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Value Investing, Evolved

CIO Austin Hawley discusses the dramatic underperformance of value stocks relative to growth stocks over the past decade—and why a strategy focused on intrinsic value is still relevant. A shift toward a service- and knowledge-based economy focused on intangible assets, and the emergence of internet-based businesses means traditional definitions of value have become less useful. However, price remains an important factor in determining future returns.

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Small Cap Stocks: Selective Opportunity

Since 2014, mega-cap stocks have substantially outperformed small-cap stocks. However, today we sit at the widest valuation gap between small caps and large caps in nearly two decades. This doesn’t seem to be a case of simple mean reversion. Rather, there have been several fundamental factors contributing to the performance gulf between large caps and small caps over the past few years—some of which have been more structural in nature, and many of which still exist today.

Commentary

Revisiting Excess Cash in the Technology Sector

In August 2013, we provided an analysis of excess cash on the balance sheets of four technology holdings: Apple, Inc. (AAPL), Juniper Networks, Inc. (JNPR), Microsoft Corp. (MSFT), and Cisco Systems, Inc. (CSCO).

Commentary

Global Energy: Positioning for the Long Term

A long-term orientation allows us to move from today’s headlines to tomorrow’s prospects. While current energy headlines are focused on OPEC’s ability to accelerate the rebalancing process, we are focused on two longer-term developments that are influencing our positioning in the energy sector.

Commentary

What to Buy in an Overvalued Sector?

The most important and the most difficult question in investment management is, “What to buy?” A stock well bought, like any other merchandise, is half sold.
Commentary

Long and Short Opportunities in Branded Apparel and Footwear

The past few years have witnessed a substantial shift in the way products are sold and purchased. Retail companies used to be the primary point of distribution for their apparel and footwear vendors. Today, most brands have dramatically increased their distribution channels, bringing product to market through owned retail stores, websites and—as indicated by the roughly 30% share of North American retail sales growth recently claimed by Amazon—third-party websites.
Commentary

Health Care Pricing Dynamics

The health care industry is in the business of saving people’s lives. That is the implicit expectation in commercial and social contracts the industry has with other parties. For the benefit of the services it provides, the industry is afforded a payment that should reward it for the risks and the costs entailed in delivering that benefit. That payment is ultimately a function of demand and supply, which should meet in the long run at the marginal cost of production.
Commentary

Capital Flows into Insurance: Are We at a Tipping Point?

A sudden rush of small, related moves within an industry could signal something bigger: an imminent tipping point, perhaps with large impacts. Recent capital flows into the property and casualty (P&C) insurance industry appear to show signs of one such shift.
Commentary

Global Energy: Adapting to New Realities

The recent slide in oil prices is symptomatic of large fundamental shifts taking place across the energy sector. The current volatility is nothing new to oil markets as their self-correcting nature has frequently resulted in a sequence of deep boom and bust cycles. While we can anticipate and prepare for these cycles, much like with earthquakes, the timing and consequences can still be surprising. In times like these, maintaining a long-term perspective is essential to place current events in the proper context.
Commentary

Quantifying Risk

We view risk as the permanent loss of capital, and we manage risk to minimize the chances of a permanent loss of capital. In our view, risk generally falls into three broad categories – valuation risk (price that you pay), balance sheet risk (financial leverage) and business risk. While important, we believe that valuation and balance sheet risk can be mitigated through a disciplined investment process. Business risk, on the other hand, is more complex and covers many facets including competition, regulation, management execution, and capital allocation.
Commentary

Waiting for the Right Pitch

Patience is a virtue, both in life and in investing. As a long-term investor in a short-term focused world (and a father of three young children), I know that remaining patient is not always easy. At Diamond Hill, we keep the advice of both Warren Buffett and legendary hitter Ted Williams in mind and try to wait for the “right pitch.”
Commentary

Cabela’s: Little Room for Error

Through our research process, we attempt to identify actionable investment ideas, but we often conclude that a company does not present an immediate long or short investment opportunity. A decision not to invest in a company is valued just as much as a decision to invest in one, but we are always expected to stay current on our area of coverage in case conditions change.
Commentary

Hub Group: A Long-Term Investment Thesis

In September 2013, we outlined our favorable view of the domestic intermodal transportation industry driven by cost advantages, continued market share growth opportunities, and improving pricing power. At that time, we viewed Hub Group, Inc. (HUB) and Pacer International, Inc. as the most attractive investment opportunities within the industry. During the last seventeen months there have been material developments in each of these areas, some positive and some negative.
Commentary

IBM: When a Company Veers Off the Roadmap

In 2010, International Business Machines? (IBM) then-CEO Sam Palmisano unveiled the company?s 2015 Roadmap in which management detailed its plans to grow (non-GAAP) operating earnings to ?at least $20? per share by 2015. This plan was the successor to a 2010 Roadmap, originally unveiled in 2007, in which management outlined its plan to deliver ?at least $10? in earnings per share by 2010. Since the company ultimately exceeded its 2010 Roadmap expectations and delivered $11.52 in 2010 earnings per share, the 2015 Roadmap was generally met with enthusiasm by
Commentary

When is a Turnaround Not Really a Turnaround?

Like all good students, we try to learn from the experience of experts, and amongst value investors there is no more esteemed expert than Warren Buffett. We have followed Buffett closely, sending dozens of employees to Berkshire Hathaway annual meetings and scouring past letters to shareholders in search of value investing knowledge. Thus, we pay heed when Buffett warns that the temptation to predict a turnaround is often misguided.