Value Investor Warns of S&P 500’s Concentration, Favors Undervalued Stocks Outside Tech
Longtime value investor Bill Nygren has issued a cautionary note about the S&P 500, warning that the index is not as diversified as it once was due to the overwhelming dominance of the technology sector. Nygren, portfolio manager at Oakmark Funds for four decades, points out that the largest 25 tech companies in the index now constitute about 50% of the total investment. He believes this concentration poses a risk to investors, potentially undermining the perception of the S&P 500 as a low-risk equity investment strategy. "It’s not nearly as diversified as investors think it is," says Nygren, highlighting how a concentrated few tech giants are driving market gains.
Key Takeaways
- The S&P 500’s diversification has dwindled due to the tech sector’s dominance.
- Nygren favors undervalued companies with significant buyback programs, believing these can generate strong returns independent of broader market sentiment.
- Corebridge Financial, a recently spun-off retirement services and life insurance company, is an example of the type of undervalued stock Nygren is seeking. He expects the stock to climb significantly in the coming years due to its aggressive buyback program.
The S&P 500’s Shifting Landscape
While the S&P 500 index has recently reached record highs, the rally has largely been fueled by a handful of mega-cap tech names like Nvidia and Meta Platforms. The index’s increasing concentration in technology has raised concerns about the market’s fragility, with many seeing this narrow breath as a sign of potential vulnerability. This trend has created a negative bias towards "value" stocks, which are often associated with more traditional industries and slower growth.
Nygren’s Focus on Undervalued Value Stocks
Nygren believes the current market environment presents an opportunity for investors seeking value. He’s actively pursuing companies with relatively inexpensive stocks that have robust share repurchase programs in place. These buyback programs allow companies to directly increase shareholder value by reducing the number of outstanding shares, boosting earnings per share regardless of market conditions. Such a strategy is particularly appealing to Nygren in the current environment, where value stocks are often overlooked and undervalued.
Corebridge Financial: A Case Study in Undervalued Value
Nygren cites Corebridge Financial, a $15 billion retirement services and life insurance company recently spun off from AIG, as a prime example of his investment strategy. Trading at around $28 per share, Nygren sees the company’s stock reaching a book value of $50 by the end of 2025, representing a substantial appreciation. This optimistic outlook stems from Corebridge’s commitment to share buybacks, which could reduce the number of outstanding shares by 20% per year, driving earnings growth.
Nygren emphasizes that Corebridge’s success doesn’t hinge on market sentiment or the performance of other stocks. "They don’t have to depend on other investors to recognize the value," Nygren highlights, emphasizing the company’s ability to control its own destiny through buybacks.
Beyond Tech: Rethinking Investment Strategies
Nygren’s focus on undervalued value stocks outside the tech sector highlights the importance of diversification in a market increasingly characterized by concentration. Investors, particularly those relying on the S&P 500 as a primary investment vehicle, should be cognizant of the shifting dynamics within the index and actively seek opportunities beyond the dominant tech names.
Nygren’s approach serves as a reminder that value investing remains a viable strategy in today’s market. By identifying companies with sound fundamentals that can generate returns through internal strategies like buybacks, investors can capitalize on undervalued opportunities and mitigate risk in a market dominated by a handful of high-flying tech giants.
