Is Amazon a Value Stock in the New World of Investing?

The end of the era of cheap money is having a major impact on corporate America's earnings, and this is completely changing the way that Wall Street views which stocks are the best bargain buys or the most promising for growth.

As Big Tech companies struggle with slowing revenue growth, a new commodity cycle is underway. In this new environment, companies like Amazon and Netflix are becoming value stocks, while Exxon Mobil is seen as a growth stock.

As the economy struggles with inflation, tech mega caps are no longer seen as easily growing corporations while oil shares are now trading at higher valuations. Growth-fund managers, who have been investing in tech superstars, are now buying shares in more traditional value companies. And vice versa.

As the lines blur between two of the most popular stock investing styles, the largest index managers are far apart on classifying the likes of Amazon and Exxon. This makes life even harder for stock managers who are reshuffling their holdings like never before.

Stephen Yiu made a billion dollars in less than five years by investing in the tech boom. These days, he's trying to explain to clients why he sold all his shares in Meta Platforms Inc. and Alphabet Inc.

"We're now trying to tell people that we're not just a tech fund," Yiu said. "Hopefully people will understand that we're also interested in energy, but some of them still have the perception that we're only interested in tech."

In an effort to recover from a 28% loss in 2022, the London-based investor is now promoting new picks in old-economy sectors like energy and railroad - traditionally seen as value bets in the days of low interest rates.

There is a lot of disagreement among investors about how to define value and growth investing styles. This is not surprising, since both discretionary and quant managers have different ways of approaching these concepts. However, the current divergence in views is noteworthy, especially since there is a lot of money riding on these investment strategies. Index classifications are important in this context, since there are over $800 billion worth of exchange-traded funds tracking value and growth investments.

During the past decade, growth investing was seen as a bet on the tech industry, which expanded at a rate that was much higher than other industries. However, after the pandemic caused a boom, software and internet firms saw their momentum start to decline in an environment of rising bond yields. Meanwhile, a supply shock due to the war in Ukraine, along with an increase in global demand, caused commodity prices to rise significantly.

Now equity investors are having a hard time figuring out which stocks are cheap and which will exhibit strong earnings growth.

Brian Frank, whose Frank Value Fund has counted a tech firm, PayPal Holdings Inc., as one of its top stock holdings, said that before you could easily say that tech is growth and energy is value, but now the line between the two is murky and it's not clear cut. He added that value investors ignoring growth is a mistake.

In its annual reconstitution in December, growth and value indexes run by S&P Dow Jones Indices saw record turnover, with almost a third of their market capitalization affected, according to Hamish Preston, director of US equity indices. Energy’s representation in the growth segment jumped to 8% from 1.4%, thanks to a surge in share prices and a wave of earnings upgrades. On the value side, tech saw its weighting increase by 6 percentage points to 16.8% as the industry became home to many of the market’s biggest losers and analysts cut their estimates.

Amazon, for example, was recently added to the S&P value index after previously being included in the growth index. The change in Amazon's index weighting reflects the company's recent stock performance.

S&P's style benchmarks are used by investors to track the performance of around $380 billion of assets. The latest data available shows that these benchmarks are still relevant and accurate.

There is speculation that S&P's rival, FTSE Russell, may follow suit during its yearly reconstitution in June. This would reflect the reversal in industry fortunes if the current trend holds.

Meanwhile, S&P classified Netflix as a value stock, while the Center for Research in Security Prices kept it in the growth category. The CRSP indexes are used by the largest value and growth ETFs, both from Vanguard.

For investors trying to figure out how long the value revival will last, it's a messy picture. Based on S&P indexes, growth is valued at 40th percentile relative to value, which looks reasonable. However, at Russell, growth is valued at 82nd percentile, which is still pricey. The gap between the two measures is the widest it has been in 20 years, according to Citigroup Inc. strategists including Scott Chronert.

"In the past, the two style indices (S&P, Russell) have not been too far apart," they wrote in a note earlier this month. "Therefore, it is possible that we could see similar shifts when the Russell indices go through their annual reconstitution mid-year."

There is no guarantee that the rise of technology or the fall of energy will last. In the early weeks of 2023, their fortunes reversed again, with tech now running ahead amid speculation that the Federal Reserve will raise rates more slowly in light of signs that inflation is peaking. The tech-heavy Nasdaq 100 is up nearly 8% this year, compared with 4% for the S&P 500.

Catherine Yoshimoto, director of product management at FTSE Russell, has said that it is difficult to predict what will happen during the upcoming reconstitution process. She explained that the style indexes are constructed bottom-up, meaning that the sector allocation is not predetermined. Rather, it will be the result of the underlying companies' style variables.