This Market Just Killed Value Investing (For Now)

Let's bring in Charlie Bobrinskoy, he's vice chairman at Ariel Investments. Charlie, good to see you. Good morning. >> Good morning, Mike. How are you? >> All right. I mean, look, backdrop here is an overall stock market that's been kind of stuck and churning for a couple of months, but you're a value investor, value over growth has been one of the themes. So, you still you think that that can persist, and what does that mean in the way in the world of rates and and oil going higher? >> Yeah, we we've got a long way to go to catch up to growth. This has been a terrible 15 years for value. If you look at the 100 years, value beat growth every 10-year period, literally from 1926 to something like 2020. But then the last 10-15 years, it has been all growth, and we are still at a point where growth stocks um using standard valuation methodologies are still overpriced, while the value market looks much more reasonably priced. Now, we would say, broadly speaking, it is tougher to find value anywhere today than at many points in history. This is a market that is expensive, and if you're listening to people like Warren Buffett or Jamie Dimon or other leaders in the value community, we're all saying the same thing. Stocks are pretty fully priced here. We're not saying we know which way it's going in the next 3 months, but in general, high valuations have not been great for returns historically. >> Sure. And of course, you know, we got depending on what you want to measure it on, forward PE of the S&P got to 23 late last year, very high historically. But what do you say to those who constantly are coming out and saying earnings growth is off the charts. It's going to be 25% on the S&P this quarter. They always blast away the the forecast, or maybe it's higher than that. And this These are levels you don't see except coming out of a deep downturn. So, does that mean we're pulling forward earnings, or are companies are over-earning, or how does that fit into the valuation story? >> I think the key point here is that that is looking at EPS. Cash flow is going to be much worse than that. There's going to be much worse cash flow growth because of the massive capital expenditures, a trillion dollars going into data centers. We're putting money into an area that has never shown a proven return. If we get great returns, then it'll be fine, but you know the way that the accounting works is that trillion dollars of spending doesn't flow through the EPS number for many years. And so I would say that the EPS numbers are overstating cash flow. >> I see here that you believe that bank stocks are no longer attractively priced. It's interesting cuz we just heard the reports last week and JP Morgan chairman and CEO Jamie Dimon basically said this environment for banks is about as good as it gets. It sounds like you think, you know, maybe it is. And maybe this is peak bank environment. >> Yeah, so I was introduced to the stock market by my grandfather about 45 years ago. And what he taught me was that you really want to look at price to book when it comes to banks. And his rule was you buy the banks when they're below one times book, you sell them when they get to two times book. And that's because it is very hard to earn twice the rate of return on equity that a two times book would suggest you need. So names like Goldman Sachs and Morgan Stanley were trading in 2011 for less than book, for 0.75 times book. Today, Goldman Sachs and Morgan Stanley are trading at almost three times book. That is because it is, as Jamie says, almost a perfect environment. There are very little credit losses. There's a positively sloped yield curve, which is good for banks. There's a lot of capital markets activity, a lot of M&A. All of that is great for banks. It's a cyclical business. It's not going to last forever. The valuations tell you that it's going to last forever. I'm skeptical.