Deep value investor Andrew Wellington on predicting earnings, value multiples and Mag 7 | S07 E08
Mar 3, 2025
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Andrew Wellington, a deep value investor and portfolio manager at Lyrical Asset Management, shares insights into his firm’s unique approach to valuing companies. He discusses strategies for identifying high-quality growth stocks that are undervalued and the importance of balancing diversification with concentration in portfolio construction. Wellington also delves into navigating cyclical investments, critiques market valuations, and reflects humorously on the journey of value investing while emphasizing the power of patience and fundamental financial analysis.
Lyrical Asset Management focuses on identifying undervalued stocks with low P/E ratios and strong earnings growth to capitalize on market inefficiencies.
Their disciplined portfolio management involves diversifying across sectors to mitigate risks associated with industry concentration and cyclical downturns.
The podcast highlights the potential for smaller value stocks to outperform due to current valuation disparities caused by the dominance of large tech firms.
Deep dives
Value Investing Philosophy
Lyrical Asset Management emphasizes a classic value investing approach, managing nearly $8 billion with a focus on deep value stocks that are often overlooked or misunderstood by the market. Their investment philosophy is characterized by seeking companies that maintain a low price-to-earnings (P/E) ratio while also exhibiting solid earnings growth, identified as 'gems amid the junk.' The firm distinguishes itself by combining deep value with quality growth, which allows them to identify stocks that outperform standard indices despite maintaining discounts in pricing. This strategy enables them to capitalize on market inefficiencies and enhance returns over time.
Investment Strategies and Stock Selection
The investment strategy involves starting with a large universe of stocks, typically narrowing down to about 30 high-quality stocks that are undervalued. Lyrical prioritizes diversification, ensuring that no more than three stocks from the same industry are included in the portfolio, which typically comprises 33 stocks spanning various sectors. They aim for a maximum position size of 5% at cost, focusing on finding stocks that are fundamentally strong and have good growth potential. This disciplined approach allows for a balanced portfolio that mitigates risks associated with industry concentration and cyclical downturns.
Understanding Market Inefficiencies
Lyrical Asset Management recognizes that many undervalued stocks do not necessarily face immediate problematic circumstances; rather, they are often simply ignored or misunderstood by the market. As an illustration, companies like Ameriprise and Primerica demonstrate how businesses with strong fundamentals can remain undervalued due to a lack of peer comparisons or competition, leading to mispriced stocks. Investors may find these companies challenging to value because they lack clear benchmarks, promoting opportunities for Lyrical to leverage their research and analytics. By identifying these companies, Lyrical attempts to capitalize on future market corrections that tend to realign valuations with their fundamentals.
Challenges of the Current Investment Climate
The podcast discusses the current investment climate, highlighting the pronounced valuation disparities between the largest tech firms and smaller stocks outside the 'Magnificent Seven.' The S&P 500 often shows inflated figures due to the large caps dominating the indexes, resulting in a premium for these stocks despite lesser earnings growth compared to their peers. Lyrical Asset Management argues that this creates an opportunity as markets eventually correct these discrepancies, leading to potentially significant cumulative underperformance for cap-weighted indices as smaller value stocks may outperform in the long run. This presents a potential scenario for investors willing to be patient and selective in their stock picks.
Long-Term Perspective in Value Investing
In value investing, nuanced perspectives on market downturns and the timing of re-rating of stocks are critical. The firm embraces a long-term investment horizon, often holding stocks for several years, promoting patience even amid temporary market corrections or underperformance. Lyrical asserts that market reactions to recessions tend to be exaggerated, and recommended actions often overlook the intrinsic value of the underlying businesses. Such an approach encourages investors to maintain a focus on sound fundamentals rather than getting swayed by temporary market volatility, positioning Lyrical well for eventual market rebounds.
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcastWe are live every Tuesday at 1.30pm E / 10.30am P.About Jake Jake's Twitter: https://twitter.com/farnamjake1Jake's book: The Rebel Allocator https://amzn.to/2sgip3lABOUT THE PODCASTHi, I'm Tobias Carlisle. I launched The Acquirers Podcast to discuss the process of finding undervalued stocks, deep value investing, hedge funds, activism, buyouts, and special situations.We uncover the tactics and strategies for finding good investments, managing risk, dealing with bad luck, and maximizing success.SEE LATEST EPISODEShttps://acquirersmultiple.com/podcast/SEE OUR FREE DEEP VALUE STOCK SCREENERhttps://acquirersmultiple.com/screener/FOLLOW TOBIASWebsite: https://acquirersmultiple.com/Firm: https://acquirersfunds.com/ Twitter: https://twitter.com/GreenbackdLinkedIn: https://www.linkedin.com/in/tobycarlisleFacebook: https://www.facebook.com/tobiascarlisleInstagram: https://www.instagram.com/tobias_carlisleABOUT TOBIAS CARLISLETobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).
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