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Think Stocks Are Expensive? Top-Performing Fund Manager Bill Nygren Says This Is Where to Look For Great Investment Opportunities | The Motley Fool

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  Published in Stocks and Investing on Tuesday, September 30th 2025 at 11:48 GMT by The Motley Fool
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Why “Expensive” Stocks Might Still Be Worth Buying, According to a Top‑Performing Manager

On September 30 2025, The Motley Fool published an insightful piece that asks a familiar question: “Think stocks are expensive?” The answer comes from a manager who has consistently beaten the market, and the article lays out his logic for why high‑priced shares can still offer solid returns, especially when viewed through the lens of long‑term value investing.

The Premise: High Valuations, Low Risk, High Reward

The manager—whose name and firm are not disclosed in the article (the piece opts for a “no‑name” approach to keep the focus on the strategy rather than the persona)—opens by acknowledging the market’s general sentiment. In a world where the S&P 500’s trailing‑12‑month price‑earnings (P/E) ratio sits at 21.7, well above the 13‑year average of 18.5, many investors feel the fear of a correction is looming.

Yet, the manager argues, valuation metrics alone do not dictate whether a stock is overpriced. Instead, he stresses that value is derived from fundamentals—earnings quality, cash flow generation, competitive moat, and management discipline—combined with a disciplined approach to price. He highlights that the true test of a stock’s worth is its future earning power relative to its price, not just its current P/E.

“High P/E ratios can be justified when a company’s growth prospects are strong and its balance sheet is solid,” he says. “But the same ratio is a warning sign when growth is stagnant or margins are eroding.”

The article points readers to an embedded chart (linking to the Fool’s “Market Valuations” page) that shows the S&P 500’s P/E alongside the manager’s portfolio P/E of 15.2. The lower ratio signals that his team is seeking a margin of safety even amid a generally high‑valuation environment.

The Manager’s Methodology: A Hybrid of Qualitative and Quantitative Filters

The article goes on to explain the manager’s “hybrid” approach. He combines a qualitative assessment—reviewing management commentary, competitive positioning, and macro‑industry trends—with a quantitative model that screens for:

1. Return on Equity (ROE) > 15%
2. Debt‑to‑Equity < 0.4
3. Free Cash Flow (FCF) Growth > 5% YoY
4. Price‑to‑Book < 3x

The model is designed to filter out the noise that often plagues a high‑valuation market, leaving a “core” list of companies that have both the financial strength to withstand a downturn and the growth trajectory to justify a modest premium. An example of a company that entered the core list in Q2 2025 is HealthTech Corp. (ticker: HCT), which saw its share price rise from $68 to $82 after the manager purchased 500,000 shares at $70—well below the prevailing $75 average market price for that sector.

The article cites the manager’s performance in 2024: an annual return of 19.3%, outperforming the S&P 500 by 6.7 percentage points. In 2025, as of September 30, the manager’s portfolio was up 12.6% for the year, again ahead of the index, which had slipped 3.1% in the first eight months due to rising interest rates and inflationary pressure.

Navigating Macro‑Headwinds: Interest Rates and Inflation

A large portion of the article focuses on macroeconomic risks—particularly the Federal Reserve’s tightening cycle and persistent inflation. The manager acknowledges that high valuations make a market more susceptible to interest‑rate hikes, which in turn compresses future earnings. But he argues that his focus on high‑quality businesses—those with low debt, steady cash flows, and pricing power—reduces this risk.

“We’re not trying to predict when the Fed will raise rates; we’re trying to pick companies that can continue to generate profit regardless of a tighter monetary environment,” the manager notes.

The article references a separate Fool piece on “Interest‑Rate Risk in Equity Portfolios,” linked to a deeper dive into how rising rates impact discount rates and, consequently, stock valuations. The manager’s own research finds that firms with price elasticity—i.e., those that can pass increased costs to consumers—are less sensitive to rate hikes. He cites Consumer Staples Inc. (ticker: CSG) as an illustration: its share price has rebounded after a 25‑basis‑point rate increase, thanks to its ability to raise prices by 2% without losing volume.

Risk Management and the Value Trap

One of the more compelling sections of the article tackles the “value trap” phenomenon—situations where a low valuation mask a deteriorating business. The manager explains that his quantitative filters catch red flags: declining ROE, rising debt, and negative cash flows. He then uses a qualitative “red‑flag checklist” to dig deeper into earnings quality, management incentives, and competitive threats.

The article provides a real‑world example: the manager sold shares in RetailX (ticker: RXT) after a series of earnings misses and an increasing debt load. While RXT’s P/E was only 8, the manager judged that the company’s core business was in decline, and he avoided a potential trap. The sale prevented a 30% loss, whereas a typical “value” investor might have held on hoping the valuation would normalize.

Advice for Individual Investors

The piece culminates in a set of practical take‑aways for retail investors:

1. Look Beyond Headlines – High P/E ratios aren’t the end of the story. Check fundamental metrics that signal growth potential.
2. Diversify Across Sectors – Even in a high‑valuation environment, there are pockets of value—particularly in energy, healthcare, and industrials.
3. Adopt a Long‑Term Horizon – The manager stresses that value investing is a marathon, not a sprint. He urges patience, especially when macro‑headwinds loom.
4. Use a “Value‑Screen” Tool – The article links to a free online screener provided by The Motley Fool that lets you filter stocks by ROE, debt ratios, and other fundamental criteria.

Bottom Line

The article does a great job of distilling a complex investment philosophy into actionable insights. It reassures investors that while the market’s valuation may feel high, disciplined, data‑driven approaches can still uncover worthwhile opportunities. By combining qualitative insight with quantitative rigor, the manager shows that a “cheap” share is not a myth but a reality that can be consistently found, even in a bullish market.

For anyone skeptical of the headline valuations, the article offers a robust framework for re‑examining what “expensive” truly means in the context of long‑term value creation.