Value investing and Fangs are not commonly uttered in the same sentence, unless the latter is being used to define what the former most certainly is not.
The rise of US technology stocks has for years been decried by commentators on a seemingly daily basis as precisely the sort of momentum-driven mania that should make the cautious investor nauseous.
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Yet an interesting pattern has emerged over the past year: a number of highly respected fund managers have started to add some of the Fangs to their portfolios for what they argue are reasons of valuation.
Warren Buffett’s Berkshire Hathaway (BRK/B, BRK/A) making Apple (AAPL) its single largest stock investment grabbed headlines, but other self-identified value investors have bought up large positions in Alphabet (GOOGL), Google’s parent company, and a handful of other racy technology names that would seemingly be kryptonite to their investment process.
Last year Bill Nygren of Oakmark Funds, a well-followed value manager that professes to “purchase stock in those businesses only when priced substantially below our estimate of intrinsic value”, gave an impassioned defense of why he had made Alphabet and Netflix (NFLX) important positions in his portfolio.
What is going on? How is it possible that these investors who claim to focus on buying undervalued companies would be buying shares that so many others believe are obviously “in a bubble”? Have these career value investors, including the Oracle of Omaha himself, suddenly lost their minds?
Some important things appear to have occurred to make this seemingly strange outcome possible.
Firstly, these investors claim to be seeing value that the wider market is overlooking due to its obsession with next quarter’s results. The huge investments some of these companies are making into their business means “costs are expensed now and current earnings are reduced”, Mr Nygren argues, making them appear more highly valued than they are. Secondly, by doing this they can, with a touch of irony, claim to be capitalizing on the wider fear about “bubbles” in tech as well as cognitive biases about what can, or cannot, be a value investment.
These investors are taking part in a process whereby large companies formally defined as “tech companies” are slowly graduating to becoming plain old “companies”, much in the way the glamour of once revolutionary technology such as motor cars and trains eventually faded. Eventually, the time will arrive when old-school value investors owning tech will be no more surprising than them owning shares in any other large American corporation.
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