AI trading hides one of the biggest market distortions in decades – and it’s about to reverse.
Listen to the audio version of this article (generated by artificial intelligence).
Tom Young here with today 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 value sports cars or SUVs so large that you need a stepladder to get inside. And I bet their portfolios are made up of gaudy money Growth stocks.
Others take a practical approach, like the owners of a Tesla Model 3 electric car or a dark red pickup truck heading to their children’s soccer practice. You’ll usually see them wearing sensible shoes, perhaps investing their 401(k) in target-date index funds.
Meanwhile, my ten-year-old Mazda tells a somewhat different story.
In my case, I found my white sedan after it had 70,000 miles on it. It had no speed control or digital displays. For the low price of $7,500, including taxes and fees, I bought it.
“Tyler” as I nicknamed the car, and I’m now 203,000 miles away. We are still going strong.
By now, you might guess that my natural investing style is valuable. And you’ll be mostly right. My first investments were in Airlines stocksAnd I still get excited when I see companies trading at 5x forward earnings.
But, of course, value alone has not been enough to satisfy investment portfolios… especially since the mid-2000s. Over the past decade and a half, growth stocks – like those that make up the seven great stocks – have dominated the headlines and delivered some stunning returns.
This has led many investors to believe that growth has permanently outpaced value. But this conclusion ignores an important detail: much of the growth success has been due to only a small group of extraordinary companies.
per day Smart moneyIn this article, I’ll share with you why value investing isn’t dead — and where today’s overlooked opportunities are hiding.
The illusion of growth
Two forces made it seem as if growth stocks permanently outperformed value stocks after 2008.
First, low interest rates. After the financial crisis, central banks pushed interest rates lower, making future profits from fast-growing companies more valuable. According to Vanguard analysts, this explains much of the growth outperformance from 2010 to 2020.
Second, the rise of giant technology companies. Companies like Alphabet Company (Google) and Apple Inc. (Apple) Markets you dominate. These companies grew rapidly while avoiding many of the costs that traditionally bedeviled large companies. Then came the AI boom, which pushed more money to a small group of perceived winners.
Combined, these forces created an environment that was almost perfectly designed for growth stocks.
But there is a problem: The growth success has been driven by far fewer companies than most investors realize.
While those in the Mag 7 may have risen, many other growth stocks have struggled. For example, high growth stocks e.g Zoom Communications Company (ZM), Peloton Interactive Inc. (Button)and Roco Company (For this year) Interest rates rose during the pandemic boom, but fell when higher rates revealed their challenges.
Meanwhile, value investing has not disappeared. It was simply hidden behind the success of a few giants of the technological revolution of the 2000s. Cheaper, asset-rich companies like Texas Pacific Land Company (TPL) and Exxon Corporation (AXON) 100X returns were achieved almost unnoticed.
Today, with investors once again fascinated by AI’s biggest winners, it can be easy to forget that a handful of companies don’t represent all growth stocks. Better opportunities can instead be found in 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 Mazda with 200,000 miles on it, value investing isn’t flashy. They don’t make headlines. But they continue to quietly provide services long after the glamorous alternatives collapse.
The key here is to find companies that the market has overlooked – companies that have strong fundamentals, reasonable valuations, and have the potential to surprise investors.
That’s why Eric recommends a particular hospital automation company, a fertilizer company, and an oil and gas company whose profits are expected to grow about 25% this quarter.
You can learn more about these companies by clicking here.
These companies may not have the excitement of the biggest AI winners, but history shows that value stocks have rewarded patient investors over the long term.
Its long-term value track record is one reason I think it deserves attention today.
In the latest Fry investment report The monthly issue, which was released just yesterday, I joined Eric to explore another reason:
Why value stocks could be positioned for a comeback sooner than many investors expect
Understanding where value stands today can help investors avoid chasing yesterday’s winners and uncover tomorrow’s opportunities.
Click here to find out how to read all about it.
Until next time,
Thomas Young, CFA
Market Analyst, InvestorPlace
