Tech Rout Shifts Spotlight From Growth To Value: 5 Top Picks
Zacks Investment Research | Jun 15, 2017 10:37PM ET
It’s time to discard growth and load up on value stocks. Investors have steered clear of tech behemoths that constitute the bulk of growth stocks on overvaluation concerns. Such stocks have soared into the stratosphere this year and investors are skeptical about their potential to scale further.
On the other hand, value stocks, led by financials and consumer staples, look enticing. While the recent Fed rate hike added shine to financial stocks, consumer staples are immune to uncertainties. Also, we shouldn’t forget that the tech trade collapse and a surprise U.K. election vote have already unnerved investors. Hence, value investing for the time being seems judicious.
Is This the Time for Value Stocks?
Growth verses value is one of the oldest investment styles known to us. While growth investing involves selecting stocks with earnings growth of above-average rates, value investing entails the buying of stocks that are underpriced. Value investing gained fame under Ben Graham and David Dodd. Their 1934 text book “Security Analysis” is mostly viewed as the bible of value investing.
It shouldn’t surprise you that the reason growth has outperformed value this year is largely because of the significant jump in big-cap tech stocks. After all, the top holdings in the S&P Growth Index, as per their weight, are Facebook Inc (NASDAQ:FB) , Amazon.com, Inc. (NASDAQ:AMZN) , Apple Inc. (NASDAQ:AAPL) , Microsoft Corporation (NASDAQ:MSFT) and Google parent Alphabet Inc (NASDAQ:GOOGL) . These are the so-called “FANG” stocks along with Microsoft that everyone has been talking about this year.
However, investors ditched one of the most profitable tech trades of the year so far, after stalwarts like Facebook, Amazon, Apple, Microsoft and Alphabet lost ground following Goldman Sachs Group Inc’s (NYSE:GS) declaration that these five companies’ recent outperformance was potentially overheated. The recent downgrade of tech giant, Apple by Mizuho Securities also sustained the tech sell-off.
Investors Dump Tech
Selloff in the largest tech companies deepened concerns that the high-value industry is in a bubble. Robert Bouroujerdi, chief investment officer at Goldman Sachs, warned that the “FANG” stocks along with Microsoft are overvalued. He said, “Facebook, Amazon, Apple, Microsoft and Alphabet - have added a total of $600m of market cap this year, or the equivalent gross domestic product of Hong Kong and South Africa combined”.
This tech slide wiped out billions of dollars from the net worth of Mark Zuckerberg, Bill Gates and Jeff Bezos, who was poised to become the richest person in the world. While Bezos lost $2.6 billion, while Zuckerberg’s worth was dented by $2 billion.
Brokers, in the meanwhile, downgraded Apple for a second time in two weeks, which slashed $30 billion from the company’s value. Mizuho Securities reduced its price target for the iPhone maker to $150 from $160 per share. Analyst Abhey Lamba added that “Apple has meaningfully outperformed on a year-to-date basis and we believe enthusiasm around the upcoming product cycle is fully captured at current levels, with limited upside to estimates from here on out”.
Play Smart: Buy Value Stocks
We are now seeinga shift from tech outperformers to value stocks. As a rule, value stocks are mostly financial along with consumer staples. And why not? The S&P Value Index’s biggest names are Berkshire Hathaway Inc. (NYSE:BRKa) Zacks Investment Research
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