Tough Tech Afternoon, Tough Value Decade
(Professor Graham, we have a few questions. Wikipedia)
Is value investing for the birds? A recent Goldman Sachs note ponders the question. The analysis points to recent stagnation in the outperformance of the Fama French factor explaining returns to going long cheap stocks and short expensive stocks. Basically, returns to the strategy have been choppy and yielded a flat net result since around 2010. The explanation isn't totally clear to me. There's some discussion of investor demand for stocks that can grow earnings amid slow broad-based economic growth, which drives up multiples for growth stocks. But that seems sort of tautological. Investors want expensive stocks with built-in growth expectations, so those stocks are outperforming.
There's also this cool chart, which asserts a relationship between valuation dispersion and value factor returns. It's pretty interesting that dispersion isn't particularly high at the moment.
I was talking with a portfolio manager the other week, and he expressed skepticism about value from a different perspective. Cheapness relative to earnings or book value is often a signal of distress, and many companies that are cheap do underperform. It's only the rare return to normal from distress that produces winners that make up for all the duds.
Meanwhile, markets are simply getting more efficient as information flows more freely and transaction costs have declined for many public securities.
What to believe? For one thing, this is a tough market. Multiples for broad indices are steep in the U.S. On top of that, indexing is as popular as ever, perhaps padding growth's results relative to the fundamentals. Referring back to the chart above, could indexing also be affecting multiple dispersion levels? If fund flows are bidding up stock prices in proportion to existing market caps, perhaps the dispersion we're used to seeing is getting suppressed.
On top of all that, 10 years might not be a sufficient sample Through the past several generations, there have been a lot of value investors' letters to investors near the tops of stock markets answering questions about why the strategy hasn't been working lately. Low multiples have less distance to collapse, and the balance between growth and value may mean-revert during the next downturn.
Meanwhile, another note out from Goldman questions tech stock valuations:
"Driven by the rise of megatech, momentum, as a factor, has built a valuation air pocket underneath it creating cause for pause."
Let's keep things in perspective; this afternoon's selloff dropped the Nasdaq around 1.8% for the day, which is a lot for recent times but relatively small in the big picture. Nevertheless, the groundwork seems in place for pessimism to return to the market.
If you believe they do ring a bell at the top and that Goldman piece is the golden contrarian indicator, this afternoon provided a handy narrative. Nvidia (NASDAQ:NVDA) fell after publication of a short idea by Citron Research. Intel (NASDAQ:INTC) is picking fights. And bank stocks, which usually show value characteristics, put in a nice rally this week.
Elsewhere in tech:
- SiriusXM to make $480M strategic investment in Pandora
- Digital Realty to merge with DuPont Fabros
- Apple boosts digital health efforts
- Bain replacing KKR for Toshiba bid
- Citi downgrades Snap, lowers price target; shares down 1.6%
- Piper Jaffray: Facebook could triple revenue by 2022
- A sector market cap chart via Teddy Vallee (@TeddyVallee) has tech on the top, energy on the bottom.
- Jesse Felder shows a high P/S ratio for the S&P 500.
- Cheap Beta (@cheapbeta) pointed to the Goldman value factor note that drove this article.
- Robin Wigglesworth (@RobinWigg) shows us the latest in Liquidity Supernova news.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.