In his latest Q2 2024 market commentary Bill Nygren discusses how giant cap growth companies that performed well in 2023 continued their success in 2024, while large cap, slower growth companies that underperformed in 2023 continued to struggle. High-priced growth stocks need to maintain growth rates or high P/E ratios to keep outperforming, but Oakmark does not support above-average growth or P/E beyond seven years.
Historically, excitement around transformative technologies like computers and the Internet did not always yield long-term profits, as seen with IBM, AOL, and Yahoo!.
This historical context suggests caution in assuming today’s AI winners will sustain their advantage.
Here’s an excerpt from the commentary:
At the intersection of the three tailwinds, giant cap growth companies that performed well in 2023 continued to perform well in 2024. At the convergence of the three headwinds, the large cap, slower growth companies that didn’t perform well in 2023 continued to underperform in 2024. So, you can see why we didn’t keep up.
For high-priced growth stocks to continue outperforming, they must either maintain their growth rates long into the future or maintain their high relative P/E ratios. Oakmark uses a longer time horizon than most value investors, but we won’t underwrite either above-average growth or an above-average P/E beyond seven years. Our belief that many growth stocks today are fully valued could be proven wrong if these businesses can sustain their advantage for longer than businesses have in past technology transformations.
There have been two technologies in my career that seem similar to the artificial intelligence (AI) excitement boosting tech stocks today – computers and the Internet.
When I was in business school in 1980, there was so much market interest in the computer manufacturers that IBM was the largest market cap company, and the industry was referred to as “IBM and the Seven Dwarfs” (Burroughs, UNIVAC, NCR, Control Data, Honeywell, General Electric, and RCA). Suffice it to say that profits from computer manufacturing disappointed for all eight companies.
Then in 2000, amidst “dotcom” hysteria, the largest cap Internet companies were Cisco, America Online (AOL), and Yahoo!. AOL and Yahoo! ended up nearly worthless, and Cisco, at a lower share price than in 2000, has lost 80% relative to the S&P 500. We think these results should give pause to anyone believing the AI winners have already been determined.
You can find the entire commentary here:
Bill Nygren Q2 2024 Market Commentary
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