Dr Allan Gray – our founder – had a number of hard-won investment tenets that he regularly shared with his colleagues. These ‘Allanisms’ are woven through our investment philosophy and inform much of the way we continue to think and invest today. As we look across markets today, one of these Allanisms resonates strongly. Allan would often warn about buying a stock on the first downgrade in earnings expectations but loved buying the first upgrade – the first green shoot. His view was that when a company’s fundamentals turn, the market can be slow to appreciate the magnitude of the shift.

In the article below, our sister company, Orbis, looks at how its Funds today own multiple companies that are sprouting green shoots, yet whose valuations continue to get cheaper. Why would that have excited Allan and why should it excite your clients today? Because when it comes to returns, it suggests to us there is potentially more performance left in the tank.


How much juice is left to squeeze?

After three blissful years of 15%+ returns, global stockmarkets are down by 13% so far this year. With a decline of 8%, April was the worst month for stocks since the dark days of 2020.

Big price moves can trigger knee-jerk reactions, from panic selling to contrary buying. In both stable and volatile markets, we remain focused on valuations and fundamentals. Faced with big price swings, we ask a question before we act. Why have prices moved?

As we’ve written before, there are just three sources of equity returns: dividends, changes in valuations, and fundamental growth. By splitting out each one individually, we can see what is driving markets. (Because markets are forward-looking, investors tend to react to changes in expected earnings.)

Over the past 12 months, earnings expectations have risen for the market as a whole, suggesting that investors have a more positive view of corporate profits. Yet they aren’t willing to pay as much for those earnings, so valuations have fallen. The decline in valuations this year partly reversed the pattern of 2020, when earnings collapsed but valuations became breathtakingly expensive, leaving markets up. In the case of some unprofitable tech darlings, we think valuations have gone from outrageously expensive to merely silly. In other cases, companies that were fairly valued now look compelling.

We can do the same analysis for individual companies, and the charts on the right show holdings in our multi-region Funds. In each chart, the dark markers show how earnings estimates have shifted over the past year. If the blue dot is higher on the right side of the chart, it means investors now expect higher earnings than they did a year ago. The light lines show how the share prices have moved.

Earnings expectations have increased for each of these stocks—yet share prices haven’t kept up, meaning the companies are now cheaper on a price-earnings basis than they were a year ago, even though some of the stocks’ prices have risen substantially. In other words, the market is starting to agree with us about a company’s present, but continues to disagree with us about the company’s future.

As contrarians, this setup excites us. Our founder, Dr Allan Gray, often warned against buying the first downgrade in expectations for a stock. But he loved to buy the first upgrade, because when a company’s fundamentals turn, the market can be slow to appreciate the scope and sustainability of the positive shift. Today, the Orbis Funds own multiple companies that are seeing improving fundamentals, yet cheaper valuations. When it comes to returns, that suggests to us that there is more juice left to squeeze.


Financial advisers can contact their local Regional Manager to learn more about the Orbis Global Equity Fund.


This report does not constitute a recommendation to buy, sell or hold any interests, shares or other securities in the companies mentioned in it nor does it constitute financial advice.