The last few days have been eye-opening for investors. They are re-learning the old saying that trees don’t grow to the sky. Market darlings like Tesla, Apple, Microsoft, etc have taken it on the chin. And yet, most of these companies are only slightly less expensive on a relative and absolute basis than they were a couple weeks ago. I pulled these two charts below from the Morningstar website as of August 31:
On a 1 and 5-year basis, one can clearly see how much money has been piling into large and mega cap growth names (FAANG, SAAS etc) at the expense of everything else. This is not a COVID phenomenon – it has been ongoing and COVID has exacerbated it. The chart below shows another view of how stretched valuations have become i.e. we haven’t seen this kind of spread even at the peak of the last tech bubble in 1999-2000.
As a reminder, we ignore labels like growth or value; we focus on buying companies that are highly profitable and generating growing streams of cash that we can invest in at reasonable valuations. I don’t know when the music will stop for this bubble but it will stop eventually and free cash flow will come back into favor. (See the period from 2000-2002 in the chart above. Fingers crossed for a repeat!)
Let’s chat about how to take advantage.