Nygren on a “Once-in-a-Generation” Opportunity

Top value fund manager Bill Nygren says that investors should stop paying attention to every zig and zag the stock market makes, and instead take advantage of a “once-in-a-generation opportunity” in equities.

“We believe investors currently have a once-in-a-generation opportunity to use asset allocation to add to their investment returns,” Nygren tells Morningstar. “Stocks appear to be significantly undervalued relative to bonds.” But, he adds, many investors continue to shun stocks and buy bonds, mistakenly believing that bonds will return as much in the coming decade as they have in the past decade — something he says is a mathematical impossibility given the current low bond yields.

Nygren also says investors should stop hyperfocusing on every move the market makes. “The financial media have business reasons to make investors believe they need to follow every zig and zag of the market and of their portfolio,” he says. “But one doesn’t need to, and for some investors, the more they look, the more nervous they get. It is not only unnecessary, it is counterproductive.”

Nygren says that companies have built up larger stockpiles of cash than are necessary, because the memory of the 2008 financial crisis and liquidity crunch still lingers. “Companies today are underearning because of their excess liquidity,” he says. “We estimate that the S&P 500 P/E could be a point lower (11 instead of 12) if companies simply returned their balance sheets to historically normal debt levels. … One of the reasons we are more optimistic is that we believe that outlook ignores the EPS growth we will see as corporate excess liquidity gets invested.”

And just because capital spending is expected to produce subpar returns, that doesn’t mean companies won’t invest that excess liquidity, he says. They can and will do so through share buybacks, dividend increases, or acquisitions.

Nygren says large-cap stocks are now offering better value than smaller stocks. Given their advantages in terms of liquidity, access to global markets, and stability, he says large-caps should sell at a premium of about 15% to small caps; currently, they sell at about a 15% discount.