Better To Buy Value Or Growth During This Transition?
Summary
- Technology and Stay At Home stocks have largely fueled the recovery thus far.
- Over the past two weeks, we have seen some rotation beginning to take place from growth to value.
- At current valuations, many names are starting to looked stretched and should be re-evaluated.
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Over the past couple of weeks we have started to see the shift from large-cap growth companies to the more value oriented names, which have largely lagged during this aggressive recovery we have seen since bottoming in March. Since bottoming on March 23rd, the S&P 500 has rallied 40%, and is now only down roughly 3% on the year.
Due to the COVID-19 pandemic that has taken a toll on the US and global economy in 2020, many workers have been shifted to a work from home setup, for non-essential businesses. During this time, work from home names, big cap technology companies and biotech companies have largely lead the recovery.
The past couple of weeks have started to show the tide may beginning to turn in favor of value.
Growth Was Largely Driving The Market Forward During The Recovery
Let’s begin with the incredible run the FAANG names have seen since we bottomed out in March. Facebook (FB) has been the clear leader of the group with the stock increasing nearly 60% followed by Apple (AAPL) advancing over 40% through May 20th, which is about the time we started to see some growth names hit a wall.
Microsoft (MSFT), Apple, Amazon (AMZN), Facebook, and Google (GOOGL) make up over 20% weighting in the S&P 500, so any big moves by these names tends to pull the entire S&P 500 with it.
Outside of FAANG, stay at home stocks such as Netflix (NFLX), Peloton (PTON), Zoom, and Shopify (SHOP), among many other technology names have seen tremendous gains year-to-date. After all, the NASDAQ 100 is less than 1% from all-time highs.
The 30% growth in NFLX shares from March 25th to May 20th largely makes sense as more consumers were stuck at home and many turned to NFLX or other streaming options for entertainment.
Zoom was largely known in the business world, but once stay at home restrictions were put in place, the platform usage was something corporate America in every industry turned to for communication among colleagues. The platform became so popular, the stock has run up over 230% year-to-date, yes that is not a typo.
With Health and Fitness locations all but shut down, still largely to this day, workout bike Peloton has become ultra-popular for those looking to get a workout in at home. Orders as well as shares have skyrocketed, as PTON shares are up over 70% year to date.
The last name I will discuss in the growth stage, which is certainly just another of many similar stocks that have seen big gains based on the new work from home environment, is Shopify. Shopify is a cloud based commerce platform that relates to small and medium sized businesses and the growth in e-commerce. Year-to-date, shares of SHOP have surged over 90% with more and more businesses relying on e-commerce, which is already an area that was seeing huge growth.
The recovery and growth in these names listed above, which is just a few names that have exploded the last two months, is quite fascinating, especially for those of you that were invested in the name.
Time For Value And Cyclical Names To Start Running
During this recovery, value names in financials, industrials, and other value names have largely lagged those big growth names mentioned above. However, over the past two weeks or so we have largely seen the tide turning towards value and cyclical names.
Large value names such as Warren Buffett’s Berkshire Hathaway (BRK.B), JP Morgan Chase (JPM), and AT&T (T) all gained less than 8% from the March 23rd lows through May 20th. During this same timeframe, the S&P 500 gained 27% and we saw above how some of the tech and growth names performed as well.
Since May 20th, we have seen BRK.B, JPM, and T move higher 11%, 18%, and 10%, respectively. In addition, the Invesco S&P 500 Value ETF (RPV) has gained 15% during the last two weeks, meanwhile the Invesco S&P 500 Growth ETF (RPG) has gained 7%.
Comparing this performance to some of the growth names above, in the last two weeks these are how these growth names have cooled off.
Looking at history, value was not going to be left behind for much longer. According to a Bank of American study,
In 14 of the last 14 recessions, value stocks have outperformed growth for at least 3 months when the economy showed signs of improving.”
Where We Will Go From Here
As such, based on the information above, you are probably asking yourself, “Well, what is next?” In no way shape or form do I believe Technology and large-cap names for that matter are done. However, I do believe many of the tech names and stay at home names were largely overheated and looking quite frothy, which in turn had investors looking for more reasonable valuations.
Right now we are seeing a mass movement of retail investors into the stock market. Many people are at home and have heard about the strong stock rally we have seen the past few months, which has led to every person you run into these days providing stock tips. This can setup for a dangerous outcome in the market.
This surge we have seen in the market is largely disconnected from the economy and what is presently going on in the US and world today. Unemployment levels are at an all-time high, US and China tensions are once again rearing there head, civil unrest from the horrible situation that took place in Minneapolis, yet the stock market moves on.
The saying goes is that the stock market is forward looking, well since the bottoming in late March, I would not say things are that much better. Unemployment has continued to rise, the civil unrest is recent, and we still do not have a better idea of when a vaccine is coming. As such, I believe we are due for a correction. Valuations are looking frothy, yes I have now used this word twice in this article, and we have no earnings results to fall back on.
Right now the market is acting as if everything is normal and we are right back to life as it was in February. I have been wrong before and I may be wrong again in the short-term, but I certainly cannot say that is the case. Was the March 23rd bottoming a large overreaction, sure, but so is this recovery back to even levels on the year.
Investor Takeaway
The year 2020 will go down as a year to forget in American history. However, some of you that hit the jackpot with the stay at home stocks and rung the register will have a different opinion. The market has been on a tear of late, but things seem to be cooling down.
Retail investors have poured into the market, which has helped fuel the rally we have seen as it almost seems like no news can derail this train. I still have money working, but I have trimmed some of my large position winners of late and I would recommend you take a hard look at your portfolio as well. Value seems to be seeing a rotation for now, but a well-balanced portfolio is recommended.
Things do not go up forever and I want to be ready when we get a correction. Retesting the March lows is not likely, as that was a once in a lifetime opportunity, but an opportunity nonetheless is what I believe you will get again in the near future.
Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!
Author’s Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
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This article was written by
Mark Roussin is an active Certified Public Accountant (CPA) in the state of California. Mark has worked as a CPA, serving both public and private Real Estate corporations for over 10 years. Today, he provides his followers insights to both undervalued dividend stocks mixed with high-growth opportunities with a goal of them reaching financial freedom in the long-term. Mark tends to invest primarily in dividend stocks with a strong emphasis on Real Estate Investment Trusts (REITs).
Author of the weekly financial newsletter, "The Dividend Investor's Edge."
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DISCLAIMER: Mark is not a Registered Investment Advisor or Financial Planner. The Information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. He asks that you perform your own due diligence or seek the advice of a qualified professional. You are responsible for your own investment decisions.
Analyst’s Disclosure: I am/we are long AAPL, AMZN, T, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (19)
"Zoom was largely unknown in the business world..."
F, MAXR and CLF are my top choices for both. LMT is both. The market is full of stocks that offer both right now.
Just not BP.
