The Value of Value Investing

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History has proven that timing markets is a daunting task. The preference for growth stocks in recent times has led to the virtues of value investing being largely overlooked. Yet, instead of arguing why value is now ripe for a comeback, perhaps it is more helpful to remind investors why value remains a proven investment strategy.

In simple terms, value stocks are defined as companies that are trading at a discount to their intrinsic value. These are often well-established companies with steady profits that tend to redistribute those cashflows back to investors in the form of dividends or share buybacks. The goal of value investing is finding stocks that are not only undervalued but also well-positioned to regain their fair value over time. In other words, these companies present a favorable risk/reward for investors.

While the identification of such outperformers is largely down to good stock selection, certain macro and market conditions can tilt the market in favor of value stocks. Historically, value stocks generally perform well during periods of high inflation and rising interest rates, as these conditions lead investors to seek out companies with strong fundamentals and stable earnings. The higher free cash flow yields offered by value stocks can provide a steady income stream that is especially appealing during times of economic uncertainty. Consequently, in an economic slowdown or during turbulent market conditions, value companies’ reliable and durable business models can often present a stark contrast with their growth peers by offering greater stability and downside protection.

Finally, there have occasionally been prolonged periods of time where value stocks have fallen out of favor with investors. Such environments can enhance the valuation discounts of unloved stocks, particularly in relation to highly-valued growth stocks and create an even more compelling reason to include value within a portfolio.

What value means to us

The term “value” can undoubtedly mean many things to investors, including deep value and relative value approaches. Our value framework is different.

Our definition of value is centered on three distinct criteria. First Free Cash Flow. We aim to invest in companies with attractive and durable free cash flow that we believe can generate returns through both good and bad times. Second, we seek Capital Discipline, focusing on a company’s capital allocation and its capital structure. Finally, as value investors, we pay close attention to Valuation, seeking those companies that trade at a discount. We believe identifying stocks that meet this combination can deliver downside protection as well as provide optionality on the upside over time.

A big misconception about value investing is that it equates to a sacrifice in quality. In our view, the value universe is full of attractive, leading franchises that generate high levels of sustainable free cash flow with defensible market positions and ample financial flexibility. Such companies exhibit capital discipline and trade at attractive valuations, which can lead to compelling risk-adjusted returns over the long term while providing a margin of safety for investors.

Another differentiated dimension of our approach is that we also scrutinize capital allocation. If a company is generating a lot of free cash flow, we explore what it is doing with that capital and how it is being allocated. Ideally, we look for companies where a large part of their excess cash generation will be distributed back to its shareholders either through recurring dividends or a share repurchase program.

At Brown Advisory, we aim to be highly discerning in terms of the value companies that make it into our portfolio. Rather than using a rule-based screening approach to filter through our stock universe, we set the bar higher. Our non-exclusionary stance encompasses the entirety of the value universe, leveraging our 50+ dedicated research team to look at companies one by one, evaluating potential new ideas with existing names in the portfolio to see which names will potentially fit. Engaging with management teams, customers, suppliers and other subject matter experts is a critical component of our value-added due diligence process, as is ensuring that all investment decisions are informed by solid data and clear insights about a company’s prospects. Consistently applying these rigorous principles results in what we believe to be a differentiated perspective on how our investments can navigate the complexities of various market environments and achieve success over the long term.  

CASE STUDY: Talen Energy¹

Value can be found across different market caps, geographies and segments. Sometimes a stock is simply overlooked, or there may be corporate actions on the horizon. Often, this is a result of the non-traditional way in which the company goes public.

Talen Energy is an independent power producer with a flagship nuclear plant in Pennsylvania. This business had previously gone bankrupt in 2022 after being over-leveraged and under-hedging its input costs under private equity ownership. The restructured entity, Talen Energy, emerged in 2023 with an appropriate capital structure and unburdened by many legacy environmental and pension liabilities. It had an attractive set of cash-generating assets and a motivated management team, but lacked sell-side coverage. Its valuation was attractive and also traded at a coverage. Its valuation was attractive and also traded at a significant discount to other nuclear power-oriented utility companies. Electricity pricing has been under significant upward pressure over the past several years due to several factors. Data center growth has been an increasingly significant user of base load electricity. Talen has a long-term power purchase agreement with Amazon Web Services’ (AWS) for a significant portion of the power from its nuclear facility. The re-shoring of industrial capacity, along with a continued trend towards electrification, has also increased demand. In addition, supply growth has been muted by a lack of new generation capacity, along with continued closures of coal-fired plants.

We believe that Talen incorporates many elements of a successful investment: a business model with a significant portion of the revenues tied to a long-term contract; a management team with a focus on building shareholder value through buybacks; and an attractive valuation. There is also the potential for a mergers & acquisitions (M&A) exit that could add to the success of this already attractive investment.
 

CASE STUDY: CRH plc²

Similarly misunderstood opportunities also exist in the large-cap space. Our rigorous attention to combing through a broad universe helps us identify differentiated opportunities.

Despite being one of the largest building materials companies in both North America and Europe with a $60bn market cap, CRH has remained somewhat under the radar. When our research process uncovered the company nearly two years ago, it only traded under a sponsored ADR, there was no direct US analyst coverage, and it was not included in any relevant indices. Today, CRH has moved its primary listing to the NYSE, and it features in several Russell indices.

CRH operates a unique, vertically integrated model across the heavy materials value chain. There are inherent barriers to entry in the US market, where CRH generates 75% of its EBITDA. Its foothold in the US, coupled with an increasingly consolidating industry, has led to strong underlying pricing power for the business and consistent free cash flow generation. CRH’s management has also been divesting slower-growth assets and redeploying proceeds into less cyclical, faster-growing markets, helping revenues grow at an 8% CAGR and EBITDA margins to nearly double over the last decade.

The company has persistently maintained discipline from a capital structure perspective, operating with limited balance sheet leverage. This has allowed the company to allocate an increasing amount of its excess free cash flow back to shareholders through dividends and share repurchases. Despite this, CRH still holds an attractive absolute valuation and a sizable discount to its closest peers.

A margin of safety

With high valuation multiples come high expectations. Value investing offers an attractive complement to growth strategies as its lower multiples provide a margin of safety for investors that can help enhance portfolio diversification.

At Brown Advisory, we offer a range of solutions across the equity spectrum, including value strategies. Our thoughtful approach to investing embeds patience, rigor and humility to ensure our strategies consistently pursue their objectives to deliver a first-rate performance for each and every client.
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<sub><sup>1. Source: Talen Energy company reports, and Brown Advisory analysis. Talen Energy is a current holding in the Small-Cap Fundamental Value portfolio representative account as of 03/31/2025 and was selected because the investment team believes it demonstrates the strategy’s stated investment and value philosophy; It does not represent all of the securities purchased, sold or recommended for advisory clients.
2. Source: CRH plc company reports, and Brown Advisory analysis. CRH plc is a current holding in the Large-Cap Sustainable Value portfolio representative account as of 03/31/2025 and was selected because the investment team believes it demonstrates the strategy’s stated investment and value philosophy; It does not represent all of the securities purchased, sold or recommended for advisory clients.</sup></sub>

Disclosures

The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. 
 

The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities or issuers mentioned. It should not be assumed that investments in such securities or issuers have been or will be profitable. References to specific securities or issuers are to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy and is not a complete summary or statement of all available data contained in this communication.

Sustainable investment considerations are one of multiple informational inputs into the investment process, alongside data on traditional financial factors, and so are not the sole driver of decision-making. Sustainable investment analysis may not be performed for every holding in the strategy. Sustainable investment considerations that are material will vary by investment style, sector/industry, market trends and client objectives. The strategy seeks to identify companies that it believes may be desirable based on our analysis of sustainable investment related risks and opportunities, but investors may differ in their views. As a result, the strategy may invest in companies that do not reflect the beliefs and values of any particular investor. The strategy may also invest in companies that would otherwise be excluded from other funds that focus on sustainable investment risks. Security selection will be impacted by the combined focus on sustainable investment research assessments and fundamental research assessments including the return forecasts. The strategy incorporates data from third parties in its research process but does not make investment decisions based on third-party data alone. 

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000® Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment. The Index is completely reconstituted annually to ensure that new and growing equities are included and that the represented companies continue to reflect value characteristics. The Russell 2000® Value Index and Russell are trademarks of the London Stock Exchange Group Companies. 

The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected and historical growth rates. The Russell 1000® Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics. The Russell 1000® Value Index and Russell® are trademarks/service marks of the London Stock Exchange Group companies. An investor cannot invest directly into an Index. Benchmark returns are not covered by the report of the independent verifiers. 

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Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. 
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Terms & Definitions

Free Cash Flow (FCF) represents the cash a company generates after cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital. Free Cash Flow Yield (FCF Yield) is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. Compound annual growth rate (CAGR) is the rate of return that an investment would need to have every year in order to grow from its beginning balance to its ending balance, over a given time interval. The CAGR assumes that any profits were reinvested at the end of each period of the investment’s life span. EBITDA (earnings before interest, taxes, depreciation, and amortization) is an alternate measure of profitability to net income. EBITDA attempts to represent the cash profit generated by a company's operations.