The "Magnificent Seven" Are Overvalued: Wealth Manager Bets on Small Caps and Undervalued Markets
As the tech giants known as the "Magnificent Seven" continue to dominate headlines and attract investor attention, one wealth manager is bucking the trend. Tariq Dennison, co-founder and investment advisor at GFM Asset Management, believes these stocks are "wildly overvalued" and is instead focusing his investments on lesser-known companies in undervalued sectors.
Key Takeaways:
The "Magnificent Seven," including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, are deemed "overvalued" by Dennison.
He’s shifting his focus to smaller companies, particularly in the U.S. small-cap market and undervalued markets like China.
Dennison is using ETFs like DFA Dimensional US Small Cap Value ETF and Avantis U.S. Small Cap Value ETF to gain exposure to the small-cap space.
He’s optimistic about Hong Kong-listed stocks, citing their "cheap valuations" and highlighting companies like Chow Tai Fook, MTR Corp, and Tencent.
- Global stocks on his radar include Fresenius Medical Care, Kazatomprom, and Nestle.
Why The "Magnificent Seven" Are Not the Answer
Dennison argues that the recent outperformance of the "Magnificent Seven" is largely driven by institutional flows into large-cap stocks, creating a cycle of upward momentum. He believes this momentum is unsustainable and that the companies are currently priced at "ridiculous valuations."
"There is a possibility that the Magnificent Seven will continue to grow and generate positive returns for investors in the next decade, but I don’t think that’s the case with all the companies," Dennison told CNBC Pro.
U.S. Small Caps: A Hidden Gem?
Instead of chasing the high-flying tech giants, Dennison is turning his attention to the U.S. small-cap market. He believes that smaller companies have more potential for growth and are currently undervalued.
The Russell 2000 index has seen significant gains in recent weeks, rising 8.5% year-to-date, compared to the S&P 500 at 15.4% and the Nasdaq 100 at 24.4%.
Dennison is utilizing exchange-traded funds (ETFs) to gain exposure to the small-cap space. He prefers DFA Dimensional US Small Cap Value ETF and Avantis U.S. Small Cap Value ETF as starting points and plans to identify individual companies within these ETFs for further consideration.
Specific Companies of Interest:
- Abercrombie & Fitch (DFA ETF)
- Cadence Bank (DFA ETF)
- Commercial Metals (DFA ETF)
- KB Home (Avantis ETF)
- Jackson Financial (Avantis ETF)
- Warrior Met Coal (Avantis ETF)
China: A "Shoppers’ Paradise" for Value Investors
While the Chinese market has been out of favor recently, Dennison sees significant potential in this undervalued market. Despite representing a small 2.5% weight in the MSCI All Country World Index, Dennison is overweight on China, believing it offers "more upside than downside."
He is particularly interested in Hong Kong-listed stocks, which he believes are trading at extremely attractive valuations.
"Hong Kong is a shoppers’ paradise… there are several good names there," he said.
His Top Three Hong Kong Holdings:
- Chow Tai Fook, a jewelry chain
- MTR Corp, a public transport operator and property developer
- Tencent, a tech giant
Tencent has recently received positive analyst attention, with Goldman Sachs adding it to its conviction list. All three stocks also trade as American Depositary Receipts (ADRs).
Global Stocks: Beyond the U.S.
Dennison’s global portfolio extends beyond the U.S. and China, with notable positions in two specific companies:
- Fresenius Medical Care, a German health-care company
- Kazatomprom, a Kazakhstan-headquartered producer of uranium
He has been accumulating shares in both companies for some time, particularly noting Kazatomprom’s attractive valuation in the past. While it’s no longer as cheap as before, he still considers it a "good and special company." However, he admits he may not be buying "as aggressively" at this point.
Kazatomprom is dual-listed on the Kazakhstan and London Stock Exchanges and also trades as an ADR in the US.
Nestle: A Value Stock With Potential
Finally, Dennison’s global portfolio includes a position in Swiss food and drink conglomerate Nestle. He sees Nestle as a "value stock" due to its strong Swiss Franc valuation.
He plans to continue accumulating Nestle shares as long as their average price remains under 100 Swiss francs ($112.48) a share.
Nestle trades on the Six Swiss Exchange and as an ADR in the US. Its year-to-date performance is down 3.1%, with shares currently trading at 94.50 Swiss francs. Analyst sentiment is mixed, with 12 out of 22 analysts giving a buy/overweight rating, eight issuing a hold, and two recommending a sell. The average price target is 106.15 Swiss francs, implying a 12.3% upside.
Conclusion: A Diversified Approach to Investing
Dennison’s investment strategy highlights the importance of diversification and seeking value beyond the most-hyped names. While the "Magnificent Seven" may continue to attract investor attention, his focus on smaller companies, undervalued markets, and global opportunities demonstrates a more nuanced approach to capital allocation.
His bold stance against the "Magnificent Seven" and his focus on finding value in overlooked sectors could be a valuable lesson for investors who are seeking to navigate the ever-changing market landscape.
