With growth stocks outperforming for so long, history tells us the odds of a correction are increasing. But does a return to value need to see growth stocks suffer? Or are there exceptions? At the recent Morningstar Investment Conference , we listened to leading views in value and growth, respectively, with Rob Arnott of Research Affiliates and Cathie Wood at ARK Invest. Moderator Daniel Needham, Morningstar Investment Management’s Chief Investment Officer, began by asking Arnott if value stocks were about to catch up with growth stocks with the current wide performance gap or whether this time was… different.
“We always hear the observation that it’s different this time,” said Arnott, agreeing that while things may seem different, those differences may not matter. History tends to repeat itself. “When it [the gap between growth and value] widens, that’s a good predictor of subsequent performance of value relative to growth,” he added. The Growth – Value Inflection Point
Arnott said he does believe value and growth will revert to their means or average historical performance. “If you have a stock that’s down 58%, but its P/E ratio is down 70%, that means its underlying fundamentals have grown. That means it’s cheap,” said Arnott, “You can look at that and say ‘get me out of here I can’t stand the pain’, or you can look at that and say ‘I can’t believe how cheap this is, and if I’m not willing to buy now I never will’.” While the math may add up, do more buyers in value come at the cost of growth? Or perhaps there are disruptors out there that make mean reversion look less relevant?
It’s different this time, indeed, said Wood. “We’re on the cusp of transformations to every sector globally,” said Wood comparing our current environment to the times of the 1900s and the revolutionary inventions of the telephone, electricity and the automobile. “Life as we knew back then certainly changed and never reverted to the mean. We did not want to go backwards then and I think the same will be true this time as well.” Are Today’s Innovations More Valuable?
Wood identifies five innovation platforms today that she believes will change the game: DNA sequencing, energy storage, robotics, artificial intelligence and blockchain technology. And she points to Wright’s law as her way of identifying winners in a world where value may be coming back into focus. With experience comes progress, and cost decline – which widens another gap between those investing heavily in new technologies and those that aren’t.
Companies like Tesla ( TSLA ), for example, have invested in electric vehicles and should find they’re able to achieve prices at or below their gasoline counterparts in as little as a year or so from now, thanks to Wright’s law, Wood noted. And then consider the cost savings, reliability and convenience. Consumers want their next vehicle to be electric, believes Wood.
Arnott agreed with the importance of innovation in the investing space but cautioned that the disruptors today can also be disrupted tomorrow. Can Tesla Be Disrupted?
An important feature of recent disruptors is the barriers to entry they’ve built. “In the coming years, Tesla will face increasing competition. Automakers plan to electrify their fleets through the addition of an EV version of existing vehicles and the creation of new platforms,” says senior equity analyst Seth Goldstein, however, “Tesla’s brand cachet is not likely to be impaired any time soon as other automakers move into the battery electric vehicle, or BEV, space because we expect Tesla to keep innovating to stay ahead of startup and established competitors.”
While elements of Wood’s five key innovation platforms can be copied, the application of new technologies, patents, partnerships and level of progress set companies apart. This is illustrated well by unpacking the four barriers to entry that Wood identifies at Tesla: 1) Battery costs, 2) Artificial intelligence, 3) Data, and 4) Over-the-air software updates. Examining Tesla’s Barriers to Entry
Let’s consider each of these innovations in action to learn exactly how they’re keeping companies ahead of the competition:
Battery Costs
Tesla’s batteries are so far ahead, you can’t help but wonder how far ahead they will be by the time the competition catches up in a few years. Built through an exclusive partnership with Panasonic ( PCRFF ), which already makes for a formidable alliance, the batteries use a proprietary design that sets them apart.
“Tesla built its cars on cylindrical batteries. Most other auto manufacturers have based their cars on lithium-ion pouch batteries […]
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