With technology and communication services stocks suffering some of the bear market’s biggest body blows, a handful of value stock managers are starting to nibble on some of the beaten-up names in what is usually the domain of growth-stock funds.

It’s too early to say if this is the beginning of a trend, but Microsoft MSFT, Amazon.com AMZN, and Google parent Alphabet GOOGL are among those seeing hints of interest from value fund managers.

Despite these stocks traditionally being thought of as growth stocks, in some cases managers may now think certain stocks are “too cheap to ignore,” says Morningstar manager research analyst Paul Ruppe.

The technology and communication service sectors were market leaders throughout most of 2020 and 2021 but have taken it on the chin this year. The Morningstar US Technology Index is down 28.4% and the Morningstar US Communication Services Index is down 38.3% through Nov. 21, while the Morningstar US Market Index is down 17.2%. The profit outlook for many of these stocks is glum, with Big Tech companies offering up downbeat forecasts along with third-quarter earnings reports.

Companies like Alphabet and Facebook parent Meta Platforms META have historically landed in the growth stock category. Their growth rates for earnings, sales, book value, and cash flow puts them into the growth area of the Morningstar Style Box. Morningstar assigns every stock it covers a “style score.” These scores are relative, with companies landing in the value, core, and growth categories.

A company’s style score, which determines where it lands in the style box, also factors in dividend yields and relative valuations, such as the price/projected earnings ratio, price/book, price/sales, and price/cash flow.

Growth stocks have been particularly more sensitive to this year’s jump in interest rates, because their stock prices depend heavily on expectations for future earnings.

But these positions in the style box are relative, and companies can move among value, growth, and core—the category that lands in between.

Aside from Apple, some of the biggest names in the technology sector to help the market grow in recent years are trading below their Morningstar fair value estimate. Meta is trading at about $109, while Morningstar values the stock at $260.

When the Russell indexes were reconstituted in June, Meta joined as the Russell Value Index’s fifth-largest holding, and is now its ninth-largest weighting. Russell’s style indexes use a metric called price/book ratio to determine what constitutes a value stock, which compares a stock’s price to the assets on a company’s balance sheet, and the fall in Meta’s share price put it closer to value territory.

Among Morningstar indexes, Meta is not a constituent in the Morningstar Value Index. But the Morningstar US Large-Mid Cap Broad Value Index, which includes “pure value” stocks as well as those that display characteristics of both value- and growth-leaning companies, began including Meta in December 2021.

Moves such as those within widely-followed benchmarks encourages value fund managers to move into those stocks. And of course, index-tracking funds will automatically follow suit.

For most funds, the portion of their portfolios invested in technology and communication services stocks shrank as share prices fell.

Now, some managers have taken the opportunity to increase their weightings in these stocks. The $4.5 billion Oakmark Select OAKLX added an additional 3.91 percentage points of its portfolio to technology stocks in the third quarter. The fund added to its Alphabet and Meta positions. The fund already owned Netflix NFLX.

“Valuation underpins Oakmark’s analysis, but it’s not a deep-value shop,” says Morningstar director of equity strategies Katie Reichart. “Rather, the team looks to find companies poised to grow per-share value that are mispriced relative to what a rational buyer would pay to own the entire business.”

No funds covered by Morningstar analysts showed a large increase in communication services holdings.

Bar chart showing the changes in exposure to technology stocks in the third quarter if U.S. mutual funds

The $491 million Hotchkis & Wiley Value Opportunities HWAAX also upped its technology stake, adding an additional 3.26 percentage points to technology companies. Microsoft was the fund’s largest holding at 7.61% as of June, but managers bought more shares in the third quarter. It’s no longer the fund’s largest holding, instead software company F5 FFIV now takes the top spot. “We are attracted to select technology companies that trade at better valuations and grow faster. Many of these businesses also have great balance sheets and are less economically sensitive than generally believed,” the fund’s managers wrote in September.

Microsoft has shown up in some value funds. Templeton Growth TEPLX purchased shares in the company in August. The fund also has positions in Alphabet, first purchased in March, Amazon, first purchased in June, and Taiwan Semiconductor Manufacturing TSM, bought in March, though these positions each make up less than 2% of the fund’s holdings. Warren Buffett recently took a stake in the semiconductor company as well.

Though Morningstar categorizes Templeton Growth in the global large-stock value category, the managers have been moving more to the growth side of the style box, says Morningstar associate director Andrew Daniels. “The team had long followed a classic value approach, but in recent years began defining other types of value, including discounted assets, mispriced growth, and quality,” Daniels wrote.

Microsoft has also started to show up in some dividend portfolios that are categorized as value funds. The company has a five-year history of increasing its dividend payments and is included in Morningstar’s Dividend Growth Index, says Morningstar strategist Dan Lefkovitz. The $3.8 billion Invesco Dividend Income IAUTX and $1.8 billion Pioneer Equity Income PEQIX both added the wide-moat company to their portfolios in September.

Though undervalued Microsoft still remains in growth territory, according to Morningstar equity research, unlike Apple, where the argument can be made for it being either a value or a growth stock, and it is included in Morningstar’s broad value and growth indexes.

A few value funds also dipped their toes into Alphabet. In the third quarter, Lord Abbett Focused Large Cap Value LAFLX invested 2% of its portfolio in the company and initiated a position in Fiserv FISV, while the $226.7 million Allspring Large Company Value WLCAX invested in both Alphabet and Tesla TSLA.

Table of the U.S. equity mutual funds that have bought technology stocks in the third quarter.


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