Increasing Value Trend: My Purchasing Strategy Amid Growth's Potential Decline

In recent times, the world of finance has been abuzz with several notable developments. Let's delve into these events, focusing on the tightening of credit spreads during the late stage of economic cycles, the rebound of REITs, and the questionable returns from commercial AI implementations.

Firstly, it's worth noting that tightening credit spreads, a phenomenon observed during the late stage of economic cycles, has been making headlines. This trend is particularly relevant as we navigate the current economic landscape.

Meanwhile, Apple Inc. (AAPL) has been a standout performer, continuously repurchasing stock since 2013. Over the last 12 years, the tech giant has retired over 40% of its shares outstanding, even as its P/E ratio has risen steadily over the last decade. However, it's crucial to remember that if executed at a high valuation, stock buybacks can cease to be accretive, as non-accretive buybacks currently account for a record level of market capitalization.

Now, let's discuss the rebound of Real Estate Investment Trusts (REITs). Following the release of an MIT study on August 18th and Powell's Jackson Hole speech on August 22nd, the real estate sector (VNQ) has seen a vigorous rebound relative to the SPY. Interestingly, value-oriented stocks such as those in the Schwab US Dividend Equity ETF (SCHD) and iShares Core High Dividend ETF (HDV) have outperformed tech-heavy growth names such as those in the Nasdaq Index (QQQ) and Roundhill Generative AI & Technology ETF (CHAT) since the same date.

The MIT study also sheds light on the commercial AI profitability landscape. Surprisingly, the study found that most productivity benefits from AI come from free or low-cost chatbots and tools used by individuals, not expensive, specialized, embedded applications in team workflows. This finding could indicate that commercial uses of AI at the enterprise level could be more limited and gradually implemented than is currently priced into tech stocks.

The study, based on 150 interviews with leaders, a survey of 350 employees, and an analysis of 300 public AI deployments, revealed a startling fact: 95% of organizations implementing AI tools saw zero return on investment.

In the realm of REITs, it's worth mentioning that they typically have very little floating rate debt, making them relatively immune to Fed rate cuts. This characteristic, coupled with the Fed's signaling of imminent rate cuts, may be just what the doctor ordered to rejuvenate REITs.

If even a fraction of fund flows into Money Market Funds (MMFs) are diverted into REITs, then REITs should enjoy a robust bull market going forward. For instance, the total market capitalization of all US equity REITs was approximately $1.4 trillion in 2024, compared to the roughly $1 trillion in funds that have flowed into MMFs over the last year.

Lastly, it's important to note the role of insider buying in the market. Despite insider buying being at its lowest, companies are increasingly using their own cash for buybacks rather than insiders using their own cash for stock purchases. This trend, coupled with the aforementioned developments, paints an interesting picture of the current and future market landscape.

One such company is Palantir Technologies, whose price to sales ratio jumped over the last few years from the teens to over 100x, and whose P/E ratio currently sits above 240x. This astronomical valuation, coupled with the findings from the MIT study, raises questions about the current pricing of tech stocks in the market.

In conclusion, the current economic landscape is marked by several significant developments, including the tightening of credit spreads, the rebound of REITs, and the questionable returns from commercial AI implementations. As investors, it's crucial to stay informed and make decisions based on a comprehensive understanding of these trends.