In 1976, US economist, Herbert Stein, famously stated that “If something cannot go on forever, it will stop.” His observation could well be applied to the ballooning value of many technology companies, some of which have never made a profit, and possibly never will. Which is why this might be a good time to look at high quality businesses that have been left behind by the rally.
Notwithstanding the lockdowns, infections and tragically unnecessary deaths in Victoria, the global investing news flow in recent weeks has been relatively positive. The Europeans agreed on a stimulus package and the news on the progress of a vaccine has been encouraging. It should have been very, very good news for the stock market, especially for cyclical and value stocks (those that have not participated in the technology bubble).
Much of the strength in the stock market since the March lows has been driven or led by technology companies. Don’t get me wrong – some are amazing businesses, they enjoy monopoly pricing power, tailwinds and long runways for growth. In an environment where returns are very low, investors are right to seek high quality growth, and that is what these companies represent.
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