Finding Value In Value
A recent article in the Wall Street Journal highlights that the U.S. stock market is showing the biggest divergence between growth and value stocks since the dot-com bubble in 2000. Since January of this year, growth stocks have outperformed value by 19%. Does this growth surge suggest that something has changed in the market, or do value stocks still represent a good opportunity?
Tech leads the way
The technology sector comprises the bulk of what are considered “growth” stocks, and the enchanting narrative surrounding the disruptive forces of FAANG (Facebook-Apple-Amazon-Netflix-Google) have led many investors to disregard valuation in order to bid up the prices of these powerful companies. However, as First Fiduciary’s COO, Bill Henry, notes, “Big prices bring with them big expectations, and years of good news are priced into FAANG shares today. If these companies even modestly disappoint, the negative reaction could be tremendous. When we purchase a stock, we require a sizable margin of safety. We don’t see one in FAANG stocks today.”
“Price is what you pay; value is what you get”
The quote above, from esteemed investor Benjamin Graham, underscores the difference between investing and speculating. By owning companies that have the earnings power, sustainable competitive advantages, and balance sheets to justify current share prices, First Fiduciary is a careful steward of client capital. “We don’t subscribe to the Greater Fool Theory of Investing, which asserts that the price of an asset is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants,” says Mary Anderson, First Fiduciary’s President. “Our portfolio of high-quality, dividend-paying companies continues to return cash to shareholders while growing earnings, increasing the intrinsic value of our holdings over time.”
It can be tempting to “chase” performance and buy yesterday’s winners at any price. However, deviating from an investment process that has led to impressive risk-adjusted returns over many years is something that will not happen at First Fiduciary. “We are value investors. We will continue to invest in high-quality companies that are trading at attractive valuations. Eventually, valuation is its own catalyst, which should lead to outperformance for value stocks,” says Senior Analyst Andrew Givens.