The conversation revolves around the current state of the market, with a focus on valuation and potential investment opportunities. The speaker discusses the narrowing of the market and the high valuation of the S&P, suggesting that there is a lot of value to be had. They mention that the premium paid for the highest PE companies is currently over seven times, which is back to where it was in 2021. This indicates that there are many undervalued stocks available in the market.
They discuss the potential risk of overpaying for upper-end preferred names, and the importance of an intrinsic approach to valuation, where growth is a component of value. They use Google as an example, stating that while it trades in line with the market on a straight PE basis, its value is significantly lower when considering its cash flow and other bets.
The conversation then shifts to the tech sector, with the speaker discussing the potential of AI in companies like Google and Microsoft. They acknowledge the challenges these companies face in court, particularly in relation to antitrust suits, but do not provide specific commentary.
The speaker also discusses the healthcare sector, specifically mentioning diverse groups such as drug stocks and biotechnology companies. They provide an example of Iquvia Holdings, a contract research organization (CRO), and discuss its unique advantages in the drug industry.
Lastly, the conversation turns to the energy sector, with the speaker discussing the importance of long-term pricing and the potential for significant cash flow. They use Conocophillips as an example, stating that at the current price, investors can expect to get their investment back over ten years.
Here are the key facts extracted from the text:
1. The S&P looks expensive, with a price-to-earnings ratio (P/E) of over 20 times earnings.
2. The valuation dispersion in the S&P is high, with the top decile trading at over 7 times the price of the bottom decile.
3. Historically, the premium for the highest P/E companies in the S&P has been around 4 times, but it's now over 7.
4. Oakmark is actively buying more traditional value names that are undervalued.
5. Alphabet (Google) has a leadership position in AI and is considered undervalued by Oakmark.
6. Microsoft and Google both have great AI capabilities, but it's still early and unpredictable.
7. In the healthcare sector, some drug stocks and biotechnology companies are trading at all-time lows relative to the S&P over the last ten years.
8. Oakmark likes Iqvia Holdings, a contract research organization (CRO) that helps drug companies through the trial process.
9. Iqvia Holdings has a unique advantage due to its ownership of the traditional IMS business, which is the prescription data business.
10. Oakmark underwrites energy companies at a long-term price of $70 a barrel.
11. The marginal cost of a barrel of oil appears to be around $70.
12. At this price, energy companies are expected to produce significant cash flow, with some companies expected to return their market cap in ten years.
13. ConocoPhillips is expected to produce the market cap in ten years at a minimum, with production growing in the low and mid single digits.