‘Our focus is on stock selection rather than favouring particular sectors’, says Daniel Johnson, Portfolio Manager of the River Road US Large Cap Value Select Fund as he shares his latest analysis with us below, on why value investing deserves proper attention.
The primary positive in our current outlook lies in the relative valuation of value stocks compared to growth stocks, which currently appear to be priced for perfection.
Unlike the S&P 500, with approximately one-third of its weight in the Information Technology sector, our strategy currently has zero exposure to the sector because we cannot find businesses that fit our Absolute Value framework AND trade at compelling prices. Valuations remain elevated in the sector.
However, while we currently don’t see any stocks that fit that process in the IT sector, we believe some excellent opportunities do exist across other sectors….
BJ’s Wholesale Club Holdings Inc (consumer staples) is a stock that embodies our style of value investing.
It operates warehouse clubs in the US with membership fee income, which generates over 50% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) and has grown for more than 25 consecutive years. Since returning to the public markets in 2018, BJ has successfully reduced net leverage 5.0x to below 1.0x, and now the company can fund its store expansion effort which should sustain attractive growth over time. BJ trades at substantial discount to Costco Wholesale Corp. (COST) despite our expectation that BJ and COST will grow at similar rates over the next several years.
Two of our most recent purchases highlight where we are finding value today.
Lithia Motors Inc. (LAD) (consumer discretionary) is one of the largest new and used automotive dealers in North America. CEO Byran DeBoer, from the founding family, perfectly describes LAD’s business model as “a national footprint with local autonomy, integrated digital tools, high margin adjacencies that scale earnings across the ownership lifecycle while also being the preferred acquirer of business in the industry.”
Finance & Insurance (F&I) and Parts & Services (P&S) generate roughly 60% of profits, providing resiliency against the more cyclical vehicle sales. LAD’s proven acquisition strategy boasts a 95% success rate with over 25% returns and provides the company with ample room for future growth with only 2% market share of new vehicle sales and less than 1% of used vehicle sales.
We also repurchased Kroger Co. (KR) (consumer staples) which we had previously sold in April after the stock traded above our assessed value. Kroger is the largest traditional grocer in the United States, operating 2,731 supermarkets.
The company’s strength lies in its scale and operational efficiency, leading to a 90% market share in its major metros, along with a high margin private label penetration. Since exiting, KR underperformed the Russell 1000 Value by -20% despite strong operational execution. Given the stock’s attractive discount, the $7.5 Bn (~15% of market capitalization) capital return plan in the second half of 2025, a robust investment-grade balance sheet, and consistent free cash flow, we were pleased to reintroduce KR to the portfolio.
Daniel Johnson is Portfolio Manager of the River Road US Large Cap Value Select Fund
