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Holly LaFon
Holly LaFon
Articles (9284)  | Author's Website |

John Rogers' Ariel Investments July Commentary

Within the world of investing, if there is one concept we have all come to know, it is the notion of 'the bubble'

August 09, 2018 | About:

Within the world of investing, if there is one concept we have all come to know, it is the notion of “the bubble.” The only problem is that most bubbles are only truly understood once the damage is done. In recent years, we have seen some memorable bubbles come and go. However, the shadow of the infamous dot com bubble that jump started the new millennium only to come to a crashing halt looms especially large now, as the economy has experienced another era of remarkable growth in technology-based businesses led by the near vertical rise of FAANG – Facebook, Amazon, Apple, Netflix and Google.

Over the last five years, Google (now officially called Alphabet) Class C and A shares have both more than doubled. Apple shares quadrupled. Amazon shares delivered more than a six-fold increase and Facebook shares jumped nearly eight times over. Netflix took the prize though, with its shares accelerating to nearly a thirteen fold lift.

Said differently, these five juggernauts accounted for nearly a quarter of the S&P 500’s +13.4% gain over the period, even though they only comprised 4.2% of the overall index at the end of June 2013.

While Google, Apple and Facebook collectively made $76.9 billion in profit last year, Amazon and Netflix brought in just under $3.6 billion between them. As is true with many growth stocks, investors are not buying these names on fundamentals, they are purchasing them on the expectation of a future where their dominance endures.

As we know from past experience, bubbles are formed from heightened expectations. They are driven by hope for the future and by FOMO – aka – fear of missing out. The rise in price is often viewed as validation of an investment thesis.

This premise conflicts with Ariel’s flagship value approach which is built on targeting undervalued businesses with differentiation and predictability over the next three to five years. Rarely do technology names with those attributes trade at significant discounts. Therefore, in periods where tech returns are strong, our traditional value portfolios will face headwinds.

That said, over the past few trading sessions, disappointing operating and financial results from certain members of the FAANG gang have yielded a swift and steady decline in the group’s stock price performance. While it may be too early to write the obituary of high flying tech-related stocks and claim that a market rotation from growth into value is upon us, the recent turn in sentiment along with heightened regulatory scrutiny across the technology industry, as well as rising trade tensions with China has investors taking another look at the high-growth expectations that have been baked into valuations.

Nonetheless, decades of investing have taught us that combining an initially sensible thesis with a well-publicized rise in price has the potential to keep the pool of buyers swimming upstream – for some time. While we do believe some of these companies will rule their niche in the world for years to come, we have learned that when bubbles are blown large enough, they inevitably pop.

The opinions expressed are current as of the date of this commentary but are subject to change. The information provided in this commentary does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.

Past performance does not guarantee future results. None of the stocks mentioned are held in Ariel’s portfolios. Portfolio holdings are subject to change. The intrinsic value of the stocks in which Ariel’s portfolios invest may never be recognized by the broader market.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website

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