Is this a “Value Moment”?
Coming out of the Covid-19 crisis, the market seems have caught a “value bug.” Value stocks have been on a tear. Classic “value” names like Exxon-Mobil or Freeport McMoran — the mining company — are up 40 or even 50 percent, while more “growthy” stocks like Johnson & Johnson or Facebook have gone sideways. Partially, this is a correction from an extreme. Since just before the Global Financial Crisis, value stocks have doubled, while growth stocks have more than quadrupled. You can only stretch a rubber band so far.
Sentiment in some market segments has also gotten extremely pessimistic. Some famous value-stock managers have closed up shop and said that this market doesn’t sense to them anymore. Entire segments of the economy have gone from darling to dog. Consider energy. At the height of the fracking boom the industries that heat our homes and fuel our cars and transport our goods and services was 15% of the total market; by the end of September it accounted for less than 2%. It’s true that as the world economy shut down there was less demand for oil; but this is extreme. It’s hard to imagine that this entire sector of the economy is worth less than Google.
Source: S&P, Bloomberg, World Market Advisors
So is value coming back? It certainly seems that way. The prospect of broad vaccination, an opening economy, and a generous government all have investors optimistic that life may soon get back to normal – with the understanding that there will be a “new normal” when we get there. “Zoom fatigue” may be real, but video meetings, home offices, and online shopping will be part of our work-life, home-life, and school-life for the foreseeable future.
Which brings up the next question: how durable is this shift to value? After all, value stocks have been left in the dust. The economy has been shifting towards online shopping and virtual experiences for a long time. In 2011, tech entrepreneur and investor Marc Andreesen wrote a prescient op-ed for the Wall Street Journal, “Why Software is Eating the World.” In his essay, Andreesen outlines the reasons why software-driven companies have become so dominant: wide access to broadband communication, the increasing computing power of our smartphones, the ubiquity of app-based businesses facilitated by inexpensive cloud computing, and network effects which lead to winner-take-all economics. The trends Andreesen identified a decade ago have only intensified. And they have been turbocharged by the Covid-19 crisis.
But everybody knows this. Markets identify trends and climb on board. The Covid crisis caused investor to pile into stay-at-home stocks like the FAANGs and Zoom. And the shares of those companies were repriced to include about a year-and-a-half of additional sales. And if you want to outperform the consensus, you need to invest differently than the consensus. And you need to be right.
Old economy activities like drilling for oil and mining copper and building houses are still going on, and those businesses have been made more profitable by the software revolution – one of the less-noted aspects of Andreesen’s software revolution. While the energy sector is expected to lose money in 2020, it should return to profitability the following year. And even if new carbon taxes are imposed, the world still needs gasoline, diesel fuel, jet fuel, and heating oil.
Which raises the issue of values. Many investors have adopted Environmental, Social, and Governance (ESG) standards. They don’t want to own companies that contribute to global warming or aren’t connected to their communities or don’t meet other (often non-financial) criteria. By happenstance, most of these companies tend to be on the “value” side of the ledger. That’s contributed to the trend.
It’s important to be comfortable with our investments – how they perform, as well as what they do. Stocks aren’t pieces of paper or blips on a computer screen. They represent fractional ownership of real companies engaging in real commerce. As long as we live in a real world, we’ll need these old economy companies.