Now that the world has reopened, I had the great pleasure of attending an economic and investing forum — in person! A question posed there to one of the speakers really struck me: “With the massive growth and influence of technology companies shaping our world, why would investors put money anywhere else?”
It’s not a silly question. After all, tech CEOs are the new pop stars. Elon Musk just hosted “SNL.” Bill Gates gets more press than the Kardashians. And Jeff Bezos loves the spotlight so much he just bought MGM Studios. Hello, Hollywood! So, who’s interested in companies that do boring things like stocking your pantry, keeping the lights on and keeping your car on the road? Or little things like keeping the financial plumbing of the U.S. working, providing mortgages, and keeping your bank accounts safe? Industry sectors outside of tech that do the latter still sound pretty valuable to me.
So, let’s dig into the numbers of growth stocks (typically all things tech) versus value stocks (think dividend-paying companies in more traditional sectors).The Nasdaq composite is composed primarily of tech stocks. When you hear investors talking about growth stocks, think Nasdaq. In comparison, many companies in the Dow Jones Industrial Average could be considered “old line” industries, such as banks, food and beverage, energy, health care and defense. When you hear talk of value stocks, think Dow. Here comes the data that’s driving the debate. Over the last 10 years, the Nasdaq has trounced the Dow — the Nasdaq is up over 350% while the Dow is idling around 150%. That’s an astounding difference!
How can the “old” ever beat the “new” again? Meaning, can value ever win over growth again?
Trust me, this is a logical question. However, one thing to know is that historically growth and value stocks have traded places in cycles. Growth stocks have their time in the sun and then get supplanted by value stocks. It’s happened time and time again.
Let’s consider how Warren Buffett fared through the tech boom that started in the late 1990s. Did he abandon his tried-and-true sectors in favor of the latest hot stocks? No. The Oracle remained committed to his personal investment strategy, even as the press speculated he might have “lost his magic touch” after 30 years of unsurpassed success.
Buffett was down 28% from June 1998 to the end of the decade, while the S&P 500 (driven largely by the top-five tech names of the time) was up 32%. That’s a 60 percentage point spread! But from that point to 2009, the S&P 500 was down cumulatively by 9%. His investments were up almost 77% during the same time. That’s over an 85 percentage point outperformance for Buffett.
Interestingly, over the course of history, different investing styles (growth, value, momentum, U.S., international) tend to trade places on the leader board. One style might win for a period of time, but then typically get surpassed by a style that has lagged behind. Market strategists call this reversion to the mean. It’s the nature of markets and has been for decades. So just because growth has been winning doesn’t mean it will win forever.
Additionally, it’s important to consider that “old can meet new.” This means that technology isn’t found exclusively in tech stocks — technology can put power behind any sector that chooses to embrace it. For instance, banks, industrial companies, oil, transportation, food and beverage all use tech to strengthen their business.
Let’s talk through three examples of “old” sectors that have employed technology remarkably to keep up with America’s growth.
- Innovative food production company Plenty, for example, uses a vertical farming technique. It allows them to grow massive amounts of produce on just 2 acres, producing as much product as a traditional 720-acre farm. So, today, this agribusiness relative to traditional farming uses 99% less land and 95% less water. Plenty’s 2-acre power farm is able to supply over 400 Albertsons stores, a West Coast grocer, nearly all of their varieties of lettuce all year long.
- Oil and gas. Here at home, field production of crude oil in early 2009 was about 4.9 million barrels per day. That number has more than doubled to 11.1 million barrels per day based on data from the end of 2020. Not bad for this old sector. The U.S. has gone from an undersupply to having the ability to supply the whole world with oil. This remarkable about-face is due to a reinventing in the way we tap our natural resources. Using new technologies, oil companies now drill horizontally as opposed to the traditional vertical process. This new drilling technology facilitates the extraction of larger quantities of oil and gas more quickly and with fewer resources.
- Fast food. Domino’s Pizza is a case study of tech and food. Today, the company considers itself an e-commerce outfit that sells pizza — not a fast-food chain. That’s because digital orders account for about 75% of the chain’s orders — and they only introduced online ordering in 2007. That’s outstanding growth and transition using tech. Domino’s has since added the ability for customers to order by text, Twitter and smartwatch. They were the first to implement an order tracker system to let customers watch as their pizza makes its way to their doorsteps. You may have seen their latest innovation advertised, the Domino’s unmanned autonomous delivery vehicle — coming to a doorstep near you.
Remember, the role of tech is to make everyone more profitable — not just the individual tech companies. And we still need food, banks, energy and all the rest. None of these “old” staples are going away. It’s hard to imagine turning a blind eye to these traditional stock sectors, especially as technology will continue to teach these old dogs new tricks.
Read the original AJC article here.
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