Animal Spirits Podcast Summary: "Talk Your Book: Valuation Still Matters"

Release Date: June 2, 2025

In the June 2, 2025 episode of the Animal Spirits Podcast, hosted by Michael Batnik and Ben Carlson, the focus centers on the enduring significance of stock valuation in investment strategies. The episode features insights from Don San Jose and Scott Blasdell, Managing Directors and Portfolio Managers at J.P. Morgan's US Value team. Together, they delve into the evolution of value investing, the integration of quality metrics, diversification strategies, and the impact of macroeconomic factors on portfolio management.

Introduction: The Evolution of Value Investing

The conversation kicks off with a reflection on historical value investing strategies. Don San Jose reminisces about early value investing approaches where companies traded below their cash positions, allowing investors to profit by liquidating assets. However, he notes that such opportunities have largely vanished since the 1960s and 70s.

Don San Jose [00:45]: "So I think those disappeared probably like Buffalo was doing that. They probably disappeared in the 60s or 70s. Certainly by that point they were gone. So that style of value investing, long way behind us, that stuff doesn't work anymore."

Michael Batnik adds that modern value portfolios differ significantly from those of previous decades, emphasizing a shift towards higher-quality, blue-chip stocks.

Valuation Metrics: Why They Still Matter

Michael raises a critical question: Despite the apparent dominance of growth stocks over the past 15 years, do valuations remain a crucial factor in investment decisions? He challenges the notion that market flows have overshadowed valuation metrics.

Michael Batnik [03:27]: "For the past 5, 10, 15 years that valuations just haven't mattered very much at all. And it seems like flows have sort of trumped valuations in a lot of areas of the market."

Scott Blasdell responds by affirming the continued relevance of valuation, highlighting that the Russell Large Cap Value benchmark is trading at a 30% discount to growth, compared to the typical 20% discount. He attributes recent stability in value investing to improved earnings breadth beyond the dominant "Mag 7" tech stocks.

Scott Blasdell [04:09]: "I think valuations still do matter when you look at sort of where stocks are trading."

Active Value Strategy: Beyond Quantitative Metrics

The discussion transitions to the distinctive aspects of J.P. Morgan's active value strategy. Scott emphasizes the importance of combining valuation with quality to avoid "value traps"—stocks that appear cheap but may underperform due to underlying weaknesses.

Scott Blasdell [07:08]: "It's active management. And so I think what we're really focused on is more of the quality names within the value benchmark."

Michael probes deeper into how the team assesses what is priced into a stock, especially when lower valuations may reflect market skepticism about a company's prospects.

Michael Batnik [08:38]: "How do you consider something like that in terms of the stocks we own are much cheaper, but the market is missing something on the expectation?"

Ben Carlson elaborates on J.P. Morgan's approach, which involves modeling company earnings six to seven years into the future to identify sustainable growth and avoid secular headwinds.

Ben Carlson [09:47]: "What distinguishing J.P. Morgan? I think what you really need to do to make value investing work is look far out into the future."

Defining Quality in Value Investing

When asked about the criteria for "quality," the panel discusses both quantitative and qualitative factors. Scott outlines financial metrics such as return on equity, return on invested capital, and leverage, alongside qualitative assessments of management effectiveness and capital allocation strategies.

Scott Blasdell [12:43]: "I think there's definitely financial characteristics you're going to look at... But then you have to say... what are the qualitative things?"

This dual approach ensures that the portfolios are not just composed of low-valuation stocks but also of companies with robust fundamentals and sustainable business models.

Diversification and Portfolio Construction

Don San Jose highlights the transformation in value portfolios, noting that modern portfolios consist of high-quality names rather than the "junk" stocks typical of earlier value investing days.

Don San Jose [17:03]: "There are good names in here. These aren't like junk stocks."

The team discusses diversification strategies, with Scott explaining that their portfolios typically hold 80 to 100 stocks, diversified across sectors based on macroeconomic views and bottom-up analyses. Ben emphasizes adherence to diversification rules, such as position and sector weight limits, while allowing flexibility to overweight or underweight sectors based on opportunities.

Ben Carlson [16:38]: "There are a bunch of rules that we have as managers that ensure that we remain diversified."

Impact of Macroeconomic Factors and Regulatory Changes

The conversation shifts to the influence of macroeconomic policies and regulatory changes on value investing. Ben Carlson points out that factors like interest rates and banking regulations significantly impact valuations and earnings projections.

Ben Carlson [10:46]: "Higher interest rates will, everything else equal, make near-term cash flows more valuable. So that will tend to favor value stocks."

Scott discusses the potential for deregulation under the Trump administration to spur mergers and acquisitions in the banking sector, enhancing earnings through economies of scale.

Scott Blasdell [23:09]: "If there's some relaxation of M and A rules for banking, then I think you're going to see a lot of deals announced."

Competing with Algorithms and the Role of Qualitative Analysis

Michael raises concerns about the rise of algorithm-driven investing and simple rules-based strategies, questioning how J.P. Morgan's active approach maintains an edge.

Michael Batnik [11:30]: "How do you think about competing against the algorithms... how do you think about the qualitative aspect of value investing?"

Ben Carlson responds by reiterating the advantage of long-term earnings modeling and the ability to discern qualitative factors that algorithms might overlook, such as management quality and strategic direction.

Ben Carlson [11:56]: "Looking far out into the future gives us an advantage... just looking at published numbers."

Portfolio Management and Holding Periods

The hosts inquire about the team's approach to portfolio turnover and holding periods. Ben explains that turnover rates vary across different strategies but generally involve regular rebalancing based on daily rankings and long-term value assessments.

Ben Carlson [28:26]: "I have one large cap value which has a pretty high turnover rate... another strategy I have much more quality oriented portfolio where your hope is to just hang on to the winners..."

Scott adds that holding periods typically range from three to five years, with some holdings extending to eight to ten years based on performance and valuation assessments.

Scott Blasdell [29:12]: "You're really looking to own this thing for three to five years minimum."

Conclusion: Emphasizing the Importance of Valuation and Quality

The episode concludes with the panelists directing listeners to J.P. Morgan's resources for more information on their active value strategies. The overarching message reinforces the belief that meticulous valuation, combined with a focus on quality, remains pivotal in constructing resilient and high-performing investment portfolios.

Scott Blasdell [29:39]: "You can certainly go to our JPMorgan Asset Management website, find some materials there."

Key Takeaways

• Valuation Still Critical: Despite market trends favoring growth stocks, valuation metrics remain essential for identifying investment opportunities and avoiding overvalued positions.

• Quality Integration: Combining valuation with quality assessments helps in selecting sustainable and high-performing stocks, mitigating the risk of value traps.

• Active Management Advantage: J.P. Morgan's active approach, involving in-depth research and long-term earnings modeling, provides an edge over purely quantitative or algorithm-driven strategies.

• Diversification and Flexibility: Maintaining a diversified portfolio across sectors and market caps while allowing strategic overweights ensures resilience and capitalizes on emerging opportunities.

• Macroeconomic Sensitivity: Understanding and incorporating the impact of interest rates, regulatory changes, and economic policies are vital for accurate valuation and investment decisions.

• Strategic Holding Periods: Balancing turnover with long-term holdings enables the capture of value while adapting to changing market conditions.

This episode underscores the nuanced and disciplined approach required to navigate modern markets, reaffirming that thoughtful valuation and quality-focused investing continue to be foundational principles for successful portfolio management.