Value investor Bill Nygren breaks down how he's finding hidden gems in an expensive stock market

Amid record market highs and the S&P 500 trading at 23 times forward earnings, Oakmark Funds' Bill Nygren is focusing on undervalued stocks that prioritize significant capital return to shareholders. His strategy targets companies, often with multiples below 12 times earnings, that generate substantial free cash flow for buybacks and dividends, enabling per-share growth rates comparable to more expensive peers despite limited organic growth. Noteworthy holdings exemplifying this approach include Charter Communications and General Motors, both trading around five times earnings, alongside Global Payments, Ally Financial, and Corebridge Financial.

Analysis

In a market environment characterized by record highs and an elevated S&P 500 valuation of 23 times forward earnings, Oakmark Funds' Bill Nygren is advocating a distinct value-oriented strategy. The approach targets companies with low valuations, specifically noting that nearly half his holdings trade at multiples below 12 times earnings, a significant discount to the broader market. Nygren's thesis posits that while these firms may lack substantial organic growth, they generate significant free cash flow which is returned to shareholders via aggressive share buybacks and dividends. This capital return mechanism, he argues, can produce per-share growth rates comparable to companies trading at multiples three times higher. Charter Communications (CHTR) and General Motors (GM) are cited as prime examples, both trading at approximately five times earnings. For CHTR, Nygren believes the market undervalues the potential for growth driven by share repurchases in its internet and mobile-focused business. In the case of GM, which has been flat year-to-date after a 48% rally in 2024 due to tariff concerns, the low multiple is seen as ample compensation for the risk and the delayed timeline to achieve its prior earnings target of around $10 per share. The strategy is further diversified with holdings in Global Payments (GPN), Ally Financial (ALLY), and Corebridge Financial (CRBG).

Key Decisions for Investors

• Investors should consider screening for companies with low price-to-earnings multiples, particularly below 12x, that also exhibit strong free cash flow generation and a stated policy of returning capital through share buybacks or dividends.
• Charter Communications (CHTR) and General Motors (GM) warrant specific due diligence, as their low valuations around five times earnings may offer a significant margin of safety and upside potential driven by capital returns rather than market-dependent organic growth.
• When evaluating companies like GM, it is critical to weigh the deeply discounted valuation against specific, identifiable risks such as tariff impacts and the potential for delayed earnings recovery.
• Given the elevated S&P 500 valuation, allocating to value stocks with high shareholder yield could serve as a potential hedge against a market rotation away from expensive growth names.