4 Cheap Value Stocks: A Portfolio Manager With a 10-Year Outperformance Lead

The secret to Rosenthal’s success lies in his ability to find attractive investment opportunities in areas of the market that investors underestimate.

“We want to buy companies whose purchasing power and ultimately value are undervalued by the market and are not adequately reflected in today’s market price,” Rosenthal told Business Insider.

Despite what you might learn in an economics 101 course, Rosenthal does not believe that markets operate completely efficiently.

“Market participants make mistakes for a variety of behavioral reasons,” he said.

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This allows Rosenthal to take advantage of market mispricing and acquire high-quality investments at attractive prices.

Market disconnects

Speaking of market failures, Rosenthal believes the current market structure is unsustainable and needs to be corrected. He says value spreads — or the difference in valuation between one particular group of securities and another — are at extreme levels reminiscent of the March 2020 market crash or the dot-com bubble. Namely, a select few tech names are trading at impossibly high valuations, while the rest of the market is not.

While Wall Street is buzzing about a broader rally as the remaining 493 stocks in the S&P 500 match the valuations of the Magnificent Seven, Rosenthal isn’t sure how much higher valuations can get.

“We do not believe that the equal-weighted S&P index or any index other than the Mag Seven is extremely undervalued,” Rosenthal said.

He also thinks it’s likely that Mag Seven valuations will fall: “Historically, when you see excesses in an asset class or a subsector of the market, part of the way that those excesses get alleviated and those gaps get narrowed is through equity prices falling.”

4 missed opportunities

While the market valuation gap may be a concern, it also creates opportunities to buy stocks in less crowded areas of the market and take profits, Rosenthal said.

Below, he shares 4 investment opportunities that he believes are trading below their true potential, making them great buys at their current prices. All are components of the Hotchkis & Wiley Global Value Fund (HWGAX).

Provider of human capital management solutions Working day (HOLIDAY) is one of Rosenthal’s top choices.

While technology is one of the hottest areas of the market, the past year hasn’t been kind to enterprise software, with the subsector lagging behind semiconductors and hardware. Still, Rosenthal believes Workday has a strong business model and delivers a product with high customer retention, which results in solid recurring revenue. He points to Workday’s growing market share as it acquires customers who are moving their operations to the cloud, as well as the company’s solid balance sheet, as indicators of an investment with long-term potential.

The healthcare industry also has some undervalued companies. Rosenthal has CVS (CVS) in his portfolio.

He believes CVS stock has been unfairly punished by investor pessimism about the retail pharmacy industry as a whole. But CVS has been shifting its offering mix toward its health insurance business, which Rosenthal believes investors haven’t factored into the company’s valuation.

Another name in the healthcare industry that Rosenthal likes is Medtronic (MDT), a medical technology company that sells products such as cardiac devices, insulin pumps and surgical instruments.

Rosenthal values ​​the company for its history of reinvesting cash flow into core operations and believes the company can consistently deliver solid earnings growth and margin expansion going forward.

There are also opportunities in international markets. Japanese Sanso (NPXYY) is a Japanese oil and gas company that Rosenthal believes is undervalued.

Nippon Sanso is not only benefiting from consolidation in local Japanese energy markets, but has also managed to integrate new members into its management team who have led the company to successful acquisitions. Combined with the structural tailwind of corporate reforms in Japan, Rosenthal believes the Japanese company’s stock is well-positioned for growth in the coming years.