Cardinal Health: A Dividend Aristocrat the Risk Is Already Priced In-Part 2 of 7
As a value investor, I am totally cognizant of the reality that attractively valued bargains are hard to find in a strong bull market. Moreover, as an experienced value investor I clearly understand that low valuations in a raging bull market are usually associated with issues and challenges sometimes real, sometimes imaginary. The key to success is to identify when current problems are temporary, thereby creating long-term opportunity.
With that said, there are a couple of other aspects of value investing that need to be recognized and understood. As a committed value investor, I will never invest in a stock unless I consider it attractively valued. With extremely high quality companies this can simply mean that valuation needs to be sound or reasonable. With less-than-stellar companies, valuations need to be extremely low to be of interest. Nevertheless, I will never knowingly overpay for even the best of businesses. On the other hand, just because a company is fairly valued doesn’t automatically make it investment worthy.
My point being that although attractive valuation is a critically important investment consideration, it is not the only consideration. From this perspective, valuation is primarily a risk assessment metric more than it is a return assessment. Furthermore, I believe that a comprehensive and thorough research and due diligence effort should be conducted before ever investing in any common stock. However, that requires time and effort on the part of the investor.
Consequently, I will not waste my time or take this important step unless I believe that valuation is attractive enough before I start. To me, as a committed value investor, there is little that is more frustrating than getting all excited about a possible stock investment only to determine that its current valuation is excessive. Unfortunately, it is hard to find attractively valued best-of-breed stock investments when markets are high like they are today. Unless, of course, the company is faced with issues that Mr. Market is concerned about.
On the other hand, there is nothing a value investor likes better than finding a great business that the market is punishing unjustly. Finding a great business that is undervalued is value investing nirvana. In his 1994 annual report Warren Buffett stated this succinctly as follows: “Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
To summarize this introduction, finding a great business on sale is a fundamental objective of value investing. However, investing in stocks that meet your specific investment objective is also a sound fundamental practice. In other words, a great stock can be discovered at an attractive valuation and still not be appropriate for your portfolio. For example, you might ignore or reject a non-dividend paying growth stock at attractive value because your investment objective is income. This represents another situation where just because a stock is available at an attractive valuation doesn’t necessarily imply that it’s a good fit for your portfolio.