CNBC’s Leslie Picker sits down with value investor Joel Greenblatt, Gotham Funds, to discuss the markets and future of value investing.
Joel Greenblatt: Home Depot Has Huge Returns On Capital
Has it become a lot more difficult to be a value investor these days.
Well it's a lot tougher for him you know Buffett is famous for saying a fat wallet is the enemy of high investment returns. And he's right about that boat. For better or worse we don't have as much money to manage as Warren Buffett and so we don't really have quite the challenges that he does. Only looking at the few top 50 or 100 companies even in the S&P 500 there are plenty of opportunities. You know when you go back my students ask the same question you know it's going to be really hard harder for us. But I tell him let's go back 20 years when you guys learned how to read and take a look at the most followed market in the world the United States most followed stocks the S&P 500. Let's take a look at what's happened since you guys learned how to read. And I tell them from 97 to 2000 the S&P 500 doubled, from 2000 to 2002 had halved, from 2002 to 2008 it doubled, from 2000 to 2007 it doubled, from 2007 to 2009 it halved, and fruit from 2009. Today it's roughly tripled. So where does it go from today. Well that's my way of telling them that people are still crazy and very emotional. And the S&P 500 is an average of 500 names. If you look under the covers of the dispersion of those companies plenty of opportunity to so the S&P today the answer your question. We value the S&P every day going back from 1990 bottoms up the individual stocks in the S&P on a daily basis so we can contextualize where do we stand today on a valuation basis. Right now we're in the 20th percentile towards expansive meaning as compared to the last 28 years. Market's been cheaper. 80 percent of the time more expensive 20 percent of the time. And from the 20th percentile in the past it's not a prediction just saying what's happened from this valuation level in the past and it's been up 4 to 6 percent over the next year 11 to 13 over the next two. So not so bad but subnormal market average about 10 percent a year during those 28 years so subnormal but certainly not terrible.
Sounds relatively expensive at least compared to history as a value investor do you find opportunity in this market these at this hour.
Sure we don't find the index we're buying the cheapest stocks in the index and we're long short investors so short. The most expensive so there's always things that are in favor and always things that are out of favor. And so we're trying to buy things that are cheaper than the market and sell things that are more expensive than the market those always exist. The thing that's going for us that we haven't had for the last 20 years is you know 20 years ago used to get a quarterly statement and pretty much thrown in the garbage. And now you can check your stock price 30 times a second on the Internet. So time horizons are shrinking and that's really if you're a long term investor that creates lots of emotions lots of volatility in the short term. But if you can keep your cool and. And actually value businesses and have a long term horizon and even two or three years nowadays there's a long time horizon there's plenty of opportunities out there always.
I want to get into some specific opportunities your long Home Depot which made news today reporting earnings that fell short of analyst estimates, disappointing guidance. Are you buying on the dip today. Are you still a long term holder?
Yes sure. I mean you know stocks like Home Depot are well Home Depot's a duopoly. It's got above average business trading cheaper than the market. Huge returns on capital relative for the retail business. They only Lowe's is their only main competitor. I mean really hard to get a better set up or business than this so you know the market overall is expensive. But this is a better business on average than the market and also cheaper. So it's a pretty great deal.
You're also long Wal-Mart and Boeing. What attracts you that those stocks?
Well Boeing is also a duopoly. I mean there's only Airbus is their only competitor. It's got returns on capital that are quite high for a capital intensive business. They you. Know. Like I said only have one competitor. Air travel is you know continues to grow certainly grows over time. So once again above average business below average prices that's pretty exciting and Walmart's the same story. It's a duopoly with. Well Wal-Mart has more competition. They're not a duopoly but they. Are a great business they have if you want to talk about economies of scale if you're a retailer that's the name of their business they can do things cheaper their buying power is better. They have loyal customers. They're in places where consumers are convenient for consumers so they just built the business over time that does things better and so once again an above average business that a below average price.
Now on the short side Ford, Align Technology, Monster Beverage is a strictly valuation or is there something else underlying.
Those are all well and that's a great question. They're all more expensive than the market, Align Technology is a fine business. They do Invisalign you know for braces and but they're coming off patent soon, there are competition coming in.
[inaudible] club is, other startups that are getting into the fray.
You know like any business there's a lot of competition but when you're coming off Pat you're.