Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 370

The 'Heady Hundred' case for unglamorous growth

Imagine you are at a cocktail party in May 2012. The conversation turns to the stock market, and your friend mentions that she bought Facebook at its initial public offering that month. Then you tell everyone that you just invested in a trucking business. While your friend instantly becomes the life of the party, you spend the rest of the evening staring into your drink.

Growth is not only about tech stocks

Your friend made a good call. Facebook’s share price has risen almost sevenfold since the IPO. But your investment in XPO Logistics was also pretty exciting. Its share price performance was even with Facebook’s as recently as January 2020, and both companies delivered similarly strong revenue per share growth through the end of 2019. Since then, the pandemic has been considerably more painful for XPO’s shares than Facebook’s, so you ‘only’ made about 400% overall. But both stocks trounced the S&P500’s 200% return.

The lesson here is that great investments come in many different shapes and sizes, and they may not always seem obvious. The obvious winners in today’s environment have been the so-called FANGAM stocks – Facebook, Amazon, Netflix, Google (Alphabet), Apple, and Microsoft. One can debate their valuations, but whatever your view of these giants, there is strong evidence of truly speculative froth elsewhere.

Recent research by Verdad showed that there are 500 stocks in the US – the ‘Bubble 500’ – that are both more expensive than the FANGAM shares and have worse fundamentals. The vast majority of the Bubble 500 are found in areas such as software, fintech, biotech, and healthcare equipment. It's the virtual happy hour stocks of the present day. A few may turn out to be future giants, but it’s extremely unlikely that all 500 will work out anywhere near that well.

A check on the worst of both worlds

Taking a global view, we ran a similar analysis of our own on the FTSE World Index. We looked for stocks with the worst of both worlds:

  • higher valuations than the FANGAM stocks
  • weaker margins and slower revenue growth.

We found almost 100 such companies, which we call the ‘Heady Hundred’.

Unsurprisingly, software, biotech, and healthcare equipment stocks are well represented, as is the US. As shown in the table below, these companies are about 50% more expensive than the FANGAMs on a price-to-revenue basis and about 30% richer on price-to-earnings multiples yet have delivered only half the revenue growth and with lower profitability.

Astonishingly, this group of stocks carries a market value of more than $3 trillion. To put that in perspective, the Heady Hundred are worth nearly as much as the entire Japanese stockmarket.

A preference for boring, overlooked, hated

Of course, some of these may turn out to be great investments. Prices can often race well ahead of fundamentals for rapidly growing businesses. Amazon has never once looked attractive on traditional valuation metrics, but that hasn’t stopped its shareholders from earning spectacular returns over its 23 years as a public company (Amazon’s recent run has been painful for us to watch, having owned it but sold it far too early.)

The problem is that prices also race well ahead of fundamentals for all the other ‘exciting’ businesses that go on to falter. For those who fail to live up to their Amazonian expectations, the punishment can be swift and severe.

As contrarians, we much prefer the idea of investing in businesses that are boring, overlooked, or even hated. Not only are their fundamentals usually underappreciated, but there is far less room for disappointment since there is so much less enthusiasm reflected in the price.

Besides XPO, other examples in the Orbis Funds include US health insurers, emerging market banks and conglomerates, Japanese drugstores, and even a manufacturer of farm equipment. These ‘boring’ businesses have delivered revenue growth in excess of 10% per annum and some can even hold their own with the FANGAMs.

Most importantly, you don’t need to pay a heady premium for it.

 

Jason Ciccolallo is Head of Distribution for Australia at Orbis Investments, a sponsor of Firstlinks. This report contains general information only and not personal financial or investment advice. It does not take into account the specific investment objectives, financial situation or individual needs of any particular person.

For more articles and papers from Orbis, please click here.

 

Video: Brett Moshal: Our job is to be uncomfortable

Summary points

  • The dramatic rebound in the second quarter has left equity markets much more nuanced and with fewer obvious bargains compared to late March.
  • Some “Growth” stocks appear attractive, while others have never been so expensive. On the other hand, some “Value” stocks appear unusually cheap, while others have been justifiably punished.
  • In Japan, we are finding good companies at great prices and with particularly attractive dividend yields.
  • Markets globally remain highly uncertain, but as always, our focus remains on avoiding the risk of permanent capital loss by being disciplined about the price we pay.

 

RELATED ARTICLES

Why it's a frothy market but not a bubble

FANMAG: Because FAANGs are so yesterday

After 30 years of investing, I prefer to skip this party

banner

Most viewed in recent weeks

11 ASX dividend stocks for the next decade

What are the best stocks to own that can pay regular dividends and beat indices on a total return basis in the long-term? Here is our list of 11 ASX-listed companies that could help investors achieve these goals.

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Time to smash the retirement nest egg - but how?

For decades, governments told people to save for retirement, then hold onto their nest eggs. Now, they're concerned that retirees aren't spending enough. How can we encourage reasonable spending patterns in retirement?

The greatest investor you’ve never heard of

Jim Simons has achieved breathtaking returns of 62% p.a. over 33 years, a track record like no other, yet he remains little known to the public. Here’s how he’s done it, and the lessons that can be applied to our own investing.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Latest Updates

Retirement

The challenges of retirement aren’t just financial

Debates about retirement tend to focus on the financial aspects: income, tax, estates, wills, and the like. Less attention is paid to the psychological challenges of retirement, which can often be more demanding.

Strategy

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Taxation

The mixed fortunes of tax reform in Australia, part 1

While there have been numerous tax reviews at the Commonwealth and state levels, most have not resulted directly in substantive tax reforms. This two-part series looks at that history and explores the pathway forward. 

Investment strategies

America, the world's new energy superpower

The US has become the world's new energy superpower, combining production, technology and capital in a way never previously achieved – a development sure to have global implications for decades to come.

Investment strategies

Could Korean corporate reform trigger a Japan-style market rally?

Corporate governance reforms in Japan have helped spur a 45% rise in the share market over the past 12 months. Korea looks set to follow the Japanese reform playbook, and may be poised for a similar bounce.

Property

How AI will transform the real estate sector

The real estate industry, traditionally characterised by its cautious adoption of new technologies, is now at a pivotal juncture. The emergence of AI promises to fundamentally change the way we live, work, and play.

Investment strategies

Charitable giving and tax deductions

With impending Stage 3 tax cuts incentivising taxpayers to bring forward future tax deductions while tax rates are higher, it’s a good time to explore how to bolster your tax savings and community impact through structured giving.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.