13 September, 2021
The S&P500 ended August at yet another high, making it seven consecutive months of gains – the longest winning streak since January 2018. This is relatively rare; a winning streak of seven consecutive months or more has occurred just 14 times in the last 60 years.
Meanwhile, at 21x forward earnings, the S&P500 continues to flirt with all-time high valuations reached at the dot.com bubble.
Price index and Forward PE multiple of the S&P500.
Source: Bloomberg
So, with global equity indices hitting record highs and headline valuations looking full – is it time to cut and run?
The average valuation hides the fact that multiple dispersion remains stubbornly high (also just shy of dot.com bubble extremes) – meaning there’s very expensive stocks and very cheap stocks. In fact, value’s discount to growth has rarely been this attractive.
This tells us that opportunities exist in relative valuations and now is a great time to be an active value manager.
Owning disruption at the right price
It’s no secret tech stocks have led the charge over the last 6 months as investors once again seek out secular growth and businesses believed to be disruptive, because it’s believed they can grow independently of the economic cycle.
But disruption is not limited to the tech sector. It can be found through the market spectrum and given multiple dispersion remains high, it can be found at very attractive valuations in less obvious places.
The retail sector is a great example.
Prior to COVID, e-commerce was around 15% of retail sales in the US and it quickly shot up to 22% thanks to lockdown.
Amazon has been the winner with almost 40% of the US e-commerce market – which equates to almost 10% of total US retail sales. Amazon is almost the same size of America’s largest retailer Walmart (14% market share), but with no physical stores. Without a doubt, Amazon has disrupted retail.
Amazon’s dominance in e-commerce primarily comes down to the investments it’s made in logistics and improving price and breadth of choice for customers.
Amazon has a low threshold for free delivery, and same day or one day delivery across 20% of the US population and growing. Delivery speed and market share correlate so we expect the company to continue to take share. Amazon sets the bar very high for its online peers, making it difficult to compete with.
Thanks to its unassailable lead in e-commerce, and strength in its Cloud infrastructure business, Amazon’s earnings are growing more than 20% p.a. and the company is valued at 23x core 2023 earnings – not a bad price to pay for the largest player in two mega trends.
At the other end of the spectrum, we have UK retailer, Tesco.
Traditional retailers aren’t often considered disruptors or winners in the new retail world.
Tesco is not new to online. Tesco.com was launched in 2000, and it’s the leader in UK online grocery. Tesco’s 30% share of online grocery is greater than its in-store share – Tesco is a market share winner as grocery transitions online.
The UK is much more densely populated than the US, which is key to running a profitable online business, and Tesco has unrivalled coverage of almost the entire UK. Taking a leaf out of the Walmart playbook, Tesco is leaning on existing store assets – investing in fulfillment centres attached to large format stores and using existing stores to fulfill online orders.
Yet at 11x earnings Tesco is not priced for success in a digital world despite it being a market share taker. It’s valued at less than half the multiple of other global leaders like Woolworths and Walmart that also over-index to e-commerce.
Amazon (a new-world tech giant) and Tesco (a traditional retailer misunderstood by the market) are both winners from digital change and represent value for their growth profiles.
Both have a place in a pragmatic value portfolio.