Q1 2016 - Growth Vs. Value

|
Includes: CBRL, CMI, HAS, JPM, PNC, WFC
by: Clark Capital Management Group

Maira Thompson, Senior Portfolio Manager

The View

If we look in the proverbial rear-view mirror, the market low on February 11th was a good buying opportunity. A myriad of factors, including negative corporate earnings and renewed pressure on the Chinese yuan, prompted a volatile start to the year with a sharp market sell-off in January. When the Federal Reserve assumed a more dovish tone, financial conditions eased, allowing risk assets including equities, corporate bonds and commodities to rally. Despite the sharp rebound in the first quarter, the S&P 500 Index returned only +1.35%, extending the muted returns from 2015 when the index was up +1.38% for the year. A low return environment for U.S. stocks may persist until corporate earnings improve later this year. This scenario continues to be positive for quality dividend-paying stocks providing above-average cash flow.

Growth Vs. Value Stocks

For nearly a decade, growth stocks have outperformed value including throughout the most recent bull market starting in 2009. Over the last five years, many value stocks declined to "recession like" pricing in several sectors. As a result, low-tech cyclical companies viewed as undervalued relative to their peers had big upward momentum in the first quarter. Beaten-down sectors such as Materials +2.99%, Energy + 3.12% and Industrials +4.43% outperformed their growth counterparts. Despite the recent momentum, a sustained shift from growth to value at this point in the market cycle would require more leadership from Financial and Energy stocks, which may be premature based on lack of sustained earnings growth. Dividend stocks are found in both growth and value styles. We continue to favor companies with consistent earnings and revenue and dividend growth at a reasonable price over the long term.

Click to enlarge

Dividends

Over the last several quarters, S&P 500 Index dividends per share continued to rise while corporate earnings declined increasing the dividend payout ratio to 37.9% in the fourth quarter. For the first time since 2011, dividend per share growth has slowed to single digits - to a rate of 9.5%. Year over year, sectors with the highest dividend growth rate were Healthcare and Financials while dividend growth lagged in the beleaguered Energy and Materials sectors. The Materials sector was the only sector to see a year-over-year decline in dividends per share, but it could stage a recovery in late 2016-2017 as earnings growth improves. The Energy sector dividend growth slowed dramatically as several large companies, including Kinder Morgan (NYSE:KMI), cut or eliminated their dividends. A "lower for longer" commodity price scenario for oil prices may translate into additional dividend cuts within the sector. Overall, we expect dividend growth rates to continue to decelerate as long as earnings growth remains sluggish with a possible rebound in the second half of 2016.

Sector Highlights

Amid the market volatility, the sectors with the highest returns for the quarter were Utilities + 14.51%, Telecom +15.10% and Staples +4.85% versus the weakest sectors Financials -5.60%, Healthcare -5.93% and Consumer Discretionary +1.20%.

Portfolio Winners & Laggards

Winners included Cummins (NYSE:CMI) +26.16, Cracker Barrel (NASDAQ:CBRL) +21.46% and Hasbro (NASDAQ:HAS) +19.64%, and laggards PNC Bank (NYSE:PNC) -10.74, Wells Fargo (NYSE:WFC) -10.33% and JPMorgan (NYSE:JPM) -9.6%.

Sources: FactSet, Ned Davis Research

Past performance is not indicative of future results. This is not a recommendation to buy or sell a particular security.

The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There are no guarantee of the future performance of any Clark Capital Investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The Investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.

The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.

The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

Barclays Capital U.S. Government/Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related & investment grade U.S. Corporate securities that have a remaining maturity of the greater than one year.

Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.

Morningstar is the largest independent research organization serving more than 5.2 million individual investors, 210,000 Financial Advisors, and 1,700 institutional clients around the world.

For each separate account with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account's monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics.

©2013 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client's account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account's portfolio. Asset allocation will vary and the samples shown may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.

The volatility (beta) of a client's portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital's advisory services and fees can be found in its Form ADV which is available upon request.