web analytics

Markets continue to be in flux, for the most part driven by mega cap companies, many of which are overvalued. Despite many of the mega caps expensive valuations, the top 5 largest in market cap companies have realistic expectations priced-in. Many investors expect these firms to underperform based on large market caps, expensive GAAP price multiples & high investment rates, however intrinsic value data supports the market prices of most of the #FAAMG stocks.

Though not included in the report, Tesla’s (TSLA) recent run has vaulted them into the top 5. The absence of Tesla in a portfolio can have a meaningful negative impact on short term returns, however, long term investors should be cautious of the high expectation priced in.

When all the talk of higher taxes and government spending dominated the news, we cautioned investors to not react, but think through the most likely scenario. Partner and Senior Analyst Jun Wang discussed why the likely tax policy outcome was to be about $1.75 T in new spending with minimal corporate tax increases.  Jun also provides some color on our market outlook, Looking Back, Looking Forward, which is part of our Q3 review for our flagship strategy Valuation 50.

We continue to believe that for investors with long term horizons, investing in undervalued, wealth creating companies that return capital to owners (Valuation Stewardship stocks) is the key to outperformance. This thesis is supported by our quantitative analyst team in our quarterly quantitative review which highlights our ongoing asset pricing research. On a cap-weighted basis, high Valuation Stewardship stocks have returned 14.65% per year, while low Valuation Stewardship stocks have returned 7.93% per year.

In the small-cap space, investors should be paying attention to what we have noted as an alarming trend of diluting existing shareholders through secondary offerings over the past year. Over 260 firms have increased their weighted diluted shares by at least 25% over the past year. The companies with the highest levels of dilution in the Russell 2000 lagged by over 5% in the third quarter and the valuation gap observed between diluters and companies returning excess capital to shareholders is widening.


Chris Austin (@caustin34)
Applied Finance, Partner

Learn about our Valuation Driven® investment strategies.

The Valuation Edge™ Newsletter Articles:

Looking Back, Looking Forward – 2021Q3
Jun Wang, CFA reviews the events of the third quarter and provides some thoughts on China, Inflation and the Fed, the potential infrastructure package and gives some expectations on economic growth over the next few quarters.

Valuation Beta – 2021 Asset Pricing Study Update
This update to our asset pricing study highlights the significant alpha from incorporating intrinsic value, wealth creation and financing yield in portfolio construction in both large and small-cap universes over the past 23 years. Undervalued, Wealth Creating companies that return capital to owners are the key to outperformance.

Tactical Valuation: Alarming Dilution Levels in US Small Cap
The recent dilution of AMC shareholders is well documented, another 200 firms have increased their weighted diluted shares by at least 25% since the end of 2020. We highlight this alarming trend of dilution as well as explore the intrinsic value characteristics of popular styles/benchmarks.

Implied Expectations of Top 5 Market Cap Stocks in S&P 500
FAAMG stocks comprise ~22% of the S&P 500 and have a huge impact on cap-weighted benchmarks. We continue to analyze each stock’s intrinsic value contribution and implied expectations compared to consensus forecasts in advance of earnings updates in late October/early November.

ValuationEdge™ Newsletter

Join to receive updates and exclusive

Valuation Driven® insights!

You have Successfully Subscribed!