Are Value Stocks Coming Back?+ Earnings Predictions
I have never been a value investor. I see the value of value investing, and my strategy takes some aspects of value investing, but I am not, and likely never will be, a value investor. Year-to-date, my strategy has yielded some strong results. I am outperforming the Nasdaq and S&P so far, but there is a trend popping up in the market that is a result of mass optimism, and this trend is favoring value investors.
Value plays have been nonexistent since the days of the pandemic. In general, investors flocked to safety, which meant investing in the mega-cap tech stocks like Microsoft and Nvidia, pumping these companies up and providing massive gains, some of which I reaped. Now, however, despite some of our recent events, the market is feeling more and more optimistic. People are piling back into value plays, as the Russell 2000 shows.
The Russell 2000, the index that tracks all the smallest caps, is up 10% in the past five days, and the TQQQ, an ETF that makes up 11% of my portfolio, is ironically down 11% over the past five days.
This is happening because the market is extremely optimistic that the Fed will cut rates quickly, which would make it easier for the smaller companies to get money cheaply, but in particular, for value plays, lighter rates are better. Value companies are often falling apart, GameStop for example, and rate cuts make it worlds easier for these companies to get capital.
The big problem is that putting so much weight and optimism on a rate cut has hurt investors before. The Fed isn’t going to cut at their next meeting, if I had to guess, and small caps will tumble again. I also believe investors are being short-sided. They are obviously taking money out of the mega-caps and repositioning into smaller caps. Rate cuts do not change my belief that the biggest, most monopolistic companies will be the most successful over the next ten years. Trying to make a value play has a lower expected value, in my mind, than just parking your cash in the biggest of tech companies.
The implications this has for tech companies are similar to what happened in the streaming wars. In streaming, investors turned quickly and wanted tangible results and profit. Soon, investors will want profits from AI ventures. Now, there will not be a Disney meltdown in tech because these companies are spread much deeper than just AI, unlike Disney, who was making an all-out push towards streaming, which investors turned against.
I would not move out of tech or mega-cap stocks at all. As I said earlier, I am still extremely optimistic about mega-cap companies. I think they are going to continue to build upon their advantages. I understand the value play, but I believe some of the value plays may come from undue optimism, and that you should stay strong with
Now, we’re going to talk about some earnings coming up tomorrow and Friday. I have my eye on three companies: American Express, Taiwan Semiconductors, and Netflix.
First, TSMC. TSMC has done extremely well, up 82% YTD. Semiconductors are where you want to be in general, and TSMC is the preeminent semiconductor manufacturer. They are the bottleneck that everybody else must go through. TSMC makes the chips that others design, which makes them possibly the safest play in chips. With that said, I would expect a middling quarter. The valuation is super high because there is a ton of money flowing in, which is the correct long-term play, but the company is still ramping up. I am extremely bullish in the long term, but probably bearish in the short-term, just because the expectations are so high.
Netflix, AKA, my number one enemy for my prized Disney stock. Netflix is going to shoot up or down based on their earnings. It might be up 10%, and it might be down 10%, no matter the report. I would expect a below-average quarter. EPS growth of 40% is expected, which I would expect them to top. They beat earnings 85% of the time, but that isn’t as big of a deal as subscriber growth. I expect a poor quarter, just because the content over the past three months has been extremely weak. I can’t think of any major productions over the past quarter that would keep subscribers from leaving/bringing in new people, so I am pessimistic about this quarter.
AMEX is a compounding company, one of the best and most consistent card companies. Their services web is so impressive, and they are a unique company, that simultaneously brings in a lot of money. They will continue to do pretty well because their customers are protected against a recession by their wealth. AMEX customers are wealthier and more protected, so the company itself is wealthier and more protected. I see no reason why they wouldn’t have an above-average quarter.
