In the 1960s, 50 growth companies rose to the top and were considered such “sure things” that they became known as the Nifty 50. During that time, Warren Buffett—the famed value investor—folded his investing fund, lacking anything of value to purchase. But eventually, the Nifty 50’s luck ran out with the Arab Oil Embargo in 1973 and the period of high inflation and the recession that followed. Then Buffett, now CEO of Berkshire Hathaway, swooped in. Does this sound familiar? In the last decade, Buffett stayed mainly in the wings, stockpiling cash and not spending much of it until this year, when he’s poured $51 billion into the energy sector. Now there are signs that “the Golden Era” of value investing is back, and an article in Nasdaq details three of them:
- P/E ratios are falling. Though they may not be at the single-digit levels seen in the late 1970s, many analysts believe they could drop much further than the 18.3x the S&P 500 is now trading at. And forward earnings for certain industries are already in the single digits: businesses that drill and produce oil and natural gas are now trading at a slim 5.4x forward earnings.
- Dividend yield are going up. Higher dividend yields generally go hand-in-hand with cheap valuations. And the companies that have consistently raised their payouts for more than a decade or two become less and less expensive during a sell-off, such as now. As those valuations fall, dividends become more valuable, the article explains.
- Dollar cost averaging works. Back in the 1970s’ bear market, Buffett bulked up Berkshire’s stock positions in their insurance portfolio—a strategy that works in value investing because Wall Street generally lags behind on value stocks and their valuations stay low for quite a while. That allows investors to not only add to their portfolio, but at a good price.
Buffett has been dipping back into his 1970s playbook, using his massive cash reserves to buy up companies with a solid balance sheet and cheap valuations like Chevron and Occidental Petroleum. And if stocks continue to fall, it’s expected that Berkshire will dollar cost average into those companies that it sees as the best values, the article contends.