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Welcome to Episode #79 of the Value Investor Podcast
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.
Just like 2017, 2018 is off to a hot start for growth stocks. Value stocks are lagging again.
The longer growth stocks outperform, the more likely value investors are to throw in the towel and join in on the growth train.
Even professional contrarian and value investors can fall prey to the lure of growth.
Amazon: The New Contrarian Play?
Take the example of Wally Weitz, the long-time portfolio manager, and contrarian investor, at the Partners III Opportunity Fund. He told investors that he bought Amazon for the fund in the fourth quarter.
Why would a contrarian investor be buying Amazon?
In 2017, the fund returned 5.5% compared to the 21.8% return for the S&P 500. It had a big position in Allergan, which had a tough 2017.
If you’re a value investor, and you want to meet or beat the indexes, should you do what Weitz did and think about buying some of the big growth names like the FANG stocks?
Should Value Investors Buy Growth Stocks?
There are two different scenarios in play when deciding whether or not a value investor can buy growth: the professional manager and his mandate versus the Mom and Pop investor.
1. The professional manager usually has a mandate. Customers buying into a value or contrarian fund expect to get value or contrarian investments. To buy outside of that universe is a betrayal of the strategy.
2. The Mom and Pop investor only answers to one person: themselves. There’s nothing wrong with a value investor owning some pure growth or momentum stocks. After all, an investor also buys international stocks and mid-caps or small caps in addition to large caps.
Do Any of the FANGs Have Value?
If you’re going to buy the big growth stocks, which ones look most attractive on a valuation basis?
1. Facebook ) is trading with a forward P/E of 28, which is the same as other big manufacturing and industrial companies like Boeing. Yet, when it went IPO in 2012, it was trading at 198x. The P/E has slowing been lowering. Either investors don’t believe that the growth will be strong to support the higher valuation, or there’s a tinge of “value” in the shares. It’s being ignored by investors, for whatever reason.
2. Alphabet (GOOGL - Free Report) ) was a value all the way back in 2012 when it traded with a P/E of just 17. In recent years, it has held pretty steadily around a P/E of 27 or 28. It hasn’t traded at nosebleed valuation levels in years. It’s one value investors might want to keep on their short list, especially with any pullback or sell off.
3. Nvidia (NVDA - Free Report) ) is the other “N” stock in the FANG equation, in addition to Netflix. Before the AI craze took off, the stock was cheap. In 2012 it had a forward P/E of just 16. It has gone up nearly every year since then and now trades at 58x. Is there any value there?
4. Amazon (AMZN - Free Report) ) has always traded at sky high valuations yet it has never faced any repercussions for it. Back in 2012, long before the Whole Foods acquisition, it had a forward P/E of 181. In 2018, it has a forward P/E of 170. Should value investors ignore the P/E ratio and dive in?
5. Apple (AAPL - Free Report) ) has been a cheap stock for years, and still is. It’s not surprising that this is the most recent big tech addition by Warren Buffett at Berkshire Hathaway. Value investors don’t even have to compromise their principles when buying it. In 2012, it traded with a forward P/E of only 12. It still trades with a forward P/E of just 15.
If you’re going to buy growth, know what you’re buying. Remember, you’re going to pay a higher price for those earnings. That’s the whole point of growth investing.
For some value investors, those high valuations will be tough to swallow.
What else should you know about buying growth stocks even if you’re a value investor?
Tune into this week’s podcast to find out.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Are any of the FANG Stocks Value Plays?
Welcome to Episode #79 of the Value Investor Podcast
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.
Just like 2017, 2018 is off to a hot start for growth stocks. Value stocks are lagging again.
The longer growth stocks outperform, the more likely value investors are to throw in the towel and join in on the growth train.
Even professional contrarian and value investors can fall prey to the lure of growth.
Amazon: The New Contrarian Play?
Take the example of Wally Weitz, the long-time portfolio manager, and contrarian investor, at the Partners III Opportunity Fund. He told investors that he bought Amazon for the fund in the fourth quarter.
Why would a contrarian investor be buying Amazon?
In 2017, the fund returned 5.5% compared to the 21.8% return for the S&P 500. It had a big position in Allergan, which had a tough 2017.
If you’re a value investor, and you want to meet or beat the indexes, should you do what Weitz did and think about buying some of the big growth names like the FANG stocks?
Should Value Investors Buy Growth Stocks?
There are two different scenarios in play when deciding whether or not a value investor can buy growth: the professional manager and his mandate versus the Mom and Pop investor.
1. The professional manager usually has a mandate. Customers buying into a value or contrarian fund expect to get value or contrarian investments. To buy outside of that universe is a betrayal of the strategy.
2. The Mom and Pop investor only answers to one person: themselves. There’s nothing wrong with a value investor owning some pure growth or momentum stocks. After all, an investor also buys international stocks and mid-caps or small caps in addition to large caps.
Do Any of the FANGs Have Value?
If you’re going to buy the big growth stocks, which ones look most attractive on a valuation basis?
1. Facebook ) is trading with a forward P/E of 28, which is the same as other big manufacturing and industrial companies like Boeing. Yet, when it went IPO in 2012, it was trading at 198x. The P/E has slowing been lowering. Either investors don’t believe that the growth will be strong to support the higher valuation, or there’s a tinge of “value” in the shares. It’s being ignored by investors, for whatever reason.
2. Alphabet (GOOGL - Free Report) ) was a value all the way back in 2012 when it traded with a P/E of just 17. In recent years, it has held pretty steadily around a P/E of 27 or 28. It hasn’t traded at nosebleed valuation levels in years. It’s one value investors might want to keep on their short list, especially with any pullback or sell off.
3. Nvidia (NVDA - Free Report) ) is the other “N” stock in the FANG equation, in addition to Netflix. Before the AI craze took off, the stock was cheap. In 2012 it had a forward P/E of just 16. It has gone up nearly every year since then and now trades at 58x. Is there any value there?
4. Amazon (AMZN - Free Report) ) has always traded at sky high valuations yet it has never faced any repercussions for it. Back in 2012, long before the Whole Foods acquisition, it had a forward P/E of 181. In 2018, it has a forward P/E of 170. Should value investors ignore the P/E ratio and dive in?
5. Apple (AAPL - Free Report) ) has been a cheap stock for years, and still is. It’s not surprising that this is the most recent big tech addition by Warren Buffett at Berkshire Hathaway. Value investors don’t even have to compromise their principles when buying it. In 2012, it traded with a forward P/E of only 12. It still trades with a forward P/E of just 15.
If you’re going to buy growth, know what you’re buying. Remember, you’re going to pay a higher price for those earnings. That’s the whole point of growth investing.
For some value investors, those high valuations will be tough to swallow.
What else should you know about buying growth stocks even if you’re a value investor?
Tune into this week’s podcast to find out.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>