The speaker discusses the current state of the market, noting that it has become incredibly narrow. Despite the S&P 500 appearing expensive, there is a lot of value to be found. The speaker mentions valuation dispersions and compares the top and bottom decile PE ratios in the S&P 500. Historically, the premium for high-priced companies was about four times that of low-priced companies, but today it's over seven, indicating that many stocks are on sale.
The speaker also discusses the possibility of the market giving too generous evaluations to upper and preferred names, leading to high premiums. However, they argue that this doesn't necessarily mean that cheaper stocks are cheap on an absolute basis. They take an intrinsic approach to valuation, considering growth as a component of value.
They mention Google as an example, stating that it looks expensive on a PE basis but becomes cheaper when considering factors like net cash and underearning assets. They also discuss the potential of big companies that have led the market this year to continue looking undervalued.
The speaker mentions that they are more actively buying traditional value names this year. They also touch on the topic of AI, stating that Microsoft and Google both have great AI capabilities, but they don't feel like they're paying for it.
In the healthcare sector, the speaker mentions a company called iQvia Holdings, a contract research organization, which they believe is undervalued. They also discuss the energy sector, stating that they underwrite their energy stocks at around a $7 per barrel price, as that's where they believe the marginal cost of the barrel is.
Finally, the speaker thanks the interviewer for the discussion and ends the conversation.
1. The S&P 500 market has become incredibly narrow, with the S&P looking rather expensive at over 20 times earnings.
2. Despite this, there's a lot of value to be had, as the premium for high-priced companies has increased to over seven times, back to where it was in 2021.
3. The speaker takes an intrinsic approach to valuation, considering growth as a component of value.
4. The speaker owns Google on a straight PE basis, which looks traded right around in line with the market and doesn't look expensive.
5. When you back out the net cash and some of the underearning assets like cloud and other bets, you're paying a pretty low multiple for search.
6. The speaker mentions that some of the big companies that have led the market this year continue to look undervalued.
7. The speaker mentions that the more traditional value names are where they've been more actively buying year to date.
8. The speaker mentions that Microsoft and Google both have great AI capabilities, but they don't feel like they're paying for it.
9. The speaker mentions that they're finding some things that look pretty ripe in healthcare, particularly within the diverse group.
10. The speaker mentions that they're seeing more new idea flow in the healthcare sector, which is typically an indicator that there's some more value.
11. The speaker mentions that they're paying about a market multiple for a company that grows high single digits with virtually infinite Returns on invested Capital.
12. The speaker mentions that they underwrite their energy stocks at around a $7 per barrel price, which is where it appears to them that the marginal cost of the barrel is.
13. The speaker mentions that they see prodigious cash flow at that price, and even more so today, the production is 40-50% higher 10 years from now.