What My 200,000-Mile Mazda Taught Me About Value Investing
The AI trade is masking one of the biggest market distortions in decades – and it’s about to unwind.
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Tom Yeung here with today’s Smart Money.
They say you can tell a lot about a person by the car they drive.
Some people like to flaunt their wealth and drive six-figure sports cars or SUVs so large that you need a stepladder to get in. I would bet their investment portfolios are made up of flashy growth stocks.
Others adopt a practical approach, like owners of an electric Model 3 Tesla or a dark red minivan heading to their kids’ soccer practice. You usually see them wear sensible shoes, and they probably invest their 401(k) in target-date index funds.
Meanwhile, my dinged-up ten-year-old Mazda tells a rather different story.
In my case, I came across my white sedan after it already had 70,000 miles on it. It didn’t have cruise control or digital displays. And for a low price of $7,500, including taxes and fees, I bought it.
“Tyler,” as I nicknamed the car, and I are now at 203,000 miles. And we’re still going strong.
Now, you might guess that my natural investment style is value. And you would be mostly right. My first investments were in airline stocks, and I still get excited whenever I see companies trading at 5X forward earnings.
But, of course, value alone hasn’t been enough to satisfy portfolios… especially not since the mid-2000s. Over the past decade and a half, growth stocks – like those that make up the Magnificent Seven – have dominated headlines and delivered some incredible returns.
That has led many investors to believe growth has permanently beaten value. But that conclusion overlooks an important detail: much of growth’s success has come from only a small group of extraordinary companies.
In today’s Smart Money, I’ll share why value investing isn’t dead – and where overlooked opportunities are hiding today.
The Illusion of Growth
Two forces made it look like growth stocks had permanently beaten value stocks after 2008.
First, low interest rates. After the financial crisis, central banks pushed rates lower, making future profits from fast-growing companies more valuable. According to Vanguard analysts, this explained much of growth’s outperformance from 2010 to 2020.
Second, the rise of mega-cap tech companies. Companies like Alphabet Inc. (GOOGL) and Apple Inc. (AAPL) dominated markets. These businesses grew rapidly while avoiding many of the costs that traditionally held back large companies. Then came the AI boom, which pushed even more money into a small group of perceived winners.
Together, these forces created an environment that was almost perfectly designed for growth stocks.
But there’s a catch: Growth’s success was driven by far fewer companies than most investors realize.
While those in the Mag 7 may have soared, many other growth stocks struggled. For example, high-growth stocks like Zoom Communications Inc. (ZM), Peloton Interactive Inc. (PTON), and Roku Inc. (ROKU) soared during the pandemic boom but plunged when higher interest rates revealed their challenges.
Meanwhile, value investing didn’t disappear. It was simply hidden behind the success of a few giants of the 2010s tech revolution. Cheaper, asset-rich firms like Texas Pacific Land Corp (TPL) and Axon Enterprise (AXON) notched 100X returns with barely anyone noticing.
Today, with investors once again captivated by AI’s biggest winners, it can be easy to forget that a handful of companies don’t represent all growth stocks. The better opportunities may be found instead in the overlooked areas of the market.
There are areas where expectations are lower and potential returns are higher.
Here’s where to look…
How to Invest in Value
Just like my 200,000-mile Mazda, value investing isn’t flashy. It doesn’t make headlines. But it quietly keeps delivering long after the glamorous alternatives have broken down.
The key is finding companies that the market has overlooked – businesses with solid fundamentals, reasonable valuations, and the potential to surprise investors.
That is why Eric recommends a particular hospital automation firm, a fertilizer company, and an oil and gas company expected to grow earnings at around 25% this quarter.
You can learn more about these companies by clicking here.
These companies may not have the excitement of AI’s biggest winners, but history shows that value stocks have rewarded patient investors over the long run.
Value’s long-term track record is only one reason I believe it deserves attention today.
In the latest Fry’s Investment Report monthly issue, released just yesterday, I join Eric to explore another reason:
Why value stocks could be positioned for a comeback sooner than many investors expect.
Understanding where value stands today could help investors avoid chasing yesterday’s winners and uncover tomorrow’s opportunities.
Click here to learn how to read all about it.
Until next time,
Thomas Yeung, CFA
Market Analyst, InvestorPlace