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Deep value what? - Views on News from Equitymaster
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  • Sep 19, 2008

    Deep value what?

    A strategy report on Lehman Brothers' website (which still exists!) talks about the benefits of investing in value stocks as opposed to growth stocks that were no longer cheap at the time of release of this report (April 2008). Interestingly, the report lays specific emphasis on investment in stocks of financial companies.

    The writer of the report then thought that stocks of financial companies comprised around 80% of deep value stocks available in the US markets. Simply put, 'deep value' stocks are those that are attractively priced in relation to expected future earnings growth.

    Look what has happened to these stocks thereafter (including the ensuing performance of Lehman's stock)!

    Fall of the mightiest!
    (US$) 52-wk high CMP Decline from top
    AIG 70 2 -97%
    Washington Mutual 39 2 -95%
    Merrill Lynch 79 19 -75%
    Citigroup 49 14 -71%
    Morgan Stanley 70 22 -69%
    Goldman Sachs 251 115 -54%
    Lehman Bros. Ticker no longer available!!
    Bear Stearns Ticker no longer available!!
    Source: Yahoo Finance; CMP-Current market price

    The report states - "Value has become synonymous with financials, which we think are set to outperform. We think that the sector will rally from here, that it offers extreme value compared with its history."

    Well, history has been made. Lehman is almost extinct now on an independent basis and so is the case with so many financial companies in the US. There are some that have been saved by the Federal Reserve by granting a bailout.

  • Also read - Simple survival lessons

    As Fortune recently reported - "The demise of old Wall Street isn't just about bad bets on mortgages or the hubris* of its creators. It's the failure of an antiquated, risky strategy. The model had an obvious and fatal flaw. Earnings on Wall Street no longer came chiefly from recurring businesses but rather from a combination of huge leverage and huge risk."

    And now when the good luck has turned, the shareholder wealth supporting all that leverage is being wiped out.

    Ultimately, 'value' lies in the eyes of the shareholder. Whoever thought that bad businesses (as in the Wall Street types) had tremendous value due to their lower valuations is paying the price of short-sightedness.

    * Hubris, sometimes spelled hybris, is a term used in modern English to indicate overweening pride, self-confidence, superciliousness, or arrogance, often resulting in fatal retribution. Though not specifically defined, hubris was a legal term and was considered a crime in classical Athens. That was so because it was not only proof of excessive pride, but also resulted in violent acts by or to those involved. In its modern usage, it is often associated with a lack of humility, not always with the lack of knowledge. The proverb 'pride goes before a fall' is thought to sum up the modern definition of hubris. (Source - Wikipedia)



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    Aug 22, 2017 (Close)