It happens late in nearly every bull market: Complaints that value-fund managers are beginning to "cheat" on their mandates by sneaking growth companies into their portfolios, high valuations and all, goosing performance now but taking big risks on when the next bear market may arrive. Now those worries are back, with the twist that the tongue-wagging is concentrated on the FAANG names — Facebook, Amazon, Apple, Netflix and Google parent Alphabet, high-fliers that have led growth stocks to a decade of whipping value's performance.
But there's a smarter way to do value than just looking for cheap stocks, say experts led by Bill Miller, the unorthodox value investor whose 15-year streak (through 2005) of beating the Standard & Poor's 500 index is still a benchmark no active manager can touch.
The key is to avoid the mistake of thinking "value" means nothing more than a low stock price. Now running his own fund after decades at Legg Mason Value Trust, Miller's focus was — and is — on finding companies focused on high returns on invested capital and free-cash-flow growth, as well as large market opportunities. That helps small and large investors alike distinguish stocks that are undervalued from those that are simply cheap.
Twenty years ago that led Miller to Amazon, the first of the FANG stocks, excluding Apple, to go public. Along with early internet leaders, like America Online and Yahoo, Amazon helped Miller update what it meant to do value. And having just scooped up a 30 percent return by adding Facebook shares during the brouhaha over sharing of customers' data last winter, he argues that those tactics remain smart.