Tech giant becomes a contrarian’s value stock

As bottom-up stockpickers, we go where our most compelling individual investment ideas take us. Sometimes the stocks that we find attractive are classified by others as “value”. Sometimes they are considered “growth”. We are less concerned with these labels than we are with ensuring that our clients’ capital is positioned wherever we find the biggest discounts to our view of intrinsic value. And on that basis, our tilt toward the value end of the spectrum has rarely been this extreme.

In fact, the Orbis Global Equity Fund’s exposure to the value factor—in other words, the extent to which the performance of the portfolio would benefit from value stocks outperforming their growth counterparts—is currently higher today than at nearly any point in the Strategy’s history, with the exception of the late 1990s.

“Sometimes the stocks that we find attractive are classified by others as ‘value’. Sometimes they are considered ‘growth’.”

No historical comparison is perfect, but the environment in recent years reminds us of that era. Back then, value investing was painfully unfashionable—just as it was for much of 2020 and 2021. In both instances, investors were far more excited about the latest technologies than old-fashioned profits. When the bubble burst, however, the real excitement turned out to be in fairly mundane businesses with strong fundamentals.

The history of the current market cycle is still being written, but recent developments have been encouraging. Value has outperformed growth by 17% since the start of 2022, but valuation spreads are still wide. On a longer timeframe, the recent “bounce” is barely a blip, and value shares would need to nearly double relative to their growth counterparts just to bring the longer-term trend back into alignment.

As we wrote in April’s commentary, much of the recent performance of value shares has been driven by improving fundamental prospects. Earnings expectations have risen, but prices haven’t kept pace. This means value stocks are actually cheaper on a price-earnings basis.

“Growth stocks have been punished on both counts—fundamentals have been disappointing and the price investors are willing to pay has been under pressure.”

At the same time, growth stocks have been punished on both counts—fundamentals have been disappointing and the price investors are willing to pay has been under pressure. Indeed, much of the “value rotation” since the start of the year has really been due to the sharp sell-off in growth shares.

While the selling has been indiscriminate, there are important distinctions among stocks that fall within the growth cohort. As we have said for some time, many of the stocks in that bucket have looked ridiculously overpriced and risky to us, and it now appears that many other investors have come around to this view. But in other cases, there are some outstanding companies that we would love to own at the right price—and some of those opportunities have started to present themselves.

Alphabet, Google’s parent company, is a great example. It’s a company we know well, having owned the stock in the Orbis Funds at various times since 2009. While some of the details have changed over the years, the investment thesis has been broadly the same. The company’s core search and digital advertising business has a formidable competitive moat and a long growth runway, the valuation has often been attractive, and some of its money-losing ventures (e.g. YouTube in its early days) have ended up being significantly valuable assets in the fullness of time.

“A weakening economy can often be tough for advertisers—and Alphabet is not immune to that risk in the near term—but we believe it is better placed than most of its competitors to navigate a challenging environment.”

Of course, a weakening economy can often be tough for advertisers—and Alphabet is not immune to that risk in the near term—but we believe it is better placed than most of its competitors to navigate a challenging environment.

More importantly, we believe Alphabet is a rare example of a company that can use a bear market to its advantage. Year-to-date the company has repurchased $24bn of its stock, equivalent to 80% of its free cash flow over that period. We believe this is an encouraging use of capital at today’s valuations.

Alphabet trades at 18 times our estimate of next year’s earnings. That compares to multiples of 22 for the S&P 500 and 26 for Nasdaq. Yet, in our opinion Alphabet offers much better growth and profitability relative to the average business in either index. So is it a growth stock or a value stock? We are happy to let others decide. To us, it looks more like the best of both worlds.

We believe Alphabet is a nice complement to the more traditional “value” stocks that we are excited about such as BMW, Samsung Electronics, ING Groep, Howmet Aerospace and Shell. Overall, our portfolios continue to look very different from their benchmarks, which is precisely what we seek to achieve as contrarian investors.

Different for good reason

The most lucrative ideas are often in unpopular or ignored areas. We have been confidently investing in unpopular or ignored stocks for over 30 years. We’re interested in long-term potential, rather than short-term performance, focussing on unearthing companies trading for less than they are worth, rather than timing market trends. But to find these opportunities, you can’t think like everyone else. Find out more


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Equity Trustees Limited ABN 46 004 031 298, AFSL No. 240975 is the issuer of units in the Allan Gray Australia managed investment funds (Allan Gray Funds) and units in the Orbis Global managed investment funds domiciled in Australia (Orbis Funds). OneVue Wealth Services Limited ABN 70 120 380 627, AFSL No. 308868 is the Responsible Entity and the Operator and Facilitator of the Investor Directed Portfolio Service which includes Allan Gray Investments. Diversa Trustees Limited ABN 49 006 421 638, AFSL No 235153 RSE Licence No L0000635 is the trustee of Allan Gray Superannuation and Allan Gray Retirement. Allan Gray Superannuation and Allan Gray Retirement are superannuation products within OneSuper ABN 43 905 581 638 RSE R1001341. Past performance is not a reliable indicator of future performance. There are risks involved with investing and the value of your investments may fall as well as rise. This article represents Allan Gray Australia Pty Limited and Orbis Investment Advisory Pty Limited’s view at a point in time and may provide reasoning or rationale on why we bought or sold a particular security for the Allan Gray or Orbis Funds or our clients. We may take the opposite view/position from that stated, as our view may change. This article constitutes general advice or information only and not personal financial product, tax, legal, or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person and may not be appropriate for you. Before deciding to acquire an interest in the Allan Gray or Orbis Funds, open an account with Allan Gray Superannuation and Retirement or Allan Gray Investments, or before making any other investment decision, please read the relevant disclosure document available on this website. We have tried to ensure that the information here is accurate in all material respects, but cannot guarantee that it is. Target Market Determinations (TMDs) for the Allan Gray products can be found at allangray.com.au/PDS-TMD-documents, while TMDs for the Orbis Funds can be found on our 'Forms' page under 'How to Invest'. Each TMD sets out who an investment in the relevant Allan Gray or Orbis product might be appropriate for and the circumstances that trigger a review of the TMD. You should consider such funds’ Product Disclosure Statement (PDS) or Information Memorandum (IM), as applicable, before acquiring or disposing units in such funds’. The PDS or IM can be obtained from www.orbis.com.au and www.allangray.com.au.

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Graeme Shaw
Director of Orbis Investments, Australia
Orbis

Graeme joined Orbis in 1997 as an analyst, and has worked in the areas of risk management, quantitative analysis, and Australian equities. He holds a doctorate of Philosophy (University of Cambridge), and is a Chartered Financial Analyst

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