Mike Liss: Yes, I’ll discuss some traditional sectors that are attractive on the value side. And I’ll give an example that’s going to surprise you a little bit.
Banks, within the financials sector, and energy are among the traditional value stocks we currently find attractive.
Let’s talk about banks first. Many investors don’t believe banks grow earnings and haven’t grown earnings since the global financial crisis. That’s simply not correct. The earnings growth has been cyclical growth. Earnings growth dipped in 2020, of course, with the pandemic. It’s not surprising because interest rates cratered, and net interest margins were compressed.
We like to point out that we tend to like certain big banks with attractive risks/rewards. These banks, like JPMorgan, U.S. Bank and PNC Bank, grew earnings over the last 12 years. They accomplished this because they have more levers to pull than just net interest margins.
They also have fee businesses and service revenue businesses. Their loan business is also strong because they didn’t engage in the aggressive lending practices that occurred during the global financial crisis. They’ve built their book value and returned cash to shareholders.
This reminds me of 20 years ago when you had the old economy stocks and the new economy stocks. The new economy stocks—tech companies—were just going to kill the old economy stocks. But it turned out the old economy stocks used the new economy technology to improve their operations and their earnings. The old economy companies eventually came out of the tech bubble crisis. They did very well in 2000, 2001 and 2002.
The analogy today is old banks and fintech. Some think the old banks are dinosaurs. However, there’s nothing stopping old banks from using new technology. Many of them are investing billions into their R&D tech budgets.
Examples include JPMorgan, U.S. Bank, Wells Fargo and PNC. Their loan books have started to bottom out and are finally starting to grow. Interest margins are currently squeezed, but eventually the environment will be more positive. I think that change is coming sooner than later.
Now let’s consider the energy sector. It’s true that their earnings plummeted over the last 10 years. I can’t argue that fact. It was very irrational for energy companies to put every dime into the ground to extract oil and gas. That cratered the price of the commodity, and none of the companies made a profit.
Low energy costs due to the shale oil and gas boom benefited the country, but it seriously harmed the companies and their long-term viability. They finally came to their senses and reduced spending on exploration. They stopped concentrating on returns on capital, instead concentrating returns of capital.
ConocoPhillips, Devon Energy, Chevron and Baker Hughes are companies returning substantial cash to shareholders and are committed to continue that practice. We don’t think the market has recognized their more rational behavior yet.
So, banking and energy are a couple of areas where we’re finding good risks/rewards. Let’s look at a stock that might surprise you. Equinix is a REIT, so I might be getting on Brent’s turf a little bit.
Equinix is a global, digital infrastructure company that provides colocation space and related offerings. Customers rent their space and perhaps their equipment. Secular tailwinds like 5G and streaming services, such as Netflix and Disney are driving Equinix’s success.
REITs tend to have more debt, which we usually shy away from as value investors. But Equinix ticks a lot of boxes for us, including:
- High barriers to entry.
- Diverse tenant or customer base.
- Strong balance sheet.
- Solid returns on capital within its industry.
- Strong secular demand.
Brent Puff: You’ll be happy to hear we like Equinix a lot as well, Mike. It’s a company we’ve liked for a long time. It’s a great business.