Animal Spirits Podcast - Talk Your Book: Valuation Still Matters

Episode Date: June 2, 2025

On this episode of Animal Spirits: Talk Your Book, ⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠Ben Carlson⁠⁠⁠⁠⁠ are joined by Scott Blasdell, Portfolio Manager and Don San Jose, Chief Investment Officer of the U.S. Value Team at J.P. Morgan to discuss what value means today, looking for quality within value, why valuation still matters, why the wine business is in trouble, and much more! Find complete show notes on our blogs... Ben Carlson’s ⁠⁠⁠⁠⁠A Wealth of Common Sense⁠⁠⁠⁠⁠ Michael Batnick’s ⁠⁠⁠⁠⁠The Irrelevant Investor⁠⁠⁠⁠⁠ Feel free to shoot us an email at ⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠ with any feedback, questions, recommendations, or ideas for future topics of conversation. Check out the latest in financial blogger fashion at The Compound shop: ⁠⁠⁠⁠⁠https://www.idontshop.com⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: ⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠ The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠. J.P. Morgan Disclosure: Investing involves risks, including loss of principal. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by J.P. Morgan. Go to JPMorgan.com to learn more about the JPMorgan Active Value ETF. That's ticker Java, J.A. It's JPMorgan.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth. Health Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Back in 2016, when I was writing my book and doing research on the chapter of Ben Graham, I think I was reading articles that he wrote in Fortune. I think it was Fortune in like the 1930s. And there used to be companies, listed companies on the stock exchange that were trading at a lower valuation than cash they had on the balance sheet.

So in a hypothetical world, had you just bought the stock or bought all the stock and then took the cash and liquidated whatever assets it had, you could have made money. Yeah. Now, he's bought a bunch of those, right? The cigar butt approach. So I think those disappeared, probably like Buffett was doing that. They probably disappeared in the 60s or 70s, certainly. By that point, they were gone. So that style of value investing, long way behind us.

That stuff doesn't work anymore. So we actually spoke about this day with Don and Scott that the value portfolios of today, forget about 50 years ago. They look different than even 20 years ago, substantially so. It's also cool to think that you can, I remember reading the Ben Graham stuff too. And then I read early in my career, I read what we're on Wall Street by Jim O'Shaughnessy. And he was talking about building a portfolio of 50 names

and finding the ones that are cheap based on price to book and price to earnings and price. And he had this whole, all these different metrics. And I remember thinking, like, if I try to model this and do this in my own, I would never be able to do it. And this is before free trades and before ETFs. And now the fact that you can just buy,

if you're wanting to buy a basket of cheap stocks, you can just do it in the ETF. Professionally managed. Yeah, it's pretty much. Professionally managed, it's kind of amazing. So on the show today, we talked to, Don San Jose, who's a managing director and in CIO of the U.S. value team at J.P. Morgan, and then Scott Blasdell, who is also managing director and portfolio manager responsible for

large-cap value portfolio. So J.P. Morgan has a whole suite of value portfolios up and down the income spectrum and up and down the market cap spectrum. And yeah, the point you made was just that a lot of the companies are more blue-chip these days that tend to be cheaper. And I don't know if that's a baby in the bathwater thing, but it does seem like a lot of the biggest NASDAQ 100 type stocks have gotten more and more expensive, and a lot of the other names just really haven't. So I don't know if you call that Dow stocks or blue chips or whatever, but there's a lot of stocks out there that still seem reasonably priced that just probably wasn't the case, I don't know, 20 years ago or something. Anyway, here is our talk with Scott and Don from JPMorgan.

Scott and Don, welcome to the show. Thank you. Good to be here. Yeah, thanks for having us. So just this past week, I was actually looking at the J.P. Morgan Guide to the Markets. And that presentation always has a good job of showing valuations across broad spectrums, price to book and price to sales and price to earnings and all these different. And then it kind of weights, shows it against the historical averages.

And I want to make a case for you. I'm not saying I believe this case, but I want to hear your sort of rebuttal. And it seems like for the past five, 10, 15 years that valuations just haven't mattered very much at all. And it seems like flows have sort of trumped valuations in a lot of areas of the market. And I just want to hear your take that, yes, valuations actually do still matter. Yeah, I'll start off, and Scott can certainly fill in after that. But, you know, I think valuations still do matter. I mean, when you look at sort of where stocks are trading, I mean, the value benchmark, the Russell Large Cap Value benchmarks trading out a 30% discount to growth versus a typical 20% discount.

I mean, you've got PEs for the benchmark around 16, 17 times that compares to about 25 times for the Russell large cap growth. And maybe what's different versus like the last five years that you mentioned, you're just seeing better earnings. breath these days. I think we all know the Mag 7 really has shown that the earnings growth is there and people have gravitated towards that. But I think in the last four quarters, you're starting to see some earnings breadth beyond just the Mag 7. I think another thing beyond maybe evaluation is just diversification matters. And I think you've seen a couple times in the last year where there are times where having a diverse portfolio really has distinct advantages. Maybe one of the more recent ones would be Deep Seek Monday, where the Meg 7 did sell off, but value names actually did quite well.

And you saw something similar last summer when we saw sort of a soft CPI print, and maybe beginning in July, right up through the election, again, value names did pretty well. There are a lot of options for investors looking for a value-oriented strategy. Why should they consider yours? Yeah, so I think a couple things here at JP Morgan Ascent Management. I think, first of all, we have full breadth of products across the value platform. You can really view us as a one-size-fits-all. We've got everything from an equity income fund, a large-cat value fund. We have small mid-cap value funds.

And I think what is pretty consistent across all of those is that they're backed up by a portfolio management team and dedicated research analysts, all with decades of experience. And so when I look across the U.S. equity platform here at asset management, we've got over 50 analysts, about a third of them, are dedicated to value, which means they're just looking at those value stocks. And I think that's really important when they're paired up with value-focused portfolio managers. And so the analyst experience, the portfolio managers partnered with those analysts really makes a difference. I think that was the question might have been poorly worded. So forgive me. I guess specifically on the strategy, what is different about what you're offering

or tell us about the strategy versus what they can get from the Russell 1000 value index, for example? Sure. I think, you know, one of the other hallmarks of what we do is it's, it's active management. And so I think what we're really focused on is more of the quality names within the value benchmark. Obviously, all value managers are thinking about valuation, thinking about value. But what we do is combine that valuation with a quality focused. And so I think there's a reason that you need to do that.

It's really not just finding the best opportunities, but also avoiding those value traps. And so valuation alone doesn't tend to be a great indicator of a great stock always. You need to do the research. It goes back to those analysts that I mentioned. And so that does tend to go back to our differentiator and competitive advantage, having that deep knowledge behind every investment decision. The value trap idea is interesting to me because I think one of the hardest questions to answer is, you know, what's priced in to a stock?

And I think a lot of people have been saying for the past, at least for this cycle that, listen, the tech stocks are overvalued, but they're overvalued for a reason because they're higher quality, right? And stocks that have lower valuations are, have those lower valuations for a reason. And obviously the difference is just the expectations and what is priced in. So how do you consider something like that in terms of the stocks we own are much cheaper, but the market is missing something on the expectation?

Like, how do you understand what it actually is priced into those numbers? Yeah, I can weigh in here on the, on that. subject because I started 25 years ago as a real estate stock analyst here at J.P. Morgan and our approach, what distinguishes J.P. Morgan, and I think what you really need to do to make value investing work is look far out into the future. So part of what we're doing, we're modeling company earnings out six, seven years. And it's not like we're going to get the future that far out perfectly correct. in our estimates. But what

thinking that far out does do for you is that it helps you avoid some of the secular losers that Don was mentioning, which can be the value traps. So, you know, for example, I just was at a presentation talking about the wine industry. And the,

you know, it turns out most wine drinkers are over 40. And as they get older, they're going to be drinking less wine. We all drink less as we get older. That just makes it harder for somewhere yourself. Well, okay, well, this is, we're talking averages here, but, Michael's an outlier. Yeah. But the point being that, you know, there's just some headwinds

to that business that kind of make it harder for a company in that business to do well over time. And if, and if you're looking out six, seven years when you're modeling companies, forces you to ask those questions about the long-term trends. So, you know, versus passive investing, you're going to own everything, you know, we can weed out the ones that, that, that, that have those secular headwinds. When you're discounting cash flows, interest rates are a big component, obviously, to the discount rate. So is that something that people just say like I did, or do you really believe it? Like, do higher interest rates favor value stocks? Because a lot of the conversation for the past decade was, yeah, free money, you know, doesn't matter if you get

money back today, five years, 20 years, what's a difference? And we'll just go out and take more risk. Do you buy into that at all? I do. I mean, I think it's just a matter of math that, yeah, typical growth stock, a lot of the payoff is far into the future. So higher interest rates will everything else equal make near-term cash flows more valuable. So that will tend to favor value stock. You certainly saw that in spades in 2022 when we had the beginning of, you know, the post-pandemic inflation, and then the spike in interest rates, the growth stocks got crushed. But then you didn't see it in 23 and 24. This is true.

So, you know, I'd say that it's definitely valid principle, but, you know, it works over long periods of time. Maybe not every year. How do you think about competing against the algorithms and just competing against simple rules-based formulas that say, we're going to buy all the stocks that trade under this and trade below this and have numbers that do this. How do you think about the qualitative aspect of value investing when it's easier than ever to just calculate these things? It's not the Ben Graham days of calculating these formulas. It's much easier to just put these into a formula and have them spit out a list of stocks. Well, I'd say, you know, again, this is where looking far out as the future gives us an advantage, because if they're just, you know,

looking at published numbers, maybe by the sell side, the sell side's going out maybe one year, maybe two years, max. And they're not thinking about long-term growth rates. They're not thinking about what we call normal earnings, what a company should earn at a normal part of the cycle. And we have a lot of evidence that our approach of looking far out into the future does make a difference to returns. What are you looking at exactly when you think about like quality? So are you looking at some metrics like return on equity or assets? Or are you thinking thinking about quality in the non-financial term. Like, oh, it's a quality business. Yeah, I think, I think, Michael, it's a little bit of both. I think there's definitely

financial characteristics you're going to look at, whether it's return on equity, return on invested capital, leverage on the balance sheet, you know, all those things you can look at and sort of make a quantitative judgment, okay, this is quality. But then you have to step back and say, what are the qualitative things, right? So consistency over time, what's the company's ability to deliver, you know, pretty outsized returns through a cycle and just maybe maintain profitability levels that are either above peers or above industry norms. Like, you're looking at things like the management team. Do they have a long-term track record of success? Are they able to execute on the ups and the downs of the cycles? And then are they

able to allocate capital in the right way? You know, whether that's acquisition, buying back their own stock, paying a dividend, or even reinvesting in the business, there's not one way that defines quality when it comes to capital allocation, but you do need to think about how a management team does that. And then sort of to Scott's point,

we're looking at those things over the long haul, just because you have an high ROI one year or maybe you did one good acquisition in the past year. That doesn't mean your quality. You really got to just look over the long term. Don, you mentioned the diversification piece before, and I totally agree with you that there have been times in this cycle, even though the big tech stocks in S&P 500 and NASDAQ 100 have sort of dominated this past cycle. There's been countertrend rallies, and you've seen, especially earlier this year, other types of stocks did much better. I'm curious how you think about diversification within your own fund in terms of weighting the positions and having enough stocks to be diversified, but also have enough concentration. to try to outperform the index? Yeah, I think across value,

I think most portfolios have roughly 80 to 100 stocks in them, some a little bit more. But that tends to be where, you know, from a diversification standpoint, we get there through the number of names, but then from a sector standpoint, people are going to look at each sector and decide to overweight and underweight specific ones

depending on both their macro views and what they're finding on a bottom-up perspective. And so, you know, that's going to vary portfolio manager to portfolio manager. So, for instance, we're very overweight industrials because we find that we're finding lots of opportunities there. They've gotten beaten down over the last year. We want to add a little bit of cyclicality to the portfolio. So, you know, that's where in more recent times we've been looking at. Scott, I'll let you talk about sort of what you're doing in your portfolio.

portfolio? Yeah. Maintaining diversity, diversification is not such a, there's a bunch of rules that we have as managers that ensure that we remain diversified. So, for example, I have position limits, number, the percent of a stock that I can have in the portfolio versus its benchmark weight, for example, is, will be regulated depending on the strategy by various amounts. Also, those sector weights will be, you know, supposed to be kept within certain ranges. And that's one of the ways that, you know, simple ways you can use to maintain the diversification. And yeah, but I will take, you know, larger positions in some sectors when there's particular opportunities and, you know, underweight sectors where I'm having trouble finding good opportunities all the time. So that's one thing

you do at the sector level and then on you know in addition to that you're looking within sector for the best stock ideas have value portfolios i have a second part to this question but i'll ask ls this first have value portfolios changed over the years in terms of composition of quality and what they look like because i'm looking at your portfolio and um there's a lot of i'm searching for other than quality there's good names in here these aren't like junk stocks And back in the day, Scott, you're, you're bald like I am and Don, you have great hair. So you guys have been around for a while. We've been around, yeah.

But back in the day, you used to be able to build portfolios of value stocks that traded probably below 10 times earnings that were just not, that were just maybe baby thrown out with the bathwater. And along came algorithms and the embarrassment premium went away because you had all of these quantitative investors. And maybe management has gotten better over. over time. But this does not look like, like, I guess, what I would think is like a traditional value junkie portfolio. There's good names in here. I know. It can be kind of a surprise for

people. And I think that, because, you know, yeah, there is that connotation of value is really just buying anything. But really, there's so many losers that you need to avoid, I think. You know, we talked about wine drinkers. But I mean, there's any number of industries where the Chinese have, you know, decided that that's what they want to expand into, whether it's steel, aluminum, you know, solar panels, you know, where right now they're really stepping up their investments in petrochemicals, where the odds are just so against you because there's a big cost advantage that they have. So, you know, yeah, I could pay, you know, less than 10 times for a steel company, but, you know, do I really want to? Where am I going to be in five years?

So I think that I have seen some analyses that, you know, suggests that certainly on the small cap side, the small cap universe has just gotten less quality over the years. You know, there's more leverage. So that could be part of it. But I think when we're looking, again, when we're looking out and looking at what is sustainable in terms of a company's earnings and cash flows

and looking for at least some growth, you weed out the lowest quality. names that maybe, you know, 30 years ago, people would have been more open to. So part two of the question is, I don't see Nvidia in this portfolio, but I do see Microsoft and Amazon, which traditionally people think of them as growth stocks, but certainly the case could be made at their value. I mean, you guys do because it's the portfolio. So what's the case?

You don't have to get specific on them per se, but what is the case for including companies like that in the portfolio? Well, that's, I know. It's kind of funny because I'm responsible for the Amazon. Amazon, surprisingly, is cheaper than Walmart. You know, we had Walmart in the portfolio for a while. But if you look at Amazon on ebidivit, it's like, you know, 11 times, which, and the forward, the forward PE I saw as below Walmart, which is kind of wild to think about. And the forward PE, which rarely happens.

And if you look over, if you look, ever since Amazon went public, I mean, the PE has gotten down to as low as about 30 times earnings. You know, so it's never been a quote unquote value stock on PE. And yet, right, it's been a great investment. And right now it's about 33 times or something like that. So what happens with Amazon is that they invest so much of their free cash flow into new businesses all the time. And, you know, that investment depresses earning. So, yeah, you're making a bet that their current investments are going to pay off more times than not they have. I mean, look at how they've grown AWS and gotten into, you know, made a success.

of so many things. Now, you know, they're replacing UPS and FedEx with delivery. And, you know, the business keeps evolving and getting stronger. So we would say that, you know, based on what we're seeing for the future, but also looking at valuation metrics from the past, it's actually a value period right now. Are there any sectors that stick out to you that are like, man, we're just finding so many cheap stocks in this sector? Or is it just almost, is it mostly just ex-tech stuff? Like, where are you finding cheap stocks these days? Well, well, we could talk about HMOs, if you want. You know, we, you know, there's just a swirling controversy right now.

And part of it is just the Trump administration has said a lot of things, talk about getting rid of health care middlemen. That has, for example, that have cast a cloud over the whole sector. So right now I'm seeing a lot of controversy in that sector and a lot of inexpensive companies, even if you're not ready to wait into United Healthcare, which is particularly in focus right now. I mean, I think Cigna is very cheap. They don't do any Medicare advantage

and trading at 11 times earnings that we think, you know, still has very good growth opportunity going forward. So that would be one area. I don't know, Don, if you want to chime in. Yeah, I mean, I think there's also opportunities in financials. I think right after the election,

you saw just, you know, a lot of euphoria over, you know, deregulation, the fact that there's going to be more M&A, more IPOs, just general capital markets activity, really starting to pick up. And then obviously this year, that's sort of been put on hold for a bit. You're starting to see some M&A come together. You're starting to see some IPOs start to file again. And so I think when we look at financials and banks in particular, we're going to see some M&A come together. We're starting to see some IPOs start to file again. And so I think when we look at financials, we're credit still looks pretty good. You know, there's opportunities to pick and shoes amongst those banks as well. So Bank of America and Wells Fargo are two of the biggest holdings. And it's been a long time since Wells Fargo, the stock was performing well. So I looked at these a couple months ago and I was a holy moly, even Citigroup, no offense. But a lot of these stocks are performing really, really well. Do you think this is expectation of capital market formation? Is it a healthy consumer? I know not all these banks do the exact same thing, but what do you think is contributing to the strength in these names? I think a lot of the

financials have benefited in anticipation of deregulation by the Trump administration. We haven't really, you know, we've heard a lot of rumors about it. I think. When you say deregulation, is that inside the banking system or broader or just leading to more M&A? Like, what does deregulation mean for the banks? Well, for example, one thing would be I don't know if you've heard of the Basel 3 endgame, but there were, you know, under the Biden administration, there was... Is that the new Mission Impossible movie? Well, under Biden, it was kind of impossible to avoid. But it turns out under Trump, you know, it's likely that capital requirements will not be raised, at least as high as was contemplated initially, under the Biden administration. So that's one way. And if banks are not required to retain as much capital, then they can. and use the funds to buy back stock instead.

So that would be one way that it matters. I think another thing that folks are looking for, and we're already seeing a pickup in mergers and acquisitions, but we have over 4,000 banks in this country. There's a lot of reasons, whether it's technology spending or just meeting the costs of higher regulation, where we should be pushing for economies of scale and mergers, but it was really impossible under a prior administration.

So if there's some relaxation of MNA rules for banking, then I think you're going to see a lot of a lot of deals announced. And that's typically good for sentiment and should ultimately help earnings for the whole sector if we get some economies of scale. A lot of value investors over the years have said, you know, I ignore everything that's macro. I ignore politics. I just focused on the financials. And you've mentioned policy policies a couple times now. Yeah. How do you build that into your models? Because obviously you have to pay attention to it because it could impact specific companies and specific sectors more than others. But it's also ever changing. And sometimes it seems like this is going to be a death knell for this sector, but then wait, things change in a week. So like how do you try to model that out when things are changing seemingly so quickly? Yeah, that's a great question. You know, because when we're looking at earnings for companies, yeah, like I said, we're looking out long term. And so you tend to discount. near-term policy changes. On the other hand, some things like capital requirements for banks are so

important, you know, it could really move the long-term earnings for a bank up or down. So you have to pay attention. What I typically do, you know, is when it comes to, and I do spend a lot of time thinking about kind of top-down issues, you know, when it comes to a controversy, you know, a political controversy or something else, just a couple years ago, we had a bank crisis. you know, with Silicon Valley and the value of commercial real estate, threatening balance sheets of many banks. Yeah, that was like a four-day bank crisis. That was terrible.

Well, it did. I mean, it seemed bad at the time, but then it's one of those things that just sort of washed over. It turned out, it was a fantastic opportunity, which is, you know, what we concluded. You know, that typically what you have to do is just say, okay, you know, is everyone else discounting this already? And, you know, if you see evidence, you know, if it's like six months after the crisis, you know, typically by then people have absorbed whatever the controversy is and sort of factored it into valuations. And if, you know, so I'd say that it's really, you know, just getting a sense. And I think when you do as much modeling as we do of company earnings, you get a pretty good feel for when some something really dramatic has been discounted into a stock or not. And that's really kind of the art of it.

Having gone through a bunch of crises definitely helps in this business. Scott, this is maybe a hard question to answer. But are you more likely to sell a stock on the way up because you feel like it's fully valued or the risk reward becomes asymmetric at that point? Or are you more likely to sell a stock as it's going down because the thesis is wrong. It's no longer quality. It falls out of favor, whatever. Yeah, I guess I should say that it's the first.

I mean, you know, we only buy stocks that go up. But I think you definitely, yeah, I definitely tend to be trimming things. And, you know, we're ranking all the stocks using a ranking system that we have here every day. And so, yeah, something gets more expensive. And unless I can find a good reason to raise my long-term estimates, I'll be tending to sell it. But, yeah, then you also have situations where, yeah, typically if a company, you know, the thesis isn't working out or, you know, management does something you didn't expect that you don't like, be like, okay, that's not what I thought, you know, time to move on. So I'd say that those kinds of negative surprises don't tend to happen as often. I mean, it can be very painful when they do, but, yeah, it tends to be more you're just trimming things that have done okay.

Buffett's old maxim is our favorite holding period is forever. What ends up being your guy's favorite holding period? Obviously, you want to just buy and hold something and hope that it keeps going up, and that's great. But what tends to be your holding period for the stocks in your portfolio? Should I start? Yeah, I manage a couple portfolios here. I have one large-cap value, which has a pretty high turnover rate. usually like, I don't know, 120% or so.

So pretty short period of time. It's because I'm looking at rankings every day. And as stock prices bounce around, you're trimming and adding pretty often. Then another strategy, I have much more quality-oriented portfolio where your hope is to just hang on to the winners until they become truly unjustified. viably expensive. And in that portfolio, the turnover is closer to 50%. Yeah, I think, you know, and especially as you go down cap on some of the small and mid-cap portfolios, where turnover can be 20% or less. You know, so you're really looking to own this thing for three to five years minimum.

And if you own it for eight to 10 years, that's actually not really a surprise either. But, you know, right around that five-year tends to be kind of the most common sort of time frame that will hold a stock. So guys, for people that want to learn more about the JP Morgan Active Value Strategy, where do we send them to find more resources? You can certainly, you know, go to our JP Morgan asset management website, find some materials there. We've got plenty on there in terms of fact sheets, historical performance, and just

kind of slide decks on sort of portfolio construction a little bit more about the team process and philosophy and then you know certainly helps to be on shows like yours so thank you again for having us I appreciate it Don Scott, thank you

okay thank you very much thank you all right thanks again to Scott and Don remember check out jp.morgon.com to learn more about all their different value strategies and the JPMorgan active value ETF, email us, Animal Spirits at the Compoundews.com for more.