November 2020, Portfolio Meeting Recap: The Disruptors vs. The Disrupted

Zachary Bouck, CIMA®

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The best day of the month is upon us—well, it was last Wednesday—and it came right after election day.

During our monthly Portfolio Review Meeting (PRM), all Denver Wealth Management advisors meet (virtually) to discuss our holdings. We look at mutual funds, equities, bonds, real estate investments, etc., and assess their performance. Additionally, we examine items such as changes in fund managers and the cost of ownership. From there, our team combines the historical track record of each fund (year-to-date, one-, five-, and ten-year earnings) with its current standing and determine an investment forecast.

We had hoped for concrete election results by Wednesday morning, but that didn’t quite pan out. At the point of writing this article, we know that Joe Biden and Kamala Harris are leading the presidential election (pending recounts and potential litigation); the Congress will likely remain blue; the Senate will likely remain red. Sure, it’s a little blurry, but the market appears optimistic for relatively political stagnation.

The stock market likes certainty. If the Congress and Senate remain Democrat and Republican majority, respectively, as they were during President Trump’s four-year term, we can predict little change. We probably won’t see any significant tax or spending bills. And the market appears to be A-OK with that.

WHAT TYPE OF INVESTOR ARE YOU?

[4:25] Before investing, you need to determine what type of investor you are: short- or long-term. A long-term investor is concerned with growing wealth over decades, generally, and is willing to accept more significant volatility. A short-term investor is one who speculates, trying to make a quick buck here and there as opportunities arise.

At Denver Wealth Management (DWM), we’re the former. As we like to say, it’s time IN the market, not timING the market. Thus, we have to look beyond the election and ask ourselves, how do the next couple of years look? Where do we want to be invested?

Naturally, Covid-19 plays an impactful roll in that timeframe. Unbeknownst to us during our PRM, Pfizer announced tremendous Phase III test results the following Monday, stating a 90% effective rate in their vaccine, BNT162b2.

“Today is a great day for science and humanity. The first set of test results from our Phase III COVID-19 vaccine trial provides the initial evidence of our vaccine’s ability to prevent COVID-19,” said Pfizer CEO and Chairman, Dr. Albert Bourla.¹

Again, the markets hate uncertainty. A potential vaccine, which health officials predict will begin distribution this year, lends to more short-term investment certainty.

"WHEN I BUY A COMPANY (STOCK), I LIKE TO THINK OF A BUSINESS"

[7:29] When investing, a business-ownership mentality is vital—after all, that’s essentially the position you’re assuming. If you can visualize the underlying company(s) from the perspective of a business owner, you’re becoming more in tune with your securities transaction.

I, for example, am a recent dog owner. Many fellow Americans have joined that same esteemed club of canine ownership during the pandemic—perhaps folks are lonely in isolation. With dog ownership—any pet ownership for that matter—comes additional necessities: i.e., food, toys, health and wellness, leashes, brushes, animal clothes (if you’re into that), and so on.

Rather than assuming the position of Stock Market Investor, throw on your business-owner cap for a second, and approach similar companies with that mentality.

GROWTH VS. VALUE INVESTMENTS

[9:06] The on-going comparison between growth and value investments has become a staple in recent PRMs. For a brief memory-jogger, growth investors are interested in booming companies—think: Uber. The ride-share goliath, like many tech companies, has grown tremendously in recent years; however, so has the cost of ownership. Growth investors are comfortable paying a higher price for companies they believe have the capacity for future exponential growth.

Value investors, on the other hand, search far and wide for long-standing, reliable companies that may currently trade at a low price—think: utilities. Utilities aren’t a sexy addition to your portfolio, but they may be inexpensive and generate stable revenue year-over-year, offering reliable dividend payments to shareholders.

Over the last five years, growth investments have significantly outperformed value. Take the iShares Russell 1000 Growth ETF, which has generated 120.91% gains since late 2015. Compare that to its value counterpart, which returned 26.14% in the same timeframe.²

In that same timeframe, perhaps even the last decade, investors have altered their growth vs. value mentality. Old school investors are watching popular, time-tested corporations drop in value—some rather significantly—licking their lips, waiting to buy back in at a steal. If you look at the price-to-book value, numerous value investments own more underlying assets than the market value reflects.

On the other hand, new school investors are looking beyond the price-to-book value at the future earnings potential of corporations. They’re looking for the top companies of the next decade, not the past decade. Naturally, that comes at a higher cost.

IS IT CRAZY TO PASS ON VALUE?

[12:30] “Well, Zak, if growth is crushing value, then why isn’t every investor simply buying growth stocks?”

Over the past few months, we’ve assessed our growth and value holdings, thinking it may be crazy to pass on these value stock opportunities.

The balance between value and growth truly depends on who you are as an investor (your objectives, risk tolerance, time horizon, etc.). When deciding between the two, ask yourself the following: is this company the disruptor or disrupted? Take big tobacco, for example. Historically, there has not been a viable substitute for tobacco. However, the recent surge in e-cigarette use has changed that.

E-cigarettes, in that case, are the disruptor; big tobacco is the disrupted.

It doesn’t end there. Look at Juul—a prominent leader in e-cigarette manufacturing. Who owns Juul? Altria: one of the world’s largest manufacturers and distributors of tobacco products.

With that information, we know that big tobacco is both the disruptor and disrupted.

Let’s look at another example: Amazon and Walmart. It’s safe to assume that Amazon is the disruptor, and Walmart is the disrupted. Amazon changed the e-commerce game when it introduced free two-day shipping. Now, you click “buy,” stand up from your computer, open your front door, and your package is already waiting on your porch.

Since then, kudos to Walmart, which also enhanced its shipping capabilities to compete with Amazon. One key difference is it costs over $3,000 for one slice of that Amazon pie, whereas Walmart costs just under $150.²

The point here is not that Walmart is slowly overthrowing Amazon to reclaim its rightful position as ruler of the retail shopping kingdom. It’s merely illustrating that once-disrupted value investments are capable of becoming disruptors as well—relatively inexpensive disruptors.

A BIT ON INVESTING

[15:20] International investments are in the same boat as value. The U.S. growth market has effectively dominated the world’s marketplace—remember when Apple surpassed the value of the entire European stock market? I remember.

One contributing factor was President Trump. It’s no secret that the president didn’t jive with China. Setting politics aside and focusing solely on the investment implications, implementing tariffs on another country isn’t the best for investors’ international holdings. Generally, you want a free market to promote global trade.

With that said, international markets appeared to react favorably upon Joe Biden’s electoral victory.

TO SUM THINGS UP

Whether you read the entire article or scrolled to the conclusion to find the talking points, here’s a brief summation:

• Whatever comes of the presidential election, the market is happy with some indication of political stagnation. We don’t anticipate any significant change in policy over the coming years.
• Think of stock ownership as owning a business, not merely a symbol and a price.
• When it comes to value vs. growth investing, look for the disruptors and the disrupted. Of the companies that will thrive in the next decade, which are selling at a discount?
• Similar to value investments, don’t sleep on international opportunities.

As we prepare for the new year and new presidential term, now is the perfect time to revisit your financial plan. Call our office at (303) 261-8015 to talk with one of our advisors about your current portfolio or long-term financial future.

 

Sources

¹Ciaccia, Chris. “Pfizer’s COVID-19 Vaccine: What to Know.” Fox Business (11 Nov 2020). https://www.foxbusiness.com/healthcare/pfizers-covid-19-vaccine-what-to-know (Accessed 11 Nov 2020)

²Yahoo Finance. yahoofinance.com (Accessed 9 Nov 2020)

Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

International investing involves risks such as currency fluctuation and political instability and may not be suitable for all investors.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Growth investments may be more volatile than other investments because they are more sensitive to investor perceptions of the issuing company’s growth of earning potential.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.

Any individual securities mentioned are for reference only and are not intended as a recommendation to buy or sell.

All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy.