High and going higher, that's often the rationale for buyers of household staples, big tech names, or momentum plays.
Still, with tens of thousands of listed companies, small caps can break out and surprise, and that's why some investors try to beat the market by finding the next diamond in the rough.
Well, one sign a stock might be ready to move is insider buying.
Executives start buying shares.
Joining me this morning to weigh in is Jay Hill, managing director at Tweedy Brown.
Good morning, Jay.
Thank you so much for joining me.
So I do want to get your thoughts on American exceptionalism as we count down the months until year end.
So based on your investment process, what are you looking for to uncover quantitatively cheap stocks and give us your take on what we're seeing?
Our our approach is divide companies at 2/3 or less of our best estimate of private market value.
Um, so we're a value-based money manager with the ability to invest globally in cheap stocks, and I would say in the most recent years it has become increasingly difficult to find attractive US stocks.
Um, this idea of American exceptionalism to me is more than fully reflected in valuations.
Um, simply put, the United States is priced for perfection versus low expectations in international markets, particularly in Europe and the UK.
I guess what what really stands out to me is that there are several signs of of what I would call excessive optimism or speculation or overconfidence in the US market.
You've got the US stock market reaching record highs on basically every day.
You've got US corporate credit spreads that are 25 year lows.
You've got margin debt that has exceeded $1 trillion for the first time in history.
There's record options activity, which, which really means there's lots of speculation.
And and recently in the last couple of months we've been reading about the return of meme stocks and Sacks.
And so we're having a tougher time finding investment ideas that meet our valuation approach outside of the United States on a relative basis, international stocks are materially less expensive, and that gap is near an all-time high.
So today, the S&P 500 trades at roughly 23 times earnings versus a PE ratio in the low to mid-teens in Europe and the UK.
Um, and historically, JP Morgan put out a uh a research report, um, recently that talked about When investors historically have paid 23 times earnings for the S&P 500.
Over the subsequent 10 years they've earned a return in every instance of between 2% and 2% compounded annually for the next 10 years.
So it wouldn't strike me at all that if in 2035 the US stock market.
A returns effectively 0% on a compounded annual basis.
Today, if you look at European stocks, they're rating, they're trading at roughly 70% of the PE multiple of the S&P 500 versus the long term average of 85%.
So that gap is a mile wide, and we think that's likely to close over time.
Um, primarily through multiple contraction in US stocks and, and perhaps multiple expansion in international stocks.
Um, the way I would put it is that So Jay, I do want to jump in here since we are limited for time today.
So uh Jay, sorry to interrupt you, but we are limited for time here.
So I do want to ask you very quickly, why is insider buying a key valuation metric that you're watching out for?
Yeah, so, so, so what Tweedy Brown has always been interested in insider buying.
We just think, look, it's a common sense positive signal when insiders reach into their own wallet and buy shares in the open market.
We just think it's undeniable that company insiders have an information advantage regarding their own business.
And so we've always been aware of historical academic studies that have revealed that there's market outperformance by copying.
C-suite insider buying stocks.
So Tweedy conducted our own proprietary study.
This was a global study that looked over 26 years, and we uncovered what we think is a really unique insight that combining insider buying with quantitative cheapness outperforms both the average insider buying stock and the average low valuation stock in isolation.
Um, and the performance of our proprietary study was so compelling that we decided to develop what we're calling the Tweedy Brown insider plus Val ETF.
It's traded under the New York Stock Exchange under the Ticker Copy, COPY, and that ticker chosen was chosen because we're we're basically copying insiders.
Um, I think the most important point for people to understand is if it's a true free will insider by, meaning the insider by wasn't required by a minimum ownership threshold, um, that there's only one reason that insiders buy their own stock.
They think it's going up. and insiders have a unique ability to influence outcomes or to create their own catalyst.
They can implement a new cost cutting plan.
They can increase dividends.
They can increase share repurchases.
They can spin off or divest an undervalued segment, or they can initiate the sale of their entire company.
So we, we think.
Just this common sense approach of combining insider buying with statistical cheapness is a recipe for outperformance.
You're today.
Well, I'm sorry to interrupt you, but we will have to wrap it there for today.
So thank you so much for your time and thank you so much for your perspective.
Appreciate it, Remy.
Thank you for having me.
