With global equity markets approaching record highs, much of their performance has been driven by a handful of large technology companies. However, beneath the surface, market breadth remains weak, with more companies reaching 52-week lows than highs, creating opportunities for investors willing to look beyond the market’s biggest names.

 

This piece explores how market concentration and negative sentiment can create attractive investment opportunities, particularly among overlooked mid-sized companies whose share prices may not reflect their underlying fundamentals.
 

The article covers:

 

Diamonds in the dust: Finding value beyond big tech

 

 

By Sean Peche, Founder and Portfolio Manager at Ranmore Fund Management.

 

Sports teams are strongest when all players work together and they’re most vulnerable when only a few strong players determine their success, even the strongest tire and injure.

The same is true of markets, and “breadth” is the term we use to describe how well the “team members” are working together. One way to measure index “breadth” is by comparing the number of companies with share prices reaching new 1 year price highs to the number falling to 1 year price lows. “Strong breadth” is where far more index constituents are hitting new 1 year highs than 1 year lows and it’s considered “healthy” because most members are moving in the same direction.

That’s not what’s taking place right now because although the World Index is close to its all-time highs, that’s only because of the influence of the very large technology companies, Microsoft and Nvidia alone generated 116% of the World Index’s Q3 performance – an index of almost 1,300 companies. Below the surface “breadth” is “weak” with more index constituents hitting 52 week lows than 52 week highs.

The good news is that these lower prices can provide great opportunities.

Value investing involves calculating fair values for companies and this determines our actions at various price levels. If we think a company is worth 100 but it’s priced in the market at 60, our expected return is 67% (40/60) but if the price falls to 50 and nothing company specific has changed, our expected return rises to 100%. You might wonder why a company’s share price would fall if nothing fundamental has changed, reasons often include negative short-term sentiment because of macro-economic fears of a region / sector or a competitor reporting weak results.

We work hard to assess whether price weakness is due to any deterioration in the company’s earnings prospects or short-term negative sentiment, and if it’s the latter, we buy more because as the numbers above illustrate, the return potential increases. Global investors were the most underweight Europe “ever” after natural gas prices spiked following Russia’s invasion of Ukraine in 2022, but taking advantage of this negative sentiment was profitable – Europe outperformed the World Index by double digits over the following year.

Mid and smaller companies are currently out of favour and so too is the Consumer Discretionary sector over fears of higher interest rates on consumer purchasing power. Therefore, it should be no surprise to know that we’re finding great value in mid-sized, consumer discretionary companies. Nike is losing market share worldwide and when their poor performance translates into lower share prices for the very companies that have been gaining market share at Nike’s expense, like Anta Sports or Deckers Outdoor (Hoka) or On Holdings (On Cloud), you can see how these lower prices represent an investment opportunity.

So while mid-sized companies aren’t flavour of the month, we think some of these lower prices represent great investment opportunities and we certainly prefer the return potential of our portfolio at 9x earnings to the index large caps at 33x.



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