Hedge fund guru Joel Greenblatt says that the large-cap universe is looking a lot more attractive than the small-cap space from a valuation perspective right now.
Greenblatt tells CNBC that based on his valuation metric, the Russell 1000 index of large stocks is in the 70th percentile of expensiveness over the past quarter century, meaning it has been cheaper than current levels about 70% of the time and more expensive about 30% of the time. On average its year-forward gains from similar valuation levels has been about 5% to 10%. The Russell 2000 of smaller stocks, meanwhile, has been cheaper than it is today 97% of the time over the same period. Historically when the index is as expensive as it is today it has gone on to lose an average of 6% over the following 12 months, he says. He says that some individual stocks within the smaller-cap space remain attractive, however.
Greenblatt also talks about how Benjamin Graham and Warren Buffett influenced his approach, and discusses some picks he’s currently high on.
Validea’s Joel Greenblatt-inspired portfolio is up 135.5% since its late-2005 inception vs. 56.7% for the S&P 500. Check out its holdings here.