Blue Chip Issue 85

BLUE
CHIP
INVESTMENT
THE UNLOVED
OF THE
UNLOVED
Why bargain hunters should be
shopping in Europe, not the US.
Value stocks in Europe are the “unloved of the unloved”,
but they have offered more growth than growth
stocks. Here, three charts tell the story.
The value investor has become something of an
endangered species over the last decade, pushed to the sidelines
of a market fixated on seeking never-ending growth in areas
such as technology.
The underperformance of the value investment style has been
much discussed, and – barring a relatively short rally this year –
mostly painful for deep value investors such as us on the value
investment team at Schroders.
The result is a wide chasm in the valuations of the cheapest
shares and the most expensive. This has not gone unnoticed.
Indeed, one of our favourite columnists in the FT recently,
Robert Armstrong, said, “Value stocks look like a heck of a value
right now!” He pointed out that the ratio of the price/earnings
(P/E) multiples of growth and value stocks in the US was now
at a 20-year low. This is true and compelling. But there is a place
where the differential is even more pronounced: Europe. And
what’s most surprising of all, is that – counterintuitively – Europe’s
cheapest companies have been delivering higher profit growth
than Europe’s most expensive companies.
Three charts that tell the story
The first chart looks at the valuation dispersion between growth
and value in Europe, using data from Morgan Stanley that combines
three valuation measures: price/earnings, price/book (P/BV) and price/
dividend (P/Div).
While the similar value spread in the US is undoubtedly cheap,
the data in Europe is eye-wateringly so. Europe has gone lower
than the dotcom nadir around the turn of the century and the
recent bounce still leaves a very long way to go.