations Report Engel Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 5 Stansberry's Investment Advisory Porter/Gula 3 Retirement Millionaire Doc 1 Extreme Value Ferris 1 Stansberry Innovations Report Engel --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Investment Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 2,291.8% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,433.2% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,108.0% Crypto Capital Wade MATIC/USD Polygon 02/25/21 726.5% Crypto Capital Wade OPN OPEN Ticketing Ecosystem 02/21/23 279.3% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams PNC Warrants PNC-WS 6.16 years 706% True Wealth Systems Sjuggerud Maxar Technologies^ MAXR 1.90 years 691% Venture Tech. Lashmet Silvergate Capital SI 1.95 years 681% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. --------------------------------------------------------------- Stansberry Research Crypto Hall of Fame Top 5 highest-returning closed positions in the Crypto Capital model portfolio Investment Symbol Duration Gain Publication Analyst Band Protocol BAND/USD 0.31 years 1,169% Crypto Capital Wade Terra LUNA/USD 0.41 years 1,166% Crypto Capital Wade Polymesh POLYX/USD 3.84 years 1,157% Crypto Capital Wade Frontier FRONT/USD 0.09 years 979% Crypto Capital Wade Binance Coin BNB/USD 1.78 years 963% Crypto Capital Wade You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest, [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberryresearch.com. Please note: The law prohibits us from giving personalized financial advice. © 2024 Stansberry Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Stansberry Research, 1125 N Charles St, Baltimore, MD 21201 or [stansberryresearch.com](. Any brokers mentioned constitute a partial list of available brokers and is for your information only. Stansberry Research does not recommend or endorse any brokers, dealers, or investment advisors. Stansberry Research forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Stansberry Research (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.