You Should Give Value A Chance
Look, let’s be blunt; if you’ve been a value investor for the past few years, you’ve underperformed broad markets in a big way. Looking at your value portfolio today, you’re probably close to flat with where you were back in 2017, which obviously doesn’t feel very good when you look over at the Nasdaq NDAQ and it’s up some 20% or more just this year.
Value investing isn’t dead though. In fact, this might be a really good time to reexamine your portfolio and add some value investments to it.
Growth Stock Prices Have Growth Too Much
Growth stocks are getting over their skis. Up more than 20% year to date despite all the Covid-19 concerns, the Nasdaq has been running hot. Too hot. Sure, interest rates are zero and that means you have to change how you discount potential future revenues, and yes, Covid-19 changes have accelerated some shifts to the cloud; there’s a reason for the run up in growth names. But some of the companies here are priced at ridiculous multiples for earnings that are several years out in highly competitive spaces.
Paying a big multiple for potential growth is fine, but you have to discount the competitive pressures as well, otherwise you’re overpaying. What’s even worse though is when you look at companies like Tesla TSLA (TSLA) and look at how they’re priced despite having generated near zero revenue growth over the past year or so – if you’re going to buy growth at a premium, at least buy something that’s growing!
That also means looking forward at what’s going to do well instead of looking back at the unique six months behind us. Are things like Zoom (ZM) really going to keep on growing at crazy rates when people can go back into the office and hang out with each other in person? Maybe Zoom can fend off competitive pressures from the giants like Microsoft MSFT or Google GOOGL , but the big tailwind that has helped them grow – Covid-19 – is going to slowly disappear, and we think their crazy growth will disappear too.
So stop trying to trade the top of growth bubble like all the folks on Robinhood – that’s gambling right now, not investing. Instead focus on repositioning your portfolios for the economy that’s reopening as vaccines start getting approved.
Focus on Value
We’re getting more and more information about what the world is going to look like post Covid-19. Coming out of lockdown we saw people start to make more purchases, housing started to pick up, and GDP started to expand. There’s a long way to go before we’re back to normal, but we’re starting to go back to normal.
A return to normal means a return to stability and consumer focused economic activity. That means things like airlines, energy, hotels, ride sharing, things that have been beaten down start to do business and become attractive again.
It also means that we can value companies a bit differently. Right now it’s hard to buy companies for their dividends – who wants to make 3% in dividends when stock prices move 3% in a day? But as we approach normal and stability starts to come back to the market, all of a sudden those value oriented names with strong dividends start to be way more attractive.
Think about it this way; utilities that yield 3% aren’t attractive when their cash flows are in question. But, give them some stability and all of a sudden you’re comparing utilities that yield 3% to treasuries that yield less than 1%. That’s the kind of spread that doesn’t last very long for quality stable assets.
Give Small Caps A Chance Too
Small cap companies are another area that deserve a bit of attention. Now is a good time to give them a look as they actually haven’t performed well for the last two years – the Russell 2000 got hammered in 2018 when interest rates started to rise and just as it was recovering this spring, Covid-19 came and hammered it again, sending it down more than 40% from its peaks early in the year.
Yet as we start to see more news about vaccines and the US economy stabilizes, small caps should once again become attractive assets. Small growing American companies will do well when rates are low and the America consumer starts to spend again. Don’t wait until the economy starts to boom to start building them into your portfolio. Get positioned now while things are still difficult, and have yourself set up to appreciate the recovery over the course of the next 12 months.
Growth And Tech Are Different
A note on tech – just because we’re saying to look at value doesn’t mean you need to dump all your tech companies. Tech and Growth aren’t always the same thing, and there are some names you really just shouldn’t sell. For example, world beating companies like Amazon AMZN or Alphabet or Microsoft should stay in your portfolio.
Those companies have become an essential part of our 21st century digital ecosystem and their competitive advantages are huge compared to most other companies in the market. They have big technological advantages over their peers that are durable even as the economy shifts and value and small caps come more into focus.