Value stocks have outperformed growth stocks so far this year. Value stocks are generally considered “cheap” and are good value for the money. Hence as the US economy is in recovery mode value stocks have roared back from the depths of last year’s pandemic nightmare. While there hundreds of value stocks in the US market, one wouldn’t consider the mega cap tech stocks as value stocks. So I was intrigued when I came across a story at FirstLinks that argued that mega cap tech stocks are today’s best value stocks and made the case for investment in them.

Of the six mega cap stocks, four are US-based and are shown below:

• Amazon.com Inc (AMZN)
• Facebook(FB)
• Alphabet (GOOG)

• Microsoft(MSFT)

Facebook has a market cap of over $980.0 billion and the  P/E is over 30. Amazon has double the market cap at over $1.90 Trillion and the P/E is about 70. Microsoft’s market cap is $2.1 Trillion and Alphabet’s is over $1.70 Trillion. Only Microsoft pays a dividend.

Andrew Macken, the author of the FirstLinks piece mentions three reasons why these stocks are cheap. Of those the following is interesting:

3. Current valuations are too conservative

The final reason that mega-tech stocks are great value is their attractive valuations. Our analysis shows that the expectations baked into the current stock prices of our big-tech names are far too conservative.

• In the case of three dominant US cloud providers, Amazon, Microsoft and Alphabet, for example, their implied collective annual cloud revenues by 2030 are in the order of just $650 billion higher than current levels, according to consensus estimates. This is a tiny fraction of the $8 trillion increment that Microsoft CEO Nadella expects to accrue to the tech space over the next decade. If Nadella’s forecast above is even remotely accurate, then these cloud providers will see much higher revenues (and earnings) in 2030 than what is currently being implied by consensus estimates.

• Next, consider Tencent and Alibaba, the latter of which has of course suffered greatly from the Jack Ma saga, with the billionaire Alibaba founder’s fintech Ant Group IPO pulled at the last minute and with Ma reportedly under serious pressure from Chinese regulators and Government. In both cases, despite owning some of the most valuable data ecosystems in China and South-East Asia – including being the two dominant cloud providers on the Mainland – their respective stock prices imply very conservative sets of expectations. Said another way, if revenue growth for these businesses were to fall from healthy-double-digits, to just single-digits by 2025, an investor today would still make money, based on Montaka’s analysis.

• And finally, the biggest head-scratcher of them all is Facebook, which is priced at a forward earnings multiple of just 14x. Some of the businesses trading at a higher multiple than this today include Australia’s Wesfarmers, Scentre Group, and plumbing parts supplier, Reece. At the current stock price, the market is effectively giving investors all of the upside from eCommerce, the monetisation of the creator economy, WhatsApp, Messenger and Reels, as well as Facebook’s growth in VR/AR for free!

Source: Why mega-tech growth are the best ‘value’ stocks in the market, FirstLinks

The entire article is worth a read.

Based on many of the assumptions the author makes even a 10.0 Trillion market cap for these companies sounds conservative indeed….

Disclosure: No Positions

The multi-billion dollar luxury goods business is dominated by European companies. Luxury makers survived the pandemic last year better than other retailers and are emerging stronger this year. While in the past developed countries mostly were the market for luxury products that is no longer the case. China and other emerging markets are a huge source of revenue for the purveyors of these goods. Unlike consumer staples or other regular items, pricing power of luxury goods is strong since the only people that can afford to buy these goods have the capacity to bear the price increases. Moreover because these are “Veblen goods”, ever-higher prices for a product may also bring more prestige and satisfaction to buyers. For example, such consumers may feel that a $100K handbag is better than say a $50K handbag since a $100K is a rarity even among these consumers. Another point to remember is that buyers of luxury products are more likely to be insensitive to economic conditions as ordinary folks.

So how to profit from the growth of luxury companies?

One way to profit is to invest in the stocks of publicly-traded luxury firms. The four biggest European luxury companies that are public are LVMH, Kering, Hermes and Richemont.

1.LVMH:

France-based LVMH Moët Hennessy Louis Vuitton (LVMUY) reported strong sales in first quarter of this year. Its markets rose in the first quarter to become one of the most valuable companies in Europe. It owns over 75 brands including Bulgari and owns one of the top spots in benchmark CAC-40 index.

2.Kering:

Kering (PPRUY) is the owner of Gucci brand and is also based in France. It also owns the Yves Saint Laurent and Bottega Veneta brands and is a member of the CAC-40.

3.Hermes:

Hermes International S.C.A (HESAY) is another CAC-40 constituent and sells everything from fragrances to clothes to handbags and other items.

4.Richemont:

Switzerland-based Compagnie Financière Richemont SA (CFRUY)  owns brands such as Cartier, Chole, etc. The company sells apparels, watches, jewelry and other luxury goods.

Disclosure: No Positions

Related:

• The Complete List of Luxury Goods Makers Trading on the US Markets

Dividends are important factor to consider to boost return with equity investments. I have written many times before in this blog that dividends provide a cushion to a well-diversified portfolio during adverse market conditions and help increase the total return of an investment. To put it another way, buying dividend-paying stocks and then reinvesting the dividends will lead to higher total return especially in the long run in most cases. In rare situations one can lose both the principal and the reinvested dividends if a company goes bankrupt. During the Global Financial Crisis of 2008-09 many investors lost big following this strategy when banks failed and equity became worthless. However things like the GFC are not frequent enough to avoid this concept entirely.

From January, 2000 to June, 2020 S&P 500 has soared by 700% based on total returns (dividend reinvested).  This is 43% higher than price returns only. The power of compounding over many years led to a solid 43% excess return.

Sources: FactSet, Mellon Investments Corporation June 30, 2020. Past performance is no guarantee of future results. Charts provided are for illustrative purposes only and not indicative of the past of future performance of any BNY Mellon product.

Source: Equity income investing: A strategy for unpredictable markets, BNY Mellon

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No Positions