Stock index futures are pointing higher this morning, rebounding from yesterday’s pullback.
Consumer Discretionary (XLY, +0.6%) was the worst-performing sector and that was for one major reason: Tesla.
Tesla’s entrance into the S&P 500 has altered the market landscape somewhat as it’s yet to settle down, so to speak, like its megacap counterparts.
Tesla dropped 7.8% yesterday. That was its worse drop since Sept. 23. But the stock was coming off two sessions where it rose nearly 8% each day and an 11-session win streak where the stock climbed nearly 40%.
As growth stocks hold more sway over the broader market index, classic value sectors like Financials (XLF, +0.6%) are just 1% higher over the past year.
But in his latest memo, Oaktree Capital Co-Chairman Howard Marks, describes a divide between growth and value investors as comparable to the same “fervent adherence” shown by rival political factions.
And Marks, who attributes his success in fixed income to his “natural conservatism” and disinterest in tech, says it doesn’t have to be that way.
“Value investing doesn’t have to be about low valuation metrics,” Marks writes “Value can be found in many forms. The fact that a company grows rapidly, relies on intangibles such as technology for its success and/or has a high p/e ratio shouldn’t mean it can’t be invested in on the basis of intrinsic value.”
Value investors have a natural skepticism, especially as when they hear that this time might be difference. But in the world of innovation that “should be paired with a deep curiosity, openness to new ideas, and willingness to learn before forming a view,” Marks says.
“In the case of cryptocurrencies, I probably allowed my pattern recognition around financial innovation and speculative market behavior - along with my natural conservatism - to produce my skeptical position,” he adds. “These things have kept Oaktree and me out of trouble many times, but they probably don’t help me think through innovation.”
In what’s considered classic value investing, bargains used to be readily available, but with today’s sheer number of investors, it “seems foolish” to think bargains will be found as easily, Marks points out.
Big tech is currently being aided by a “virtuous circle created by the combination of their preeminence as companies, their recent eye-popping performance, their huge market capitalizations, and the strategic considerations of the fund business,” but that is “one of those trends that continues until it stops,” Marks writes.
Still, it “doesn’t make sense for value investors to bar investments simply because (a) they involve high-tech companies that are widely considered to have unusually bright futures, (b) their futures are distant and hard to quantify, and (c) their potential causes their securities to be assigned valuations that are high relative to the historic averages.”
Sector Watch
More insight on Tesla, biotechs and other growth names will come this afternoon when ARK Investment Management holds a webinar at 1:30 p.m. ET.
The ARK Innovation ETF (ARKK, +1.7%) slumped 3% yesterday on Tesla’s decline and a sharp drop in Editas.
Biotechs have been particularly strong for ARKK in January, with strong gains in gene-editing stocks.