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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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