Mind the Gap

As shown, the valuation gap between stocks that have been appreciating and those trading at compelling valuations has exploded in the past 9 months. This development, we believe, is grounded in pessimism about growth prospects for the average company and a willingness to pay up for past success.

The impulse to look for safety in what has worked may erode the downside protection that buyers are seeking. As valuations continue to climb, the room for error in producing earnings growth narrows, and eventually prospects aren’t strong enough to support premium share prices. This is why we believe momentum is a short-term trading tool as opposed to an investment philosophy.

As value investors, we seek to buy companies below their intrinsic worth. Although the stock price of these businesses will fluctuate, their intrinsic value should hold and, we believe, increase over time. With the recent market sell-off, we are finding the gap between where stocks are trading and the value of companies is widening.


Past performance does not guarantee future results.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.

Definitions: Definitions: Enterprise Value (EV): is the entire economic value of a company. Enterprise Value/Sales Ratio: is a financial indicator used to determine the value of a company including debt. It is equal to a company’s Enterprise Value divided by its annual sales. Momentum: is the rate of acceleration of a security's price or volume. Price/Earnings Ratio: of a stock is calculated by dividing the current price of the stock by its trailing or its forward 12 months’ earnings per share. S&P SmallCap 600 Index is a group of 600 U.S. stocks chosen for their market size, liquidity and industry group representation. All indices are unmanaged. It is not possible to invest directly in an index.

©2016 Heartland Advisors

© Heartland Advisors

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