Covid-19 Era Investment Opportunities

Russell Investments looked at evaluating growth and value stocks in the era of covid-19. Before making any specific suggestions, they offer some useful insights.

At its core, value investing anchors around exploiting short-term human behavior. Essentially, investors place too much of a focus on short-term outlooks.
Like growth investors, though, value investors also need to take a multi-year approach, as they don’t necessarily know which sectors, industries or parts of the market might fall out of favor. Generally speaking, you need to be willing to cast a pretty wide net, often over a number of years. Patience is required to exploit time-horizon biases.

The “take home lesson” from this is that you should diversify your investment portfolio if you want to benefit from buying cheap growth stocks today with the hope of seeing excellent long term profits.
If you are looking deals, you are more likely to find them in the value stock category right now as the spread between P/E values of growth and value stocks has widened significantly, as it did during the dot com bubble.

J.P. Morgan

A specific comment that they make is that the covid-19 crisis will accelerate changes in the tech sector and our ever-increasing reliance on tech and the internet, as we noted in our previous articles about the risks of covid-19 era investing.

They go on to note the following.

There’s been an enormous amount of consolidation in the stock market among companies within industries over the last 30 years or so, particularly over the last 20 years. Essentially, companies have been buying each other. The net effect of this is that the top four companies in most global industries now have, on average, 30% of the total industry revenue compared to roughly 20% in the past,” he explained. Ultimately, this concentration has led to rising returns and an increase in profitability for companies.

Examples include MasterCard, Google, and Facebook which routinely add users at virtually no incremental cost. These folks are so strongly positioned that it is hard for anyone to compete with them.
Virtually all large tech companies have the resources to add new products and services and will continue to benefit as the world moves increasingly to tech in all aspects of our lives.

Now Is (Always) the Time to Invest in Value Stocks

They make an excellent point that many investors wait until the future seems more secure to resume putting money into stocks. But, the best values are to be found when things look the worst. The best value occur when most folks are afraid to invest which is similar to the Buffett saying that you should be greedy when others are fearful.

The “take home lesson” seems to be that by using intrinsic stock value as a guide and by hedging your bets with portfolio diversification, the covid-19 era presents many investing opportunities for those willing to do a bit of homework and exercise a bit of patience.

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