Is the Tech Train Leaving Value Investing in the Dust?
In 2011 Marc Andreessen (founder of Netscape and billionaire investor) famously wrote the following:
‘’My own theory is that we are in the middle of a dramatic & broad technological and economic shift… More and more major businesses and industries are being run on software and delivered as online services; from movies to agriculture to national defence.’’
This new way of doing business has led to some investors calling into question whether using fundamental analysis to value companies is still valid. In essence, questioning value investing, which is the purchasing of companies that are trading at prices less than their estimated intrinsic values. It’s not hard to see why. Above is a graph showing the performance of the Russell Growth Index (blue) vs Russell Value Index (orange) vs the S&P500 (grey) since March 2009.
What is noticeable from the above graph is the outperformance of ‘’growth’’ type stocks, on average, relative to ‘’value’’ type stocks. Interestingly, many of these “growth’’ type stocks have a negative tangible net asset value (TNAV) but are increasingly assigned a positive market value. NAV is the value that is left when the liabilities are deducted from the company’s assets. TNAV is the value that is left when intangible assets (goodwill, trademarks, intellectual property) are deducted from NAV. A company with a negative NAV (i.e negative equity) has historically been considered risky (at risk of becoming insolvent). But not in today’s market environment where significant premiums to NAV are being paid.
The number of companies trading in the S&P500 with negative NAV (negative equity) have grown from 13 companies worth $15 billion in 1988 to 118 companies worth $843 billion today. That is quite the shift towards assigning significant market value to negative accounting value enterprises. The number of companies trading at negative tangible NAV is even greater. The market is, therefore, increasingly assigning value to things that cannot be touched or physically seen in the hopes that those intangibles generate high rates of future cash flows. In fact, more than 80% of the S&P500’s value is assigned to intangible assets. Easy money (due to quantitative easing) has certainly helped to fuel this occurrence. Locally, it is interesting to note that both Steinhoff, and more recently Aspen have negative TNAVs.
In Conclusion
Just as Marc Andreessen predicted; online service companies such as the FANG (Facebook, Amazon, Netflix, Google) stocks and their sort have changed the way business is being done ranging from media consumption to agriculture to national security. They have also changed the way that investors are assigning value to companies, at least for now. Where does this leave ‘’value’’ stocks?
- ‘’Value’’ and ‘’growth’’ are two sides of the same coin. Warren Buffett has stated, “Growth is always a component in the calculation of value”
- Value investing is evolving and will continue to do so. Ben Graham (Warren Buffet’s mentor) advocated investing in ‘’net-nets’’, which are stocks that trade at a price that is less than the value of their current assets, a very conservative valuation measure. The rise of technology and access to information have made those opportunities exceedingly rare, leading to the evolution of value investing
- The tech train hasn’t completely left value investing in the dust. On average, value investing tends to outperform during declining markets, not rising markets. After all, it is only when the tide goes out when it becomes apparent who has been wearing swimming trunks. Advocating for one style only, across all market conditions, would be a mistake.
Fortunately, both Fintax Funds retain good mix of growth, value, quality and core holdings (please refer to last month’s commentary for the breakdown). They have, since inception, due to being well diversified and well managed, delivered risk-adjusted returns in excess of the market.
As always, we welcome any ideas, comments or queries you may have.