What’s the Problem With Tech Stocks? It’s Not a Single Category.


December 11, 2017

The problem with the term “Tech Stocks” is the way the term is used in investing. Apple, Alphabet, Microsoft, Amazon, and Facebook are five of the six most valuable companies in the world. All are tech stocks. But AFAM Capital is only invested in two of those five currently. That doesn’t mean we don’t like tech stocks. We just don’t like Growth stocks.

Growth stocks are often young companies whose sales are expected to increase at a rate much higher than the average company. We believe that most investors in Growth stocks pre-pay for potential growth that may or may not materialize. Conversely, we believe that value stocks trade below their estimated fair value for the company’s shares, so are essentially “on sale.” Their prices are discounted based on bad news or low expectations that may or may not materialize.

Facebook, Amazon, and Alphabet have been very good for long-term investors. But Snapchat hasn’t. Twitter also hasn’t. All of those are Growth stocks and growth investing is a strategy. But it is important to pick a strategy and stick to it. We are value investors. Why? As we point out in “GROWTH VS. VALUE STOCKS – WHICH HAS THE BEST TRACK RECORD?”, Value stocks have historically outperformed Growth stocks 13.3% to 9.3%, respectively1.

When you look at some of the top tech stocks, you’ll notice two differences between tech stocks we hold and those we don’t hold. AFAM Capital holds positions in Apple and Microsoft and both have a historically consistent dividend record. Currently, both also have the lowest P/E ratios of the list.

Dividend Yield P/E
Last Financial Year
Facebook N/A 41.8
Amazon N/A 121.9
Netflix N/A 249.2
Alphabet N/A 29.6
Apple 1.60% 20
Microsoft 2.10% 25.8

*Source: Bloomberg as of 10/25/2017

AFAM Capital is invested in Intel, Microsoft, Apple, Symantec. We like tech stocks, and they’ve historically done very well for us. But they don’t go straight up. Sometimes when earnings are released, if these companies fall short of what the public was expecting for revenues or bottom line profits, then people sell off. We don’t think there’s anything fundamentally wrong with these companies. But they’ve had a nice run, and some of them go from being undervalued to becoming fairly valued.

The Case for Value Investing

We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.

Download The Case for Value Investing

What about stocks like Snapchat?

Snapchat is in the growth category. Other Growth stocks include Twitter, Facebook, Google, Netflix, and Amazon. AFAM Capital doesn’t buy growth companies. It isn’t our strategy. That doesn’t mean you can’t make money in them. A lot of Growth stocks have made their shareholders – a lot of money in the near term.

But AFAM Capital doesn’t deviate from our value approach. We think there’s a much higher probability that we will make money by buying a company that has more muted expectations, and is trading lower than what we consider its intrinsic value, than in buying a company that has to keep wowing the public in order to make money.

Metrics matter

We use specific criteria to evaluate stocks we’re considering. Price/earnings, price/sales, and price/book value are some of the metrics used to evaluate stocks. A lot of the growth companies are trading several hundred times their earnings. AFAM Capital prefers companies that trade 10 to 20 times their earnings, or maybe even less than that.

But our selection criteria is more than a black numerical box. Once metrics provide us with candidates for purchase, we apply a qualitative element that incorporates personal knowledge of current events that may impact that company or industry. We shop for stocks the same way you shop for groceries. We try to find bargains.

Does AFAM Capital have any growth strategies?

AFAM Capital does not have growth stock strategies. Our niche is value, and we believe value as an asset class will outperform growth. In fact, according to Fama and French, Value stocks have outperformed Growth stocks on an annualized basis over the long term2.

Over the last ten years coming out of the recession, coming out of 2008, Growth stocks have dramatically outperformed Value stocks. But that’s not usually the case. AFAM Capital has a longer-term approach. It goes back to the tortoise and the hare – who wins the race in the end?

The Case for Value Investing

We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.

Download The Case for Value Investing

1From 06.30.27 through 08.31.17. SOURCE: Al Frank using data from professors Eugene F. Fama and Kenneth R. French and Ibbostson Associates

2Value stocks have historically outperformed Growth stocks 13.3% to 9.3%, respectively. From 06.30.27 through 08.31.17. SOURCE: Al Frank using data from professors Eugene F. Fama and Kenneth R. French and Ibbostson Associates

Important Information:

No guarantee of investment performance or dividend payment is being provided, and no inference to the contrary should be made.

Based on analysis of price/earnings ratio, yield, and other factors, value stocks are shares of a company priced below those of its peers, and growth stocks are shares of a company priced above those of its peers.

Dividend yield is the dividend per share, divided by the price per share. It is also a company’s total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage. Price to earnings (P/E) ratio is the ratio of a company’s stock price to the company’s earnings per share. More simply, it is the price an investor is paying for $1 of a company’s earnings or profit.

Investing involves risk, principal loss is possible, and there can be no assurance that investment objectives will be achieved. The information presented herein is for discussion and illustrative purposes only and does not constitute investment advice. It is not a recommendation or an offer or solicitation to buy or sell any securities.

Information provided reflects AFAM’s views as of a particular time. Such views are subject to change at any point and AFAM shall not be obligated to provide notice of any change. While AFAM has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein.

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