The S&P 500 Index is currently trading near record highs after more than tripling since February 2009, when it fell below 700 and sank to its lowest level after the financial crisis of 2008.

Given the S&P’s current lofty valuations and high price/earnings (P/E) ratio, investors ask us the same question every day: Is the market overvalued? We think that’s the wrong question, asked based on incomplete information.

In our opinion, the only reason investors should care about the value of “the market” is if they are passive investors.

The value of the S&P 500 is determined by the constituents of that index and how those constituents are weighted. Any individual equity can be either overvalued or undervalued, regardless of the overall market level, and in most cases is not even represented in the S&P 500.

While the S&P does represent a large percentage of the overall value of the equity market, it is incomplete. Investors have literally thousands of companies to choose from that are not represented in the S&P 500. For example, the Russell 3000 Index contains, as the name indicates, six times as many potential investments as the S&P. Given that a large percentage of those companies are unprofitable, an active approach to identifying value becomes even more important. And that doesn’t even take into account the opportunities for U.S. investors to own attractive international assets.

Searching For and Finding Value

As value investors, we are willing to look far and wide for undervalued stocks. While the impact of the overall equity market level may be that fewer value opportunities exist, those opportunities are, in fact, always there. The prevalence of two emotions among investors – Fear and Greed – means there will always be companies that are trading above and below their intrinsic value.

In the past few months we believe we have had plenty of opportunities to find undervalued assets, even with the S&P 500 trading around record highs. Here are a few examples from our Oppenheimer Small Cap Value Fund and Oppenheimer Dividend Opportunity Fund:

Potlatch Corp. — Potlatch is a specialized Real Estate Investment Trust (REIT) that owns and manages timber land in the United States. In 2015, due to a weak export environment, U.S. lumber prices declined significantly, which drove the value of Potlatch shares down 40%. However, the value of timber land is much more resilient than the commodity itself. We estimated that shares were trading at a 35% discount to the value of Potlatch’s land holdings. As lumber prices rebounded, the company benefitted from the increasing returns on invested capital (ROIC), higher lumber prices and its ability to sell land at attractive values to fund share repurchase.

Honda Corp. — Honda’s stock price has been increasingly correlated with the Japanese yen in the past year. Investors believe Honda, along with other Japanese exporters, is a direct call on the currency rather than a reflection of the company’s fundamentals. As a result, a distortion has been created between Honda’s market value and our estimation of its intrinsic value. The company’s current valuation is lower than it was even during the depths of the financial crisis. With a bevy of new product launches worldwide and quality control and recall spending subsiding, Honda’s earnings and ROIC look likely to accelerate significantly from here.

Huntsman Corp. — Huntsman is a specialty chemical company with products that go into everything from paints and coatings to construction materials. Investors have been unimpressed in recent years with the company’s Titanium Dioxide (TIO2) business. TIO2 is a base pigment in products such as paint and toothpaste. The company has announced its intention to divest the TIO2 business to concentrate on higher margin specialty chemicals. Higher margins should translate to higher ROIC. With the stock trading at less than 10 times this year’s earnings, we believe there is substantial value available to be unlocked.

In our view, with such a diverse set of opportunities to choose from, at any given time the stock market will make available attractive investment opportunities at favorable valuations. The equity rally over the past few years may have reduced the number of obviously cheap stocks, but in our view there are always companies whose valuations do not adequately reflect their ability to generate wealth for shareholders. That is why we are not overly concerned about the aggregate market valuation.

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