- Big tech has been hammered this year, with the tech heavy Nasdaq Composite down 34% in 2022.
- Some analysts believe that the current environment is going to make it difficult for growth focused tech stocks to bounce back.
- Value investing could be for a renaissance, after a decade of low interest rates sent it out of favor.
According to founder and CEO of hedge fund Third Point, Dan Loeb, investors hoping and praying for a bounceback from Silicon Valley tech stocks may be disappointed.
The U.S. stock market as a whole has suffered big in 2022, and with the Santa Rally nowhere to be seen it appears that there’s no last minute relief on the horizon. The tech sector has been hit particularly badly, with the Nasdaq Composite on track to record its worst year since 2008.
With just a couple of trading days left for the year, the tech index is down over 34% year to date.
Many investors are hoping for a turnaround sooner rather than later. After all, many of the biggest companies in tech are continuing to generate outsized revenue. Not only that, but widespread downsizing has allowed them to become more efficient after a hiring frenzy during the pandemic years got a little out of hand.
Dan Leob isn’t so sure. In a Tweet on Monday, he stated that “I don’t think camping out in the last decade’s darlings, with rosaries in hand, hoping for a comeback, will be the winning strategy.”
Instead, Leob believes that value stocks are going to be the game to play in 2023 and beyond, which would mark a significant shift for many investors. Tech has been the easy play, but it might be that the thinking needs to change to take advantage of the new economic environment.
So what does that mean for the regular retail investor, and should you be switching your strategy in 2023?
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What are the FAANG stocks?
Just a really quick recap here, because this acronym is getting pretty out of date these days. It stands for Facebook, Amazon, Apple, Netflix and Google, and for a number of years represented the crème de la crème of Silicon Valley.
There’s a few problems with it. Firstly, Facebook and Google have changed their names (well, their parent company names), going by Meta and Alphabet respectively. Second, all of these companies have seen their stock value plummet, but Netflix has taken that to another level.
You’d have a hard time making an argument to include them in a list of the top companies in tech right now. Not only that, but there are some notable exclusions from those five letters. Microsoft is the most obvious company left out in the cold.
There have since been a couple of attempts at new acronyms to replace FAANG. The first brings ditches Netflix for Microsoft and updates teh company names, to give us MAMAA – Microsoft, Alphabet, Meta, Apple and Amazon.
The other version doing the rounds is MATANA – Microsoft, Apple, Tesla, Alphabet, chipmaker Nvidia and Amazon.
The FAANGs and the rest of the tech sector stocks has fallen dramatically in 2022
Regardless of which acronym you use or which names they go by, whichever way you look at it, it’s been a year to forget for big tech.
Netflix was one of the first big scalps of 2022 and its price has actually recovered significantly since May. Even so, it’s down over 52% for the year. Amazon (-51%), Microsoft (-29%), Apple (-28%) and Nvidia (-52%) have all had it rough, but that’s nothing compared to Tesla (-72%) and Meta (-65%).
There are plenty of reasons behind the reductions. Overhiring during the pandemic when households were all stuck at home and online much more, meant that costs remained high as the world began to return to normal.
This has been unwinding this year with mass layoffs across the industry, but it’s taken time and has knocked the confidence of investors.
Not only that, but there are also nerves about the impact of rising interest rates. Since the 2008 global financial crisis, rates have remained at historic lows. This has meant debt has been cheap. With access to capital cheap due to low cost of debt, growth has been the priority for many, and particularly in tech.
As the Fed increases interest rates, the era of cheap credit is looking to be over. At least for while. This creates a situation where the tech sector may need to adjust their operations to focus more on profitability and managing expenses, rather than a relentless focus on growth at all costs.
Is Value investing back in?
So with growth focused investing going out of style, value investing could be ready for another moment. But what is value investing?
Put simply, it involves buying securities that are undervalued by the market. The goal of value investing is to find assets that are trading at a discount to their intrinsic value, which is the value that an asset is worth based on its fundamentals. That’s things like earnings, dividends, and assets.
One way that value investors try to find undervalued assets is by looking for companies that have strong financial metrics, such as low price-to-earnings ratios, high dividends, and low debt levels. They may also look for companies that are experiencing temporary setbacks, such as declining earnings or a weak market, but that have long-term potential for growth.
Value investors believe that by buying undervalued assets, they can earn a higher return on their investment over the long term. They tend to be patient and hold on to their investments for a long time, rather than trying to buy and sell quickly to take advantage of short-term market movements.
So if growth investing focuses on startups and younger companies with potential for exponential gains, value investing tends to be more traditional companies in stable industries.
It shouldn’t come as a surprise to hear that Warren Buffet is a value investor. His Berkshire Hathaway portfolio contains vast holdings in companies that could be considered value stocks.
Berkshire Hathaway owns outright or large percentages of companies like Geico, Fruit of the Loom, Bank of America, Chevron, Dairy Queen and Coca-Cola. None of these are particularly innovative or exciting, but they have proven business models and consistent and stable sources of revenue.
With household budgets strained, some analysts believe that value investing will become more attractive. With growth harder to come by, stable, boring profitability all of sudden looks a lot more attractive.
How to create a value portfolio
As always, there are a number of ways to approach portfolio construction. You can start from the bottom and do it all yourself. If you fancy yourself a bit of a Warren Buffet, you can do like him and find good companies to hold forever.
The problem with this strategy is that – unfortunately – you’ll probably struggle to match the performance of arguably the world’s greatest ever investor. Not only that, but value investing takes a huge amount of time and research.
You need to be prepared to dig into company balance sheets and cash flow statements and put together complex models to ascertain whether the numbers back up the stock price. Not easy.
Luckily, we’ve got a few options that can make this a heck of a lot easier. At Q.ai, we use the power of AI to do much of the heavy lifting when it comes to the data analysis. We’ve package these complex machine learning algorithms into a number of Investment Kits, and a number of these have a specific focus on value investing.
First is our Value Vault Kit, which looks at a huge amount of historical data to find some of the best value picks in the US stock market. The Kit is automatically rebalanced every week to make sure it’s taking into account the most up to date information.
If you want a bit more of a flexible approach, our Smarter Beta Kit is another option. This doesn’t invest only in value assets, but instead uses AI to allocate holdings across various different factors via a range of ETFs.
What this means is that some weeks it could allocate a higher amount to value, the next it could swing back to growth, plus other factors like momentum. It all depends on the underlying marketing conditions, and which factor our AI expects to provide the best risk- adjusted returns.
All of this is super sophisticated stuff that’s usually reserved for only the wealthiest investors. But we’ve made it available to everyone.
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