Can a deep value approach work for individual investors?

I don’t know how you became interesting in investing and the stock market, but for me it was a case of one book leading to another.

Two titles that caught my imagination early on were Joel Greenblatt’s You Can Be A Stock Market Genius and The Little Book That Beats The Market. I then stumbled across some lecture notes from his course on value investing at Columbia University. Gold.

A feature of that course were guest speakers from Greenblatt’s network, one of which he introduced as “the smartest investor I’ve ever met” or something to that effect. The investor he was talking about was Rich Pzena – and twenty years later, his firm Pzena Asset Management is still going strong.

That was a rather long-winded way of explaining why I was excited to see that Caroline Cai, who manages Pzena’s Global Focused Value Fund, would be on a panel at Morningstar’s Investment Conference in May.

Caroline didn’t disappoint. For one, she dropped what I thought was the most interesting stock idea of the conference. More on that later. She also inspired me to take another look at the ‘deep value’ style of investing pursued by Pzena.

Pzena’s take on deep value

Like most style labels, the concept of ‘deep value’ can mean different things to different people.

Pzena refer to it as fishing in the very cheapest part of the stock market. While a ‘value’ approach might look at the cheapest third of stocks on quantitative measures like price to earnings, Pzena focus on the lowest 20% on a price to normalised earnings basis.

Pzena’s mantra is that, every now and then, good businesses will end up in that cheapest 20%. They want to buy when poor near-term sentiment beats these stocks down to a low multiple of estimated earnings in a normal year.

If a stock’s valuation on this basis recovers to being ‘middle of the pack’, Pzena will sell the shares and recycle the cash into another idea from the cheapest 20% of their universe. This is not a buy and hold strategy.

Importantly, Pzena do not require a visible ‘catalyst’ for a company’s valuation to improve. This presumably helps them get a cheaper price. It also means they are often buying when sentiment towards a company or industry is at its darkest.

A different game?

Pzena manage money for financial advisers and, by extension, the advisers’ clients. This is more of a different game to running a portfolio for yourself than you may think. The resources available are different. So too are the objectives.

The goal of an individual’s portfolio is to achieve the financial target you have set within your desired timeline. For example, I need to make an annual return of nine or ten percent to hit the target I have set for my retirement fund in 35 years time. Simple.

By contrast, Pzena know they will not be the only equity strategy held by financial advisers for their clients. The advisers might also include a core passive exposure to markets and another strategy focused more on growth stocks.

In this context, Pzena are there to do a specific job – to give clients exposure to what they think are the market’s cheapest stocks. This explains the automatic sale and recycling when a stock appreciates and exits the ‘value universe’.

Can individual investors use this approach?

We’ll get onto the positives in a moment, but let’s start with a couple of potential drawbacks.

The recycling aspect of this strategy would requires a constant stream of new ideas to replace stocks leaving the portfolio. This takes a lot of time and resources.

You also have the potential issue of selling winners too early. Again, this isn’t a problem for Pzena because it comes with the territory of their strategy. They are trying to play a specific role in a portfolio, giving their clients exposure to the very cheapest stocks.

For an individual investor, though, letting winners with solid long-term competitive positions run can be a prudent course of action too.

Not only does taking a ‘buy and hold’ approach stop capital gains taxes from interrupting the process of compounding. It can also stop you from constantly second-guessing whether it’s time to trim or sell, saving you angst (not to mention trading fees).

I bring this up because Pzena’s approach – buying good companies at times where short-term sentiment is truly bleak – has led them to some truly phenomenal entry points into great businesses. Or in other words, one half of buy and hold investing nirvana.

They owned Microsoft for a while when everybody hated it a few years ago. And Rich Pzena himself recently spoke on the Acquirer’s Podcast about buying GE when Covid had grounded planes and GE’s moaty jet engine business fell flat.

Those are two hall of fame buys. And even with moderate starting position sizes, you don’t need many winners of that magnitude to finish your investing life with a satisfactory overall return.

For that reason, I think the way that deep value investors like Pzena find buying opportunities is rather promising. Personally, I will be looking out for times that their preferred style of opportunity involves a company that I would be happy owning forever.

I’m not sure the idea that Caroline Cai from Pzena shared at Morningstar’s recent conference quite meets that criteria for me. But it was definitely an interesting and rather unexpected pitch.

Where Pzena found value recently

When asked to talk about a share that her fund has bought recently, Caroline opted to talk about Teleperformance (PAR: TEP) – a French company that operates call centres on behalf of businesses globally.

Earlier, I said that stocks can fall into Pzena’s idea of deep value territory for any number of reasons. In Teleperformance’s case, the reason is clear: people think that improved AI chatbots will kill off demand for outsourced call centres.

A report from Goldman Sachs even listed them as the number one industry at threat of extinction. The result? Teleperformance’s shares cratered. At the time of the conference, they had fallen to below EUR 90 from almost EUR 400 per share in 2021.

Figure 1: Teleperformance share price performance from May 2021 to June 20 2025. Source: Morningstar

What did Pzena see here? Big picture, they thought it was a situation where collective fear and a rush to the exits created an opportunity.

More specifically, they are not sure that better AI chatbots will automatically see demand for outsourced customer support services disappear. Not to the extent that markets rushed to price in here, anyway.

If Teleperformance clients were to bring this service back in-house using chatbots, for example, it could involve balance sheet investments and more focus on non-core activities. This would undo two big benefits of outsourcing.

And if the benefits of outsourcing do continue to ring true, who better to provide outsourced and AI-enabled support than Teleperformance? After all, it has all of the customer relationships and has previously used advances in tech – of which AI could just be viewed as the latest one – to its advantage.

Caroline admitted that we cannot know what Teleperformance’s industry or business model will look like in a few years. AI may indeed bring about big changes, and it is always hard to pin down who the winner will be in these cases.

All she knows is that Goldman’s warning of a potential zero made the shares very, very cheap versus Pzena’s estimate of normalised earnings. As she put it at the conference, “The future is highly uncertain. The only thing you really know is the price that you paid”.

Investing over investments

I shared this stock idea (and more importantly, the thinking behind it) because I thought it was a good example of how investors can think independently.

While markets probably get share prices roughly right most of the time, there are still times where investors get so excited or depressed, and so convinced either way, that exploring the other side of the trade might be profitable.

Teleperformance may prove to be one of those situations. But individual investors should remember that sticking to a deliberate strategy should take precedence over individual stock ideas. No matter how cheap, contrarian or compelling they may sound.

For a five-step guide to devising an investing strategy and setting your investment criteria, try this article by my colleague Mark LaMonica.