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The S&P 500 (^GSPC) has been riding a high lately, with the 5,800 mark clear in sight.
That leaves some investors feeling a bit anxious, as the current index level implies a price-to-earnings (P/E) multiple that’s a bit on the expensive side, historically.
“When I look at a P/E ratio today of 24 times, it makes me a little nervous,” said Michaella Gallina on a recent episode of Stocks in Translation (see video above; listen below).
Gallina has a unique perspective on the market. She began her career on the buy side, shifted to the sell side, then leaped into corporate finance. She now serves as both the CFO of the consultancy group Wave HQ and as vice president of investor relations at H&R Block (HRB) — where she has transformed corporate communications, facilitating a 191% appreciation in stock price over her brief tenure at the tax preparation company.
It’s easy for investors to get caught up in the hype around high-growth unicorns, said Gallina, who cautions against chasing moonshots.
“There’s been a lot of hoopla around some [of the] unicorns that we’re seeing with tremendous growth,” she observed, adding, “If you want to beat the market, you need to play with what’s in the game.”
In general, that means focusing on companies that offer long-term stability and reliable performance, rather than chasing the latest trend or speculative opportunity. But the quest for value over growth is easier said than done.
Gallina noted that any market frenzy (and there’s usually something) can lead investors to look for stocks that may be cheap but that have fundamental flaws, leaving them with little hope of ever going anywhere. These stocks are called value traps.
“Price is what you pay. Value is what you get,” wrote legendary investor Warren Buffett in a letter to partners in 1966. In Buffett and partner Charlie Munger’s classic aphorism, it’s far better to “buy a wonderful company at a fair price than an average company for cheap.”
And in a market where over 80% of active global equity funds underperform their benchmarks, Gallina’s focus on value stocks becomes even more critical. Stock picking has never been easy, but in today’s market fueled by a bazooka of alternative and traditional media sources, it’s arguably harder than ever.
According to a comprehensive study by Morningstar of the stock-picking records of active managers over a decade, only 44% of professional stock-pickers beat their benchmarks. But more importantly — and dangerously — they struggled to size their positions effectively.
The study found, in part, that the biggest challenge many active managers and retail do-it-yourself investors face is not struggling to find more winners, but “rather in sizing them in a manner that leads to outperformance,” wrote Morningstar senior manager Jack Shannon.
“The ground that active managers’ winners gain often cannot make up for what their laggards lose. Of course, higher fees don’t help, either,” said Shannon, referring to the relatively high commission structure still found in fund management. (The historical standard is a 2% management fee and 20% incentive fee — still charged in many cases.)
For Gallina, value follows the Buffett model in not looking for cheap stocks but in identifying companies with steady and growing profits and cash flows. She’s looking for “strong, consistent earnings and cash flow over time that you can predict and is stable.” These qualities provide a potential safeguard against the wild swings behind so many growth stories in today’s market.
The reality is that many companies that look promising on the surface don’t hold up to scrutiny.
“I think if most investors got a peek behind the curtain, they would find most companies completely uninvestable,” said Gallina, which brings up a separate (but related issue) of the difficulty in corporate communications with investors.
Gallina invests with a very long-term view, aiming for steady gains with low volatility.
“We’re not flashy, but we’re consistent,” she said of H&R Block stock which has soared 191% in her three years directing their corporate communications. For her, this is proof that steady, predictable companies are the true winners in the market, even if they don’t grab the headlines.
She relates it to her side gig as an equestrian, saying, “Riding a 1,200-pound animal teaches you a lot about grit. In the ring, there’s no one coming to save you. You just have to get through it.”
On Yahoo Finance’s podcast Stocks in Translation, Yahoo Finance editor Jared Blikre cuts through the market mayhem, noisy numbers, and hyperbole to bring you essential conversations and insights from across the investing landscape, providing you with the critical context needed to make the right decisions for your portfolio. Find more episodes on our video hub or watch on your preferred streaming service.
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