Value vs Growth - Fundstrat

If I Fell, Again

Dear fellow investors,

Investors have called their five-year love affair with technology stocks into question over the last 35 days. For this reason, we at Smead Capital Management are calling in John Lennon and Paul McCartney’s beautiful ballad “If I Fell” to help answer the following questions. Should investors continue to fall in love with these glamour growth titans? How have past love affairs with tech ended? Where might the bottom be over the next five years if history is any guide? Lastly, how will agnostic index and ETF investors react if the stocks which made their wealth grow the last five years become a source of financial heartache?

Q3 hedge fund letters, conference, scoops etc

If I fell in love with you

Would you promise to be true

And help me understand

‘Cause I’ve been in love before

And I found that love was more

Than just holding hands1

In the fall of 2018, technology companies grew to 30% of the S&P 500 Index, when Amazon (AMZN) and Netflix (NFLX) were included. This tied the peak reached at the end of 1999. To say that investors “fell in love” with these stocks would be a severe understatement. Will they “promise to be true” and help investors reach their financial goals? Have these companies helped investors “understand” why they may reward them in the future?

These are important questions to answer, “’cause investors have been in love with tech before” and they found on the downside that “love was more” than “just holding hands.” Today their hands are held by Vanguard, State Street, Charles Schwab and BlackRock, the largest owners of tech-concentrated vehicles. The growth versus value chart below shows the “love before” and how that played out:2

Value vs Growth - Fundstrat

It took four years to create a historical extreme in early 2000 and two years to completely crush those who had their hands held on the way down. Doesn’t building the peak in 10 years mean “the pain” will be handed out for five or six years this time?

If I give my heart to you

I must be sure

From the very start

That you would love me more than her

If I trust in you oh please

Don’t run and hide

If I love you too oh please

Don’t hurt my pride like her

‘Cause I couldn’t stand the pain

And I would be sad if our new love was in vain

On November 1, 2018, Tim Cook, the CEO of Apple (AAPL), joined the other FAANG companies by announcing they will “run and hide” about phone sales. Phone sales have been the bread and butter of the massive gain in Apple’s stock the last ten years. This is mild “hiding” compare to Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL). They hide on privacy, disclosure, accounting, anti-trust issues, and in many cases have used “free” giveaways (free social media, free delivery, free search) to distort our economy and amass the most power this side of Standard Oil/John D. Rockefeller in 1900.

If this market route turns into a debacle like 2000-2003 it will “hurt investor pride like her.” We believe investors in tech-heavy funds, ETFs and indexes won’t be able to “stand the pain” and will flee in a multi-year negative-tech feedback loop. Their “love” will have been “in vain.”

So I hope you see that I

Would love to love you

And that she will cry

When she learns we are two

‘Cause I couldn’t stand the pain

And I would be sad if our new love was in vain

So I hope you see that I

Would love to love you

And that she will cry

When she learns we are two

If I fell in love with you

Once the privacy, disclosure, accounting and anti-trust issues are fully priced into these stocks, we “would love to love” some parts of these businesses. Things were similar in 1999. Our investors expect us to stick to our discipline and only buy these great tech businesses when they are deeply out of favor. Look at how analysts on Wall Street have fallen all over each other to raise their price targets when nobody was left to add their buy recommendation.

The stock market always does what it must do to frustrate the most people. Investors could very well “love to love” the FAANG glamour stocks most of the way down, sucking every possible dollar into these crowded and popular trades. It would be sad if this “new (tech) love was in vain” and we believe investors “will cry” if they learn that 2018 and 1999 “are two.” We don’t expect many investors to agree with us, because when it comes to glamour tech, the stock market is “in love with you.”

Warm regards,

William Smead

1Lyrics source: The Beatles “If I Fell”

2Source: Fundstrat August 29, 2018

The information contained in this missive represents Smead Capital Management’s opinions and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

©2018 Smead Capital Management, Inc. All rights reserved.

This Missive and others are available at www.smeadcap.com.


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