Is Warren Buffett feeling deja vu in 2022?
In the 1960s, growth stocks staged a big rally with 50 of the top growth companies in cutting edge industries, like technology and pharmaceuticals, becoming so popular they were called the “Nifty 50.”
The Nifty 50 were considered “sure things,” as investors were willing to pay as high as 50x earnings to own the stocks with the belief that those innovative companies would keep growing at a fast pace forever.
By 1969, Buffett found nothing of value to buy, so he dissolved his investing fund and moved to the sidelines.
The party finally ended in 1973, as the Arab Oil Embargo, a recession and the inflation that followed, rippled through the world’s global stock markets.
When the sell-off was over, the Dow had fallen 45% in 2 years.
Suddenly, there were many value stocks and Warren Buffett came back into the game, this time, as CEO of Berkshire Hathaway.
In a now infamous 1974 interview with Forbes Magazine, Buffett could barely contain his giddiness.
Forbes asked how he felt about the market opportunities after the big sell-off and he replied “Like an oversexed guy in a harem. This is the time to start investing.”
Buffett Spends $51 Billion Diving Back In
In the Forbes interview, Buffett talked about how 1974 reminded him of the early 1950s, when the Great Depression bear market finally ended and stocks were cheap.
“Look, I can’t construct a disaster-proof portfolio. But if you’re only worried about corporate profits, panic or depression, these things don’t bother me at these prices,” he said in 1974.
Buffett has been mostly on the sidelines for most of the prior decade, building a massive $144 billion cash position in Berkshire Hathaway. His last mega-deal was when he spent $26 billion to buy Burlington Northern railroad in 2009. He didn’t even jump to buy any new stocks in the March 2020 coronavirus crash.
But suddenly, in 2022, with stocks off their highs by double digits, Buffett’s Berkshire Hathaway deployed over $51 billion of the cash hoard into energy stocks.
Energy was the best performing sector in 2021, and remains at the top again in 2022, but, in another tie in to the 1970s, it was also one of the top performers of the 1970s.
Continued . . .
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3 Signs the Golden Era is Returning
Buffett may have been giddy over the buying opportunities in stocks in 1974, but it turned out that the rest of the decade was a golden era for value investors too.
There are 3 signs that US stocks could be returning to another golden era for value investors in this decade.
1) P/E Ratios are Dropping
After topping out above 21 in 2021, the S&P 500 is now trading at 18.3x. That’s still well above the single digit P/Es of the late 1970s which is why so many strategists think that stocks may have further to fall.
But forward earnings for individual industries have plunged into the single digits. For example, the companies that are drilling and producing oil and natural gas are trading at just 5.4x forward earnings as an industry. That’s dirt cheap.
2) Dividend Yields are Rising
Along with cheap valuations usually comes rising dividend yields. Not just 2% or 3% but yields over 8%. The dividend aristocrats, those companies that have raised their dividend payouts for over 20 years, get cheaper than ever in a stock market sell-off so not only are they raising their dividend but the yield rises as the stock gets cheaper.
It was easy to get juicy dividends in the 1970s as those valuations dropped.
3) Dollar Cost Averaging Works
In Berkshire Hathaway’s 1978 letter to shareholders, Warren Buffett discussed their strategy of adding to their stock positions in their insurance portfolio as the bear market continued to rage on.
“We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be net buyers of securities,” Buffett wrote.
Dollar cost averaging works in value stock bulls because the Street is always late to the party in value stocks so valuations remain depressed for some time. It’s easy to add to your position and still get in at an attractive price.
Buffett Gets Out the 1970s Playbook
We’re already seeing Buffett, and Berkshire Hathaway, mimicking the strategy of the 1970s.
Berkshire has started deploying its cash hoard into cheap companies that have record free cash flows, such as Chevron and Occidental Petroleum.
If stocks continue to get cheaper this winter, we’ll likely see Berkshire dollar cost average into what it considers to be the most attractive companies. It has already upped its stake in Occidental to 20% of the company this year.
In the third quarter 2022, Berkshire also jumped into the beaten down semiconductor industry with a $4.1 billion buy of Taiwan Semiconductor shares. What else will it buy?
While the overall stock market lagged until 1981, the top value managers like Buffett and Fidelity’s Peter Lynch became investing legends as value investing saw great success.
There will be new investing legends created in this decade’s value stock rally as well.
Are you ready to take advantage of the value stock opportunities?
How to Profit From the Return of Value Investing
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All the Best,
Tracey Ryniec, as Zacks Value Stock Strategist, directs our Value Investor portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.