Value investors traditionally look for undervalued sectors or companies and technology stocks aren’t usually the first industry that comes to mind. However, as Brad Kinkelaar, Senior Managing Director, Equity Portfolio Manager at Barrow Hanley Global Investors points out, any stock can be a value stock, it all comes down to the price you pay. And right now, there are some great global tech leaders trading at significant discounts. You just have to know where to look.
Barrow Hanley is a global leader in value investing and while we believe in the long-term advantages of value investing, we are not set against any section of the market and, specifically, as a manager we are not anti-tech − or against any growth sector for that matter. Quite the contrary, we are always on the look-out for good stocks that are out of favour for reasons we assess as temporary. The crucial point is that we want to own tech companies at a true value proposition today, not potential value five years from now. Aside from being professional investors, we are also consumers of these great technologies that have changed our lives and we want to own them at the right price.
For example, we would love to own Amazon … if it was half the price. And you might say: “Well, Amazon is never going to get cut in half, it's too good a business.” But a year ago it would also not have been reasonable to assume the Chinese tech stocks were going to be cut in half over the next 12 months. Thanks to a government crackdown on tech companies, tech stocks in China have gotten very cheap. Two great examples of this are Alibaba, China’s largest e-commerce company by market cap, and Baidu, which made its name in search engines but is now investing in autonomous driving and artificial intelligence. We recently bought into both companies and it’s a good reminder that, sooner or later, all companies are brought back to earth, providing the disciplined value investor with what could be a once-in-a decade opportunity.
We bought Alibaba and Baidu when the headlines said that China was un-investable. Our view is that if one truly believed this, they should have been selling when the stocks were double the price as the same risk existed then as exists now. In our view, we were able to buy two of China's best internet platforms for a reasonable price without consideration for any of their other businesses. This implies we get leading internet growth engines, such as two of the largest Chinese cloud businesses, a premier Chinese AI business, and the most advanced Chinese autonomous driving business as attractive additions. Knowing that these businesses are focus areas of investment by the Chinese government provides additional assurance against the very outcomes that made Chinese stocks un-investable for some.
Looking more closely at the two stocks, Alibaba generates most of its profits from online advertising on the company’s dominant e-commerce platforms Taobao and TMall. This profit is then recycled into faster growing businesses such as AliCloud, China's largest cloud infrastructure platform. Similarly, Baidu made its name as “China’s Google” but uses the profits generated by its internet search business to reinvest in Apollo, the company’s autonomous driving unit. And while the Chinese tech crackdown could slow growth in parts of the business, it won’t stop it completely.
In conclusion, we want to own the leading companies in any industry, but we want to pay an attractive price. We’re always in search of good companies that are down for identifiable reasons that we believe are temporary in nature. This enables us to take advantage by buying when everyone else is selling. We believe we’ve done that by adding positions in Alibaba and Baidu at valuations approximately 20% lower than the average stock in our portfolio. We remain disciplined in our process, knowing market history is full of periods when the best stocks fell out of favour. The fall of the Nifty 50, the bursting of the dotcom bubble, the financial crisis, or even the COVID crisis are just some of the most spectacular examples.
Find out more about the Barrow Hanley Global Share Fund.