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Sitting On The Other Side Of The Fence - A Value Investing Story

Aug. 03, 2018 1:11 PM ETNFLX, AAPL, AMZN, META, GOOG, GOOGL, MSFT6 Comments


  • Staying away from the red-hot semiconductors sector & FAANG stocks has been a true challenge for value investors.
  • Value & Quality stocks have been underperforming for quite a while.
  • Lofty market valuations further increased the risk of owning hot stocks.
  • Update on my portfolio & strategy.

In this article, I want to take a step back from all the figures, balance sheets, and cash flows and share some of my thinking behind the current state of the market and some of the stocks that are currently appealing to the vast majority of retail investors.

What Is Hot These Days

Source: medium.com

Robinhood recently released the updated list of the top 20 stock held by customers on the platform. The list gives us a good idea of which stocks do Millennials prefer:

Source: investors.com

As a contrarian and value investor, it gives me some comfort knowing that I hold none of these stocks. Before people start jumping on conclusions, I must say that the list contains some of the highest quality companies in the world; however, the price that people are paying for most of these is prohibitively high. Of course, some companies are of much higher quality and more reasonably priced than others and as such would certainly appeal to value investors. In my view, these include Apple (AAPL), Ford (F), Bank of America (BAC), and perhaps even GE.

Not surprisingly, all FAANG stocks are present in the list, including the very hot semiconductors such as Nvidia (NVDA) and Micron Technology (MU). The list even includes some stocks considered by many as highly toxic and very speculative - Fitbit (FIT), GoPro (GPRO), Netflix (NFLX), and Tesla (TSLA).

Many of the stocks above have been disconnected from their fundamentals for quite a while now with many investors daring to even short them and go against the herd. So far, this has proven to be a foolish game as excitement around some of the names above keeps growing. One of the main reasons why this disconnection from fundamentals is persisting is that Millennials think fundamentally different from the previous generations (see below).

This article was written by

Vladimir Dimitrov, CFA profile picture

Vladimir Dimitrov, CFA is a former strategy consultant within the field of brand and intangible assets valuation. During his career in the City of London he has been working with some of the largest global brands within the technology, telecom and banking sectors. 

He graduated from the London School of Economics and is interested in finding reasonably priced businesses with sustainable long-term competitive advantages. 

Vladimir is the leader of the investing group The Roundabout Investor where he teaches the process of evaluating roundabout investments; defined by potential high capital return, growth in free cash flow, safe dividends and conservative capital allocation. He offers weekly investment ideas, a model portfolio, a watchlist, macro outlooks, and sector deep dives. Learn more.

Analyst’s Disclosure: I am/we are long ASBFY, GM, COTY, CL, CLF, UUUU, IPI, PSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

It seems to me that the oil/energy/material selections in this portfolio would be MORE volatile than the S&P500 ... for example PSX, UUUU, IPI seem to all have a beta > 1 ... so I'm a bit puzzled why load up on these if concerned with market valuations and a correction? I get that they will not be perfectly correlated with the overall market, but still seems like an aggressive move given the concerns expressed on the overall market. Perhaps the idea was to offset those risks with a sizable cash position in a "barbell" approach?
Vladimir Dimitrov, CFA profile picture
That's right, the commodity related stocks (CLF, IPI & UUUU) are much riskier than my core holdings that's why my initial investments were relatively small (CLF has had a very good run since I invested hence the 15% weight). PSX is less riskier and it's beta is below 1.0. My main concern are the FAAMG and some other tech sectors like semiconductors for example that trade at ridiculous levels while at the same time representing a very large proportion of the market. Many basic material and energy stocks trade at very depressed levels and should they drop further due to broad market downturn, they will become even more attractive in my view. These basic material stocks also fit quite well within my overall portfolio given my high cash and consumer staples exposure.
Vladimir Dimitrov, CFA profile picture
With time I will be increasing the number of companies in the portfolio and will be diversifying it both across sectors and geographies. The main thing for me is that it takes time to properly approach the whole investable universe of secutirites, then research in detail each company, its peer group and its sector. I also analyse how each stock fit in within my existing portfolio and whether it matches my overall strategy. I am really taking my time to do my homework properly before I invest and I am not in a rush to invest in new companies just for the sake of diversification. I think Buffet once said that "diversification make little sense if you know what you are doing".

One last thing is that I am first focusing on the quality of the company (i.e. what I am buying) and only then addressing the valuation. Many retail investors focus on the multiples/valuation first and could easily end up owning low quality stocks just because they trade at cheap multiples.
Moreno C profile picture
I do not understand how you would not invest in, for ex., the transport sector. XPO seems to me a very good co with p to sales ratio of 0.35.
Vladimir Dimitrov, CFA profile picture
Actually I follow a very systematic process when it comes to deciding on my new buys. I covered that in one of my previous articles. For commodity stocks (CLF, IPI and UUUU) I am using entirely different approach by focusing on well run companies with significant competitive advantages that are also exposed to commodities which in my opinion are about to reverse a long lasting bear markets.

As for the small number.. well I do not understand how retail investors like us could end up holding more than 30 stocks, unless you strictly follow a factor investing strategy.

As for the ETF .. I would pass
Are these all? It seems to be a random selection of some stocks. Maybe better off with some ETFs for the value theme. LB might fit into your bill if you consider coty.
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