2024 4Q Letter to Investors: Prices & Fundamentals Diverging
A disconnect between prices and fundamentals is being driven mostly by just a handful of the largest stocks. Given their enormous weight in the broad benchmarks, the overall market has become much more expensive and there looks to be considerable valuation risk for large U.S. stocks in aggregate as a consequence.
2024 3Q Letter to Investors: Valuation Risk
Large cap U.S. stocks in aggregate look expensive. This is primarily a function of current market leadership, where the 15 most expensive companies over $250 billion in market cap are collectively trading at a 72% premium to the rest of the market. The situation appears similar to the one in March, 2000, when the overall market was even more expensive, but a set of opportunities below the surface provided good absolute returns, even as the TMT bubble collapsed. We take a harder look at the market now versus 2000 in our letter.
2024 2Q Letter to Investors: A Tale of Two Markets
The concentration within the S&P 500 is at historic levels. This has produced a divergent set of returns and valuations across the large cap market we have not seen in decades. While our U.S. FSV portfolio has underperformed in this environment, we are steadfast in the view that valuation matters and are optimistic given that our portfolio is at a record free cash flow yield premium to the market. The Small/Mid QV and International FSV strategies also continue to have attractive free cash flow yields while maintaining an eye on quality.
2024 1Q Letter to Investors: The Magnificent 1?
While NVIDIA has driven the market’s valuations higher, we continue to find valuation opportunities that meet our quality standards, leading our U.S. FSV portfolio to its widest free cash flow yield premium in its history. Our Small/Mid QV and International FSV portfolios likewise offer very attractive combinations of valuation and quality.
2023 Year-End Letter to Investors
The U.S. equity market’s performance was dominated by its largest constituents during 2023. Looking at the annual performance of an equal weighted index of large stocks compared to a cap-weighted one shows that 2023 was the second worst year for the equal weight index going back to 1930!
2023-3Q Letter to Investors: Avoiding Risk
October 11, 2023: Lofty valuations among most of the so-called “Magnificent Seven” stocks place a heavy demand on future growth for those stocks as a group. If history is a guide, failure to achieve those implied growth rates could leave investors sorely disappointed.
2023-2Q Letter to Investors: Expensive at the Top
June 30, 2023: A strong rally moved market levels markedly higher in the second quarter, leaving any angst of the first quarter’s focus on banking turmoil behind. The rally, however, was driven mostly by handful of the biggest stocks that look increasingly rich relative to the market overall.
2023-1Q Letter to Investors: Crosscurrents from Big Tech & Banks
April 14, 2023: Equity markets rose to start 2023 but experienced crosscurrents from very concentrated gains among a select few of the biggest stocks and weakness in the bank sector. In this environment, our U.S. Fundamental Stability & Value (US FSV) strategy lagged the S&P 500 while comfortably outpacing its value benchmark.
Year-End Letter to Investors: Value Mattered in 2022
January 11, 2023: Elevated inflation and rising rates are likely to cause economic activity to continue to moderate and even possibly contract, but from a longer-term perspective, this is not unusual and the economy and corporations have weathered much more difficult circumstances in the recent past.
