Go Small ...small cap that is ... -- Scott Barlow, Globe and Mail market strategist
December 20, 2023
Richard Bernstein famously wrote “Attention Venture Capitalists: Leave Silicon Valley for West Texas” – one of the most well-timed research reports ever published – in March 2000 when he was chief U.S. quantitative strategist at Merrill Lynch. Mr. Bernstein appears to be in a similar ‘get out of the most popular technology stocks and buy pretty much anything else’-type mood as founder of his own firm RB Advisors.
Mr. Bernstein believes there are “once-in-a-generation investment opportunities” for 2024 resulting from what he terms as “overly speculative myopia.” Notably, he thinks there’s a misguided focus on the Magnificent 7 megacap stocks: Tesla Inc., Microsoft Corp., Nvidia Corp., Apple Inc., Alphabet, Meta Platforms Inc. and Amazon.com.
Investors have focused on these few stocks at a time when the fundamentals and growth characteristics of the Magnificent 7 are far from unique. The strategy team at RB Advisors screened all G7 markets, including Canada, and found 169 companies with expected earnings growth above 25 per cent. Only three Magnificent 7 stocks made the list.
The current mania surrounding artificial intelligence that is driving technology stocks reminds Mr. Bernstein of the “new economy” language in the late 1990s. The technology sector would eventually reshape the economy eventually, but not before a ‘lost decade’ for technology stocks beginning in 2000. He infers that the next ten years from here will feature similar underperformance of the Magnificent 7.
The 2000-2010 period did not see all asset classes perform poorly, as small cap value and emerging markets stocks more than doubled. RB Advisors believes U.S. small caps and emerging markets stocks will again outperform in the next decade, along with U.S. economically sensitive stocks and industrials.
The full investment thesis for each of these sectors is available in the full RB Advisors report here. For my part, I have a lot of time for Mr. Bernstein’s research but don’t currently have the risk tolerance for the added volatility of U.S. small caps. Besides, the Russell 2000 has underperformed the S&P 500 by almost a factor of five over the past three years.
That said, it is often the case that the best performing investment ideas for the future are those that are most neglected, and look the riskiest in the short term.