Applied Finance Capital Management, an asset manager rooted in research on company valuations, has spotted attractive buying opportunities in the stock market, including some big technology companies, according to one of its founders.
“Undervalued, high-quality companies are on a super sale right now,” Rafael Resendes, who co-founded Applied Finance in 1995, said in a Tuesday phone interview. His stock picks include tech giants Apple Inc., Microsoft Corp., Facebook Inc., as well as discount stores operator Walmart Inc. and fast-food chain McDonald’s Corp.
In his search for “intrinsic value,” Resendes says he is not after companies that appear cheap based on measures, such as price-to-book. Instead, Applied Finance makes projections about a company’s profitability in part by treating research and development as an investment, rather than an expense, as done under traditional accounting rules, according to the co-founder.
U.S. stocks have been falling this week, with losses of the tech-laden Nasdaq Composite Index
exceeding declines posted by the S&P 500
and the Dow Jones Industrial Average
But while many investors have grown concerned about stretched valuations in tech stocks, Resendes says his models show growth companies have begun to look attractive this year.
He now sees a “tug of war” of opportunities in growth versus value, but says Applied Finance doesn’t have “a dog in the race” between the two investment styles. “We’re always looking for what the undervalued stocks are,” he said.
Growth stocks have been trailing growth equities in 2021, a switch after outperforming for years. The Russell 1000 Growth index
has gained 1.4% this year through Wednesday, trounced by a 14.1% rise for the Russell 1000 Value index
according to FactSet data.
“We differ from probably the vast majority of people in that we don’t think value is necessarily that attractive,” he said. “We think the easy money in value was made starting last August.”
Some tech names Resendes likes have mixed performances so far in 2021. Shares of Apple
tumbled about 7.5% this year through Wednesday, while Microsoft
was up 7.5% and Facebook
That compares with a Nasdaq COMP gain of just 1.1% for the year through Wednesday’s close, trailing an 8.2% gain for the S&P 500 and the Dow’s 9.7% rise.
Big tech names may be a bit more “controversial” in terms of buying opportunities as other investors have expressed concerns that their valuations are too high, according to Resendes. But he sees “a big runway for these stocks.”
The firm’s mutual funds Applied Finance Select Fund, Applied Finance Explorer Fund and Applied Finance Core Fund are up double-digits this year, according to FactSet data.
The Select Fund
which invests in large-cap stocks, was up 16.5% at last check for the year, FactSet data show. The Explorer Fund
focused on small and midsize companies, gained 26.1% over the same stretch, while the Core Fund
which primarily targets large-cap companies, was up 16.4%.