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Investing

Sky-High Prices, Overrated Japan

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By Douglas A. McIntyre Published
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From Investment Intelligencer

An advisor submits:  Regarding Jeremy Grantham’s apocalytic view, here’s how I explain the current environment to clients.  Back in 2000, the investment landscape looked like the Alps, with stunning peaks (technology and some other large-cap growth) and deep valleys (REITs, small-cap value, energy, emerging markets).  Today, the investment landscape looks like the Tibetan Plateau, with high valuations in every direction, as far as the eye can see.

I had an interesting meeting recently with a portfolio manager for international equities.  When I asked him to describe a couple of recent portfolio additions, he said that he has been struggling to find anything new to buy at acceptable valuations.  He pointed to the run-up in value, the run-up in small caps, the run-up in emerging markets.  He noted that international markets were up 30% in the last 18 months in dollar terms, up 20% in local currency, and that "obviously" stocks aren’t worth that much more now than they were then.

I then asked him how he justified his substantial overweight in energy stocks.  He has something like 22% of his portfolios in energy, vs. 7% for EAFE, and he acknowledged he would overweight even more except that the funds have a policy limiting sector overweights.  Hasn’t energy had the same kind of run-up, I asked, as small-caps and emerging markets?

"Can you think of any other industry," he replied, "where prices have tripled?"  He said he assumes $50 oil, which he thinks is conservative, and even with that many energy stocks still appear to be much better values than anything else around.

I also asked him about his substantial underweight in Japan.  The explanation: He looks for high return on capital combined with low valuation — shades of Joel Greenblatt — and return on capital is pathetically low in Japan.

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Personally, I continue to have a hard time making sense of Japan as an investment opportunity.  Bulls emphasize that Japan is much cheaper than other developed markets on price/book and price/sales; bears emphasize that Japan is more expensive in P/E terms and that return on capital is awful.  In effect, bulls say, "You can buy assets cheap," while bears ask, "Why throw good capital after bad?"

Posted by The Editors on April 25, 2007

http://www.investmentintelligencer.com/

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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