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Looking for value? Don’t ignore the large caps

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Looking for value? Don’t ignore the large caps

There is a prevalent school of thought in investing circles that since value investing is all about buying cheap stocks for less than they are worth, investors should focus their attention on small and mid-cap stocks. Many individual and professional investors alike believe that looking at large cap stocks is a waste of time because these companies are well-followed and therefore more efficiently priced, making it hard for an investor to have an edge.

This line of thinking is deeply flawed for three key reasons and can lead to investors missing out on some sizeable returns.

  1. Investing isn’t physics (or rocket science). A larger company doesn’t generate a stronger gravity field that prevents its price from escaping its intrinsic value.
  2. The market may be “dumb” but it is (usually) not blind. Any “hidden” information that an investor believes may give them an informational edge (and is not inside information) is most likely already known to the market regardless of whether it is a $500 million or $500 billion market cap company. Some investors may have better insights, but that’s a completely different edge.
  3. Buyers of large cap stocks are human, too.

One of our favourite examples to illustrate this point is Apple (Nasdaq: AAPL). When the stock hit a low of $90 back in May 2016, down from $130 a year prior, pundits were calling for the permanent decline of Apple. Sales were falling, global smartphone penetration was reaching saturation point, cheaper Android phones were taking market share and Apple was losing its grip on China, its most important growth market. Yet fast forward to today, and Apple’s share price is $170, and it recently became the first company to break the $900 billion market capitalization milestone.

So how is it that the world’s most valuable, and arguably most widely-followed, company can see its intrinsic value increase by $350 billion, or the GDP of Norway, in less than a year?

The answer is that Apple’s intrinsic value has most likely not moved anywhere near that much. Instead, the market’s short-termism most likely drove Apple’s share price significantly below its intrinsic value. A long-term value investor didn’t need hidden information to know that Apple was an absolute bargain at $90 a share. The market was offering this extremely high quality business at a price that implied Apple’s revenue would shrink at a low single digit rate for the rest of time.

If a value investor with a long investment horizon had bought Apple shares when the price languished in the $90s, they would be sitting on more than a 50 per cent annualised return today. Not a bad return on the largest of large caps that money can buy.

The Montgomery Global Funds own shares in Apple


P.S. Here is a table of the top 10 stocks in the S&P 500 Index, showing the 52 week high and low prices and the corresponding swings in market cap. You can draw your own conclusions about whether large caps can throw up attractive value opportunities.

Screen Shot 2017-11-28 at 10.29.30 am

(Note that actual 52 week high / low market caps will vary because of different volume of shares outstanding at the different dates.)

The Montgomery Global Funds own shares in Apple 

Daniel Wu is a Research Analyst at Montgomery Global Investment Management. Prior to joining Montgomery in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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