Why Now Is the Time for Value Investing – Morningstar

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Also, what you should know before buying a spot bitcoin ETF.
Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Can value stocks make a comeback in 2024? I’ll talk with Morningstar Inc.’s markets reporter Sarah Hansen about what conditions are likely needed for a rebound. Plus—the world’s largest asset manager makes a deal to expand its footprint in infrastructure investments. And—what you should know before buying a spot bitcoin ETF. This is Investing Insights.
Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.
BlackRock has announced that it will buy $100 billion alternative asset manager Global Infrastructure Partners. Morningstar thinks this has raised the value of the world’s largest asset manager. The purchase will increase its assets under management. BlackRock reported $10 trillion in managed assets for the fourth quarter. The sum sits well above Morningstar’s forecast and is up more than 16% year over year. Higher revenue from technology services drove up total revenue for the quarter to just under 7% year over year. Earnings surpassed Morningstar’s forecast. Meanwhile, full-year revenue was flat. Elevated compensation and fund administration costs weighed on BlackRock’s operating margins. Morningstar plans to raise its $710 estimate for what BlackRock’s stock is worth by at least 10%. Shares appear fairly valued.
Higher trading revenue expectations helped lift Morningstar’s estimate for what Coinbase’s stock is worth. Morningstar thinks the cryptocurrency exchange platform’s value stands at $100 per share, up from $80. Coinbase is benefiting from crypto’s strong recovery. Trading volume sank in 2023 but has more than doubled. Anticipation for spot bitcoin ETFs led to soaring prices over the last few months. The SEC approved the first batch on Jan. 10. Higher revenue and a leaner business following job cuts last year will likely push Coinbase back into profitability this year. That’s a lot faster than Morningstar expected. Still, investors appear too optimistic. Crypto is inherently volatile. There is a risk that the current rally will prove short-lived. Morningstar thinks Coinbase’s shares are significantly overvalued, even after boosting its fair value estimate from $80 to $100.
Investing in cryptocurrency is going mainstream. The SEC has approved 11 spot bitcoin exchange-traded funds. It has removed a hurdle for retail investors to buy or sell the volatile digital currency. So, what are the risks? And what should investors ask themselves before investing in a spot bitcoin ETF? Bryan Armour is the director of passive strategies research for North America for Morningstar Research Services. He’s also the editor of the Morningstar ETFInvestor newsletter.
Bryan Armour: Yeah, thanks for having me.
Hampton: So let’s start with a quick explainer. What’s the difference between a spot bitcoin ETF and a bitcoin futures ETF?
Armour: This is the first spot bitcoin ETF to be approved by the SEC. And what that means is it holds bitcoin, so it tracks the price of bitcoin by virtue of holding the actual bitcoin itself. Bitcoin futures are futures contracts that agree to buy or sell bitcoin at a future date. And so the way that they achieve bitcoin exposure is by holding the front-month future contract and then they roll month over month into the next and so on. So it’s a little different than holding bitcoin exactly.
Hampton: Now, you’ve written that spot bitcoin ETFs are the best option on the fund market for investors. Why is that?
Armour: Yeah. So with the futures roll, there’s a cost because you’re buying a little higher price each time you roll. And so that drags on performance. Existing trusts like the Grayscale Bitcoin Trust, which is now converted into a spot ETF, had trouble tracking its net asset value by virtue of being over-the-counter trust, previously. And so what that means is it traded more like a closed-end fund. It couldn’t track its net asset value very well. And then both of those options are significantly higher in terms of fees than the new ETFs. And so that’s a huge advantage for investors.
Hampton: Now, can you talk about the unique risk that bitcoin investors face?
Armour: Yeah. So right off the bat, holding bitcoin comes with a lot of risk. And the average investor that’s never invested in bitcoin, they might be surprised to know that bitcoin is 4 times more volatile than the U.S. stock market. And stocks are usually considered the risky asset. So you have to make sure you’re comfortable with that. There’s also, in the past five years, there are four different times when bitcoin dropped 45% from its highs. And so you have to be prepared for this volatile performance from bitcoin. And then on top of that, there’s also all these different things happening with, think about FTX’s collapse. There’s issues in cryptocurrencies that can affect the price of bitcoin even if it’s unrelated. And so investors just need to be aware of these risks.
Hampton: Four times more volatile than stocks.
Armour: Yeah.
Hampton: Wow. All right. So the SEC approved 11 spot bitcoin ETFs, so there are a lot of choices. What are three things investors should consider before buying a spot bitcoin ETF?
Armour: Number one would be: Are you comfortable with the bitcoin exposure? Can you stay in bitcoin through the highs and lows because you don’t want to be buying high and selling low back and forth? It really takes a certain type of investor, certain mindset, to invest in it to begin with.
The second thing is fees. A lot of the new ETFs came in in similar fee levels. And by virtue of SEC approving them all together, they got to see what each other were pricing it at. And that created some fee competition. So, 20 to 30 basis points is where a lot of them sit, but there are outliers like Grayscale Bitcoin Trust, which is charging 1.5%. And so that is an extra fee that gives you nothing. You still hold the same amount of bitcoin; there’s no advantage. You’re not getting a better manager, portfolio manager or anything like that. So that’s number two.
Number three is the liquidity. Fees and liquidity of the ETF are parts of total cost of ownership. And so you want to think about: What’s the price you’re paying to cross the bid-ask spread each time you trade? Is there enough size there to execute against without pushing the market up or down? And so those are costs that could derail you if you’re trading a lot.
And so to this point, early on, we’re only a week in, but the trading activity has shown that iShares, Fidelity, ARK, and Bitwise are really the ETFs that have garnered the most interest from traders, have the most trading volume, tightest bid-ask spreads.
Hampton: Well, everyone listening or watching, Bryan goes into greater detail about spot bitcoin ETFs in his article. Check out the show notes for the link. Thank you, Bryan, for being here today.
Armour: Yeah, thanks for having me.
Hampton: Value stocks have sat in growth stocks’ shadow. The value category has lagged its growth rival and the broader market for many years. But, could value finally take back the lead in 2024? Sarah Hansen looked into what conditions value would need for a rebound. She is a markets reporter for Morningstar, Inc.
Thanks for joining me, Sarah.
Sarah Hansen: Thanks so much for having me.
Hampton: So, what’s been keeping value stocks from making a long awaited comeback?
Hansen: Value stocks are those companies that investors see as kind of high-quality, they’re well-established, and they’re trading at a discount to what they’re intrinsically worth. So, think banks, healthcare companies, and industrials. And then, on the other side of the coin is growth stocks, which investors think have the potential to generate lots of cash in the future, even if they might not be profitable or trading cheaply right now. So, think the “Magnificent Seven” stocks like Apple. Over the past 10 or 15 years, we’ve been in an economic environment that pretty heavily favored growth stocks over value. So, the economy has been expanding, but slowly. Interest rates have been artificially low. And when rates are low, investors feel more comfortable with companies whose returns may be more distant in the future, and all that is great for growth stocks. Then on top of that, the early days of the pandemic also gave growth stocks a boost as stay-at-home stocks like Apple and Netflix flourished during lockdowns.
Hampton: Value stocks edged out growth stocks in 2022 but lost their gains in 2023. Can you describe what happened?
Hansen: A lot of the story in 2022 comes down to interest rates. That was the year that the Fed began tightening monetary policy to combat inflation. There were seven rate hikes over the course of that year, and that was really terrible for growth stocks. As rates spiked, investors looked to value stocks, and they got a boost also as the economy reopened. And then in 2023, a couple of things happened. So, it was like a confluence of factors that made it difficult for value to keep up that momentum that they saw in 2022. We had a mini banking crisis, which made investors nervous about financial stocks, which are a big part of value. And then, on top of that, we had all the excitement over AI, which drove investors into growth stocks. Remember the massive gains in tech stocks like Nvidia.
Hampton: Now, could investors find some opportunities in value stocks right now? And what are Morningstar analysts and other strategists saying?
Hansen: Yeah, there are absolutely opportunities. So, by the end of last year, the stock market was beginning to broaden out outside the Magnificent Seven, and value was recovering some ground. And on top of that, tech stocks have gotten pretty expensive. And by contrast, Morningstar considers value stocks to be pretty undervalued, meaning that our analysts believe they’re trading at a significant discount to what they’re intrinsically worth. And that’s an opportunity for investors. And even if value stocks don’t see a blockbuster rally this year, like they did in 2022, there are also opportunities when it comes to diversification. So, the Mag Seven dominated the market in 2023, but there’s no guarantee ever that that will continue. And so, strategists say that having some exposure to value stocks makes sense, especially now.
Hampton: And what should investors watch for to judge whether value stocks are making a comeback this year?
Hansen: It’s never really possible to predict what will happen in the stock market, but there are some scenarios that could be a tailwind for value stocks. Interest rates that stay higher for longer than investors expect could give value stocks some room to outperform. And then lots of economists also expect growth to slow down a little bit this year, and strategists say that that slowing growth could be good for some defensive parts of the value stock category like utilities and consumer staples. And then financial stocks also make up a pretty significant portion of the value category. So, momentum among financials will be important for any kind of value rally. But as always, like I already said, so much of the stock market’s performance depends on things we can’t predict. And that’s why the diversification angle is so important for value stocks.
Hampton: Sarah, thank you for discussing the outlook for value stocks.
Hansen: Thanks so much.
Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and lead technical producer Scott Halver. And thank you for watching Investing Insights. I’m Ivanna Hampton, a lead multimedia editor at Morningstar. Take care.

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