Written by Alan Hartley, Black Cypress Capital
It’s been a challenging year-to-date for our value-oriented investment approach. Value stocks are out of favor. We’ve had relatively limited exposure to the best performing sectors of the stock market (tech and health care). And we’ve had a couple of position-specific setbacks.
We’re up about 3.0% year-to-date, but we’re trailing the S&P 500’s 11.6% climb. This contrasts with our performance in 2016, when we outperformed the S&P 500 by more than 12.5%. Despite our slow start, we believe this year’s performance differential is largely transient.
The Russell 1000 Value Index is up just 6.0%, while the Growth Index is up 17.0%. “Story” stocks, companies with high investor enthusiasm borne out of grand tales of rapid business growth–the types of stocks we shy away from–are up even more. Facebook, Netflix, and Amazon, for instance, are up 46%, 39%, and 29%, respectively. The question might be then, “Why didn’t you have positions in these stocks and other high-growth companies like them?”.
The simple answer would be that as value-oriented investors, we thought that their stock prices came with too high a risk of losing money should business performance fail to live up to lofty expectations. We had, in our opinion, ideas with better return potential that carried lower downside risks. And we still think that’s the case. That said, an example in contrast of idea-type should provide a much better illustration as to why we didn’t invest–and still won’t at today’s prices–in high-growth story stocks.
We believe our approach can generate the same high returns investors yearn for in the high-growth stocks that make headlines, but in a manner that lowers the risk of permanent loss that can occur when outsized growth expectations in highly-valued stocks fail to materialize.
Below we provide a basic analysis of two different companies, Amazon and WESCO International, and then offer some simple valuation and expected return considerations, with the intent to showcase why we tend to build portfolios that don’t contain the sexy stocks that you read about in the paper.
We offer the Amazon analysis with this caveat: because the stock has yet to offer what we see as a large enough margin of safety to buy, we haven’t done the weeks of research that we normally do on new ideas. So, we offer our analysis with due humility because we haven’t studied the company and its markets in significant depth. Also, we acknowledge that Amazon is one of the best performers of recent history, and we didn’t own it. However, we look at the opportunity as presented to us today, and analyze the stock and its return implications.
A Contrast in Investment Ideas – Amazon vs. WESCO International
Amazon.com, Inc.
Amazon is a phenomenally well-run, disruptive force of nature. Its stock, one of the “FANG” companies (Facebook, Amazon, Netflix, Google), has performed well this year, rising over 29%.
The company has grown sales 25% per year for the last decade, and most analysts expect it to grow revenues 20% a year for the next three to five years.
