Value investor Bill Miller IV warns Mag 7 is driving S&P 500 concentration risk to ‘extreme levels’ — and shares 4 under-the-radar stocks to buy instead

When it comes to stock-picking decisions, many investors feel like it’s safe to follow the crowd. This FOMO-driven mindset could explain the continued meteoric rise of Big Tech stocks, especially AI-darling Nvidia.

However, Bill Miller IV, chief investment officer and portfolio manager at Miller Value Funds, doesn’t believe in investing with a herd mentality.

“I have a hard time feeling like I have an edge on a market where every single person is looking at Facebook, Nvidia, or other things,” Miller said.

In what might be considered a contrarian move by many, Miller doesn’t invest in any of the Magnificent Seven stocks, which include Amazon, Nvidia, Apple, Microsoft, Tesla, Alphabet, and Meta. He believes their lofty valuations are becoming untenable, and the overall market is exceedingly dependent on the performance of just a few names.

“Their concentration in the market is approaching extreme levels, and some of those names have very aggressive expectations embedded for sustained growth,” Miller said.

Indeed, Wall Street has set increasingly high expectations for some of the biggest AI companies, and markets have reacted poorly when companies fail to meet them.

And as seen by Nvidia’s latest earnings report, sometimes it’s not enough to beat or even exceed expectations — despite the company reporting higher-than-expected Q2 revenues, investors still weren’t impressed, and the stock dipped afterward.

Finding value outside Big Tech

In Miller’s opinion, there’s a lot of value to be unlocked in overlooked areas of the market outside Big Tech. Miller’s value-investing strategy involves using a meticulous bottom-up process that takes a company’s business model, financial performance, management team, and other company-specific factors into consideration to find stocks trading for less than their intrinsic value.

Miller points out that value investing isn’t a reactionary process. He places less emphasis on factors such as the macroeconomic environment or market trends. That means Miller isn’t making any reactionary investing choices based on macroeconomic volatility such as rate cuts or the upcoming election. Instead, investing in companies with strong fundamentals at discounted prices is the best way to generate returns over a long time horizon, in Miller’s opinion.

“The great news about value investing is that our process doesn’t change relative to what’s going on in the economy or anywhere else. Every day we show up looking to find securities that trade at a discount to what we think they’re worth and what they’ll be worth in the future,” Miller said. “And that process is consistent regardless of what’s going on in the economy.”

Miller’s not alone in thinking this way. While many investors are chasing the momentum and growth of Big Tech, others — like Jeremy Grantham’s firm GMO — are looking at deep value stocks, which are trading at their cheapest valuation in four decades.

Reduce Mag 7 overexposure with these 4 value picks instead

Miller shared four companies with strong fundamentals that he believes are currently undervalued by the market. They are all constituents of the Miller Value Partners Appreciation ETF (MVPA).

One of Miller’s favorites is the online payment services company Paypal (PYPL). Miller flags several key aspects of Paypal that he believes make it a great investment: the company has a leading market position in the payment space, the total addressable market is vast, and the company appointed a new CEO in the last year whom Miller believes has a strong track record of achieving excess returns. PayPal has also generated strong cash flow and returned value to shareholders through share buybacks.

TotalEnergies SE (TTE) is another company that Miller favors. Miller believes this international French energy company has a comparable business model to ExxonMobil (XOM), yet it trades at a much lower price-to-earnings multiple — 7.5x compared to ExxonMobil’s 13.3x.

Employees hold an 8% stake in the company, which Miller sees as an indicator of shareholder alignment. Miller looks to invest in companies with “managers who are eating their own cooking.”

Miller also believes the Korean ecommerce company Coupang (CPNG), which he dubs the “Amazon of Korea,” is extremely undervalued by the market. It trades at a lower multiple of sales than Amazon but has better earnings potential and more growth levers in Miller’s opinion, which is why he believes Coupang will take off in the next few years.

Miller also likes the medical technology company Semler Scientific (SMLR). Miller believes the company has a strong management team that reinvests capital into the business in unconventional, value-additive ways. Semler Scientific has been investing in bitcoin, which Miller believes is a strategy that will generate robust shareholder returns.