Wall Street has been divided into two main strategies or “styles” for making money for most of my career. But the map of which stocks belong to which style has changed beyond recognition.
That’s especially true as the pandemic loosens its grip on the economy and we brace for higher interest rates on the horizon. Old rules fail. New ones take over.
If you’re blinded by the conventional style box, it’s an extremely frustrating time to be in the market. However, if your eyes are open to opportunities, you’ll do all right.
And you don’t have to retreat to the sidelines no matter how badly the old rules break down. I’ve seen it all before . . . there’s always a stock worth buying.
What Are “Growth And Value” Anyway?
Wall Street’s attraction to “style” started with a simple decision of how investors preferred to make money.
Those who liked waiting for good, reliable companies to get knocked down to a deep discount price became the value school. The logic here is easy to describe: buy the dip.
Value stocks are the ones you avoid accumulating until a broad market shock or isolated negative headline depresses the share price. You’re betting that the pain will be temporary.
Growth stocks are the ones you need to buy early in their trajectory, when they’re small, unproven and still at least a little speculative. Over time, they’ll mature into their promise, rewarding shareholders along the way.
If we buy value because it’s cheap today, we buy growth because it will be worth more tomorrow. There’s an element of timing and urgency here.
And because of that time element, there’s a strong possibility that fast-growing stocks will never be materially cheaper than they are right now.
They may not necessarily be “cheap” today. They’re only cheap relative to where they’re going . . . and if you snooze, you might never get another chance to buy in at this price.
This basic dichotomy launched thousands of mutual funds. But over the years, investors got a lot better at recognizing and exploiting the easiest opportunities.
People are trained to buy the dip, making every stock a theoretical “value” play on weakness. And they’re trained to think every company can keep expanding forever, making them all “growth” stocks in one way or another.
But as the lines blurred, it got harder to assign sectors into one category or the other.
Traditional “technology” stocks that started out as 100% growth decades ago have now matured. Apple, for example, now pays dividends. We buy it on the dip and cash the quarterly checks.
Likewise, the first generation of biotech stocks grew as their once-speculative scientific portfolios cleared FDA hurdles and became commercial therapies. They’re indistinguishable from Big Pharma now.
And the economic dislocations around COVID broke down the wall entirely. Based on year-over-year projections, tech stocks collectively aren’t growing much faster than their S&P 500 peers.
If anything, a lot of Big Tech (Apple, Alphabet) is now less about growth than buying the dip. They aren’t going away, but they aren’t going anywhere fast either.
Instead, year-over-year growth is hot in the “old” brick-and-mortar economy: retail (not limited to Amazon), the traditional manufacturers, conventional energy. These are usually considered value sectors and their stocks still crowd into a lot of value funds.
I don’t run any traditional value funds. I run a value-oriented portfolio (Value Authority) and a growth-oriented one as well, GameChangers. Over the years the stocks they’ve focused on have practically flipped.
Value Authority has been buying technology companies under too much pressure in the recent dip. And GameChangers is now spotlighting innovative retailers and restaurants . . . as far from Silicon Valley as it gets!
Growth At The Right Price
In the real world, growth and value aren’t factors of the kind of business you do or the area of the economy you inhabit. Innovation isn’t limited to Silicon Valley.
You can start a disruptive company in any business and grow it from zero to world-class stature, taking shareholders along with you on the way. A lot of these companies use technology . . . but they aren’t “technology” companies.
And everything depends on your timeline. If you’re just looking for a bottom line that’s moving fast in the coming year, the old economy is where you want to focus.
For example, Hilton (HLT) has one of the highest apparent earnings growth rates in the S&P 500 right now . . . because the business crashed last year and is still recovering.
Likewise, Booking Holdings (BKNG), still better known to many as “Priceline,” is looking to make a strong rebound in the coming year. The stock is once again within sight of all-time records even though it’s going to take a long time to recapture its pre-COVID fundamentals.
And then there are endless oil companies: Baker Hughes (BKR), Hess (HES), Marathon (MPC) and so on. Yes, they look like growth stocks right now, but they’re really stable “value” businesses.
If you expect oil prices to double year after year into the far future, you’ve never lived through one of the industry’s recurring bust cycles. Besides, even $100 crude will encourage green competitors.
Those are the stocks you really want to look at if you want more than a short-term growth spurt in your portfolio. You won’t find many of them in the S&P 500 yet. They’re still young, more potential than fact at present.
No matter how far you want the growth trend to stretch, you can’t pay too much. There’s always a “value” component to growth investing and ideally every “value” stock should offer at least a small growth profile.
I don’t think a stock like HLT can make it. Great company, great business . . . but here at 34X earnings, people assume that the post-COVID rebound can continue forever.
It can’t. The world won’t need twice as many hotel rooms, let alone exponential expansion.
That’s why I’m not a big fan of Tesla (TSLA) either. Call me old-fashioned. I like Elon Musk but can’t figure out the stock.
TSLA is growing fast. But under my basic rules of thumb, it won’t be attractive unless we can catch it under 165X earnings . . . which is about $500.
In other words, one of the fastest growing companies on the planet needs to become a deep value stock to make my buy list. I’d rather buy a “boring” miner like Albermarle (ALB) instead.
ALB makes the lithium that runs the cars. And it’s looking at roughly 48% earnings growth in the coming year . . . nowhere near what TSLA got last year, but enough to grow into its current valuation awfully fast.
Or how about Aptiv (APTV), to stay on the auto theme? Car parts. Old economy . . . but growing fast and still available at about 1/3 the price of TSLA per dollar of earnings.
Search the market and you’ll find plenty of companies growing faster than the economy as a whole, with stocks priced at a reasonable level.
Nobody’s forcing you to pay extreme prices for the fastest stocks on Wall Street. And nobody’s forcing you to pay deep-discount prices for companies that are in obvious decline, either.
But absolutely nobody ever needs to pay elevated prices for boring stocks. That’s the kind of situation that rising interest rates will choke down on fast.
I consider mighty Apple a value stock now, a boring company. You don’t need to dump your shares, but I hope you aren’t accumulating it here at a valuation quadruple its projected earnings growth rate.
Tesla at least has growth on its side. Apple is too big to get out of its own way. Meanwhile, “boring” companies like Visa (V) are growing faster and a lot more consistently than AAPL.
Sometimes boring is good at the right price. That’s the value side of my experience talking. And sometimes the right price is actually exciting.
Given the choice of boring old Visa or sexy old Apple, I’ll take the credit card vendor that’s actually working. Instead of Amazon, I’ll take Home Depot.
And so on. It’s a market full of stocks. You don’t have to pick the same ones everyone else does.
Having watched theme after theme rise and fall on Wall Street, I think we can all recognize that there are too many novelty stocks right now . . . too many clever angles.
We see this play out in the IPO market, which I love because this is where you can capture extreme success stories at the very beginning of their corporate trajectory from start-up to superstar.
But you can have too much of a good thing. Right now, so many new companies have flooded onto the market that it’s hard to tell the empty sizzle from the steak.
We’re going to be talking a lot more here about how I separate viable early-stage companies from copycat “me too” stocks so eager to ring the Wall Street bell that they forget to come up with a business plan.
The numbers can be scary. In the last 12 months, the Fed’s free money encouraged literally hundreds of companies to go public while the door to Wall Street was wide open.
Add up all those deals and they’ve dropped about 13% from their opening price. Let me say that again a little more clearly: if you bought every IPO last year the first second it was available to the public, you’re underwater.
And if you bought on the way up, you’re even farther in the hole. The secret was avoiding themes that got too crowded while sticking to companies with a unique proposition.
There were a lot of crowds last year. Over 100 new tech stocks . . . can you name three? High-tech sizzle wore thin. People are tired.
(I liked Roblox (RBLX) but it was probably a bad year to debut a dating service like Bumble.)
And with about 150 healthcare stocks hitting the market, it was impossible to read all the prospectuses. Investors simply stopped trying.
Those who dutifully grabbed every promising young biotech and medical device maker are down at least 25% now. Ouch.
The notorious SPACs didn’t do well either. The real hot money in the IPO market last year was in the “boring” industrials and oil stocks . . . which conceals a valuable lesson.
I see a lot of undiscovered value in these hundreds of stocks. But it’s a mine field. We’ll pick our way through it together in the weeks ahead.
And yes, if you asked me to pick the top IPO investment of 2022, names from 2021 like Bumble will make the list. Deal flow YTD has been nothing to get excited about.
The excitement will come, but for now, let’s pick through the rubble and find the gems.