Talk Your Book: Valuation Still Matters

Episode Summary

Executive Summary: The episode features a discussion with J.P. Morgan value managers Don San Jose and Scott Blasdell on why value investing still matters despite years of growth dominance. They argue that valuation, quality, and long-term earnings modeling remain central to avoiding value traps, and that today’s value portfolios look much higher quality than old-school “cigar butt” value. They also highlight opportunities in financials, healthcare, industrials, and select mega-cap stocks that now screen as value.

Main Topics: Why valuation still matters (Priority: 5/5): The guests argue that despite a long period where flows and growth stocks dominated, valuations remain important because current value benchmarks trade at meaningful discounts to growth and can benefit when rates or earnings breadth change. Active value investing vs. passive screening (Priority: 5/5): They emphasize that J.P. Morgan’s strategy is not simply buying cheap stocks; it combines valuation with deep research, long-term forecasting, and a quality filter to avoid value traps. How modern value portfolios differ from old value investing (Priority: 4/5): The managers explain that value portfolios today are typically more blue-chip and higher quality than decades ago, reflecting structural changes in markets and the elimination of many low-quality cheap stocks. Sector opportunities: financials, healthcare, industrials (Priority: 4/5): They point to current opportunities in banks, insurers, HMOs, and industrials, citing regulatory shifts, M&A hopes, and controversy-driven discounts as sources of mispricing. Quality metrics and long-term modeling (Priority: 5/5): Quality is defined by both quantitative metrics and qualitative factors such as management execution, capital allocation, profitability consistency, and sustainability of earnings years into the future. Holding periods, turnover, and portfolio construction (Priority: 3/5): They discuss diversification rules, position limits, and turnover targets, noting that some portfolios are more trading-oriented while others are built for multi-year ownership. Amazon and other growth names in value portfolios (Priority: 3/5): They explain that some traditionally labeled growth stocks can belong in value strategies when their forward earnings, cash flow investment, and relative valuation justify inclusion.

Key Arguments: Valuations still matter because the Russell large-cap value benchmark trades at about a 30% discount to growth, versus a more typical 20% discount. Active value investing works best when valuation is paired with quality research, because cheap stocks can be value traps. Modeling earnings 6-7 years out helps identify secular losers and distinguish temporary dislocations from structural decline. Higher rates can favor value stocks because they make near-term cash flows more valuable relative to distant cash flows. Modern value portfolios are often full of high-quality blue-chip companies rather than distressed or low-quality names. Diversification remains crucial; during events like the DeepSeek selloff or inflation-related growth rotation, value names provided relative resilience. Financials may benefit from deregulation, lower capital requirements, and increased M&A activity, while some healthcare names look cheap due to controversy rather than deteriorating fundamentals. Some growth-oriented companies, such as Amazon, can reasonably fit in value portfolios when valuation is assessed through forward earnings and cash flow reinvestment. Portfolio managers trim positions primarily as they become expensive and expected returns diminish, but they also sell when the investment thesis breaks. Turnover varies by strategy, with some portfolios held for years and others rebalanced more actively around daily rankings and valuation changes.

Data Points: Russell large-cap value discount to growth: 30% - Current valuation gap cited by Don San Jose versus a typical 20% discount Typical value discount to growth: 20% - Historical benchmark comparison mentioned in the discussion Russell large-cap value P/E: 16-17x - Approximate valuation range for the value benchmark Russell large-cap growth P/E: 25x - Approximate valuation range for the growth benchmark Analyst team size: 50+ analysts - J.P. Morgan U.S. equity platform research resources Analysts dedicated to value: About one-third - Portion of the analyst team focused on value stocks Modeling horizon: 6-7 years - How far out the team models company earnings to avoid value traps Amazon valuation: About 11x forward P/E - Example used to show Amazon can screen as cheaper than Walmart Amazon historic low P/E: About 30x earnings - Lowest multiple cited since Amazon’s IPO Amazon current P/E: About 33x - Approximate current valuation mentioned by Scott Cigna valuation: 11x earnings - Example of a cheap healthcare name with growth potential Value portfolio stocks: Roughly 80-100 names - Typical number of holdings across value portfolios Large-cap value turnover: About 100-120% - Scott’s large-cap value portfolio turnover rate Quality-oriented portfolio turnover: About 50% - Lower-turnover, more quality-focused strategy Small/mid-cap turnover: 20% or less - More patient strategies in smaller-cap value portfolios Typical holding period: 3-5 years minimum - Common ownership horizon for some portfolios Possible extended holding period: 8-10 years - Not unusual for the most successful holdings U.S. bank count: Over 4,000 banks - Used to justify consolidation and scale benefits

Pivotal Quotes: "Valuation alone doesn't tend to be a great indicator of a great stock always." — Don San Jose: Explaining why J.P. Morgan combines valuation with a quality focus to avoid value traps "What thinking that far out does do for you is that it helps you avoid some of the secular losers... which can be the value traps." — Scott Blasdell: Describing why the team models earnings 6-7 years into the future "You need to do that. It's really not just finding the best opportunities, but also avoiding those value traps." — Don San Jose: On the firm’s active value philosophy and quality screening

Implications: For listeners, the key takeaway is that value investing is not obsolete; it has evolved into a quality-driven, research-heavy discipline. For markets, changing rates, regulation, and sector dispersion may keep creating opportunities outside mega-cap growth.