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Buying in to the exuberance bubble

Lex Hall  |  15 Jan 2021Text size  Decrease  Increase  |  
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About a month ago I bought back into Vanguard’s US stock market ETF, known under the ticker VTS. It’s the cheapest around, has a bit of everything and carries a Morningstar gold medal. And hey, the record-setting US market only goes up, right?

In the ensuing weeks, amid growing talk of stock market bubbles, I have a gnawing suspicion that perhaps I should have waited. Fear of missing out or buyer’s remorse? Or just generally succumbing to the noise? This week amplified the anxiety somewhat, especially the headline of a report by Morningstar equity analyst Brian Colello, which ran “We see exuberance within certain US tech stocks”.

On reacquainting myself with the VTS portfolio and discovering that the largest exposure is tech (26 per cent), followed by consumer discretionary at 16 per cent (a sector also dominated by tech), I was feeling, well, slightly less exuberant.

“For more than a handful of US Tech names,” Colello notes, “we saw unusual price appreciation in 2020. We identified 11 companies under our coverage where the stock price rose 100 per cent-plus while reaching at least a US$20 billion market cap in 2020, meaning that the company added at least US$10 billion of market value in a single year. Stocks include Coupa Software, CrowdStrike, DocuSign, Nvidia, Okta, Palantir, RingCentral, Shopify, Twilio, Zoom, and Zscaler.”

Of course, as Colello notes, such large moves are rare. “We typically only see one or two companies receive such a massive infusion of investor dollars in a single year, and 1999 was the last time we saw more than five companies appreciate to this extent. In recent years, the market made some wise investments to pile into one or two of these stocks each year (especially FAANG). However, many investors did not fare well after 1999, which was the last time that the market rushed into more than a handful of Tech stocks.

By Colello’s reckoning, there are a handful of companies with what he describes as “astronomical” valuations that exceed his fundamental expectations. “We also see sky high price/sales multiples in the top decile and quartile of software stocks,” he adds. “When thinking about a ‘bubble’, we can construct a basket of highly overvalued Tech names where valuations are exuberant and might ‘burst’ in the future.”

Incidentally, and as a Firstlinks reader, “Alex D”, commented this week, while the US market has been notching records, it’s worth mentioning that many big names—most notably in energy, financials, and industrials—are in the red. Talk of a market boom is particularly frustrating when you lost money in 2020. As Jeremy Grantham put it in his update from last week, “there is nothing more supremely irritating than watching your neighbours get rich.”

Vanguard Total Stock Market ETF (VTS), Vanguard Australian Shares Index ETF (VAS) - max

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a chart showing the VTS ETF versus the VAS ETF since inception

Source: Morningstar Premium

For a fuller idea of the big industrial names that suffered, in Firstlinks this week, Graham Hand features a fascinating overview from Stanford Brown chief investment officer Ashley Owen.

Firstlinks also hears from Noel Whittaker on the magic of compound interest; and do you remember Telecom phonecards? Well, Graham Hand was once a collector, and his interstate mission to offload a rediscovered 22kg suitcase full of them is both fascinating and uplifting.

Elsewhere, as a follow-up to Emma Rapaport’s look at the best and worst performing equity funds, we single out the ten Australian stocks under Morningstar coverage that are perhaps too hot to handle.  

Morningstar healthcare strategist Karen Andersen examines how a vaccine rollout and herd immunity will end the pandemic. “Covid will create a $52 billion vaccine and treatment market and usher in immunity by 2023,” Andersen says.

In a week in which Donald Trump was banned from Twitter, Morningstar US equity analyst Ali Mogharabi looks at the effect for social media companies.

Morningstar director of content Susan Dziubinski offers some simple investing strategies for those resolving to streamline their portfolios in the new year.

We look at Avita Medical (ASX: AVH). The spray-on-skin maker reported flat revenue, but the future is bright, says Morningstar regional director of equity research Adam Fleck.

2020 was a dire year for dividend investors, but a bounce-back in value stocks could mean equity income stocks are well positioned for the long-term, says Morningstar strategist Dan Lefkowitz.

Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.

Emma Rapaport quizzes Morningstar analyst Angus Hewitt on why airlines don’t have moats—economic ones, that is.

The Australian dollar is tipped to flirt with five-year highs this year. Is it time to protect against currency risk? Nicki Bourlioufas investigates.

And finally, in Your Money Weekly, Peter Warnes tells us to be disciplined, diversified and remember what goes up must come down—and have a cash reserve to take advantage of opportunities when they arise.


Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.

is senior editor for Morningstar Australia

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