Value investing isn’t dead! My top stocks to buy as inflation hits 9%

As value investing principles come back into fashion, Andrew Mackie looks at the current backdrop and shares what he’s investing in today.

UK money in a Jar on a background

Image source: Getty Images

Since the global financial crisis of 2008, value investing has fallen out of favour. It’s easy to see why. Unprecedented technological advances have created a new breed of organisation. Initially employing a capital-light model and using emerging cloud technologies has enabled pioneering innovators to go from a garage start-up to a multi billion-dollar business in just a few short years.

Well, maybe that’s an oversimplification. But as capital continued to flow into the sector, driven by an ultra-low-interest-rate environment, so the value of growth stocks — and particularly tech stocks — has soared. In the clamour, traditional businesses seemed outdated.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Today, things are different. With the annual inflation rate rapidly heading towards 10%, value stocks are coming back into vogue. I very much see this moment as a once-in-a-generation macro-regime change where I could perhaps make strong returns. Let me elaborate.

The unravelling of big tech

Echoes of the infamous tech bubble of 2000 in today’s market are there for all to see. But if anything, the situation is worse than it was back then.

Today, three large macro themes are coalescing at once. 1) a debt-to-GDP ratio not seen since the 1940s. 2) inflation at levels last seen in the early 1980s. And 3) record valuations in US equities, reminiscent of 1929 and 2000.

In February 2021, the more speculative side of growth stocks began to unwind. But now the contagion is spreading to the mega-caps.

Just take Amazon as one example. It’s facing rising supply chain and wage costs, more intense competition and the emergence of unions that could push up staff costs. I don’t dispute that Amazon is a hugely profitable, successful company. But the problem is its valuation. Its expected future cash flow potential, the hallmark of any growth stock, can no longer justify paying a huge premium, I feel.

Inflationary bust

Inflation is the catalyst for the bursting of the bubble in US equities today. That’s a very important, and often lost, point.

In the run up to the housing crash of 2008, the oil industry, the classic value investment, had witnessed nearly a decade of rising prices. Indeed, oil hit $150 back then. When the housing bubble burst, the oil price, unsurprisingly, fell off a cliff.

Today though, we’re witnessing a total decoupling of the energy sector from every other industry, and particularly technology.

The investment thesis for energy is predicated on the capital expenditure (capex) cycle. As prices rise, oil rig count surges. Eventually, it leads to a glut of oil, prices fall and the cycle starts again.

However, today exploration budgets remain at historically low levels. In the US, aggregate capex among the top exploration and production companies is a third of what it was back in 2014 – the last time oil was over $100.

Consequently, I believe that today’s macro setup is closer to that of the 1970s than to 2000 and 2008. The 1973-74 bear market, one of the most savage in the history of the stock market, was driven by runaway inflation and a commodity shockwave.

Indeed, throughout the 1970s there were only three classes of assets that outperformed the market – energy, gold and silver. That is why a large part of my portfolio is now assigned to companies including BP, Shell, Fresnillo, Glencore and Newmont. These are the new FAANGs!

6 shares that we think could be the biggest winners of the stock market crash

The hotshot analysts at The Motley Fool UK’s flagship share-tipping service Share Advisor have just unveiled what they think could be the six best buys for investors right now.

And while timing isn't everything, the average return of their previous stock picks shows that it could pay to get in early on their best ideas – particularly in this current climate!

What’s more, all six ‘Best Buys Now’ are available to access right now, in just a few clicks.

All you need is an email address to get started

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andrew Mackie has positions in BP, Shell, Glencore and Fresnillo. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

More on Investing Articles

Young brown woman delighted with what she sees on her screen
Investing Articles

3 easy actions that could boost my stock market returns

The UK stock market is going through a sticky patch so this Fool is looking for ways to improve his…

Read more »

Hispanic man using laptop in home office and drinking coffee
Investing Articles

Boohoo shares: time for me to admit defeat?

This Fool is nursing heavy losses from his Boohoo Group (LON: BOO) shares. Should he sell up and move on?

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

6% dividend yields! 2 cheap UK shares to buy in July

Harshil Patel considers two cheap UK shares paying fairly high dividends. He'd consider them for his Stocks and Shares ISA.

Read more »

Social media and digital online concept, woman using smartphone
Investing Articles

Will Lloyds shares recover in 2022?

Lloyds shares have struggled this year and the looming recession won't help. But I'd still buy them today.

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Investing Articles

Can the stock market make me rich even now?

Here are three ways I'm coping with the stock market's recent bout of weakness and aiming to build wealth in…

Read more »

Cogs turning against each other
Investing Articles

3 top investment trusts to buy right now

Investment trusts offer a wide range of options for investors. And in troubled times, they provide some safety through diversification…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Why hasn’t the FTSE 100 crashed in 2022?

The catastrophic events of 2022 have left investors around the globe fearing the worst for stock markets. And some have…

Read more »

Trader on video call from his home office
Investing Articles

2 inflation-resistant FTSE 100 stocks to buy today

Soaring inflation could dent my returns if I don't take care. Here are two top inflation-resistant FTSE 100 stocks I'd…

Read more »