Value Has Never Been Cheaper

Summary

• Markets are off a few percent off their highs and yet many stocks have suffered huge drawdowns.
• Can growth go up indefinitely?
• Or is value set to deliver the best returns ahead?

The ratio of S&P 500 Growth to S&P 500 Value hit a new low and fell comfortably below the pandemic panic moments.

This revulsion for value is not just in the US.

The current episode is so extreme that MSCI World Value Index would have to appreciate by 50% versus MSCI World Growth Index, just to match the extreme ratio seen at the dotcom peak. While tough on portfolios of today, there has never been a better time to selectively acquire high quality companies at bargain prices. The number of companies that now have a free cash flow yield of greater than 10% has exploded in the last few weeks. These, we believe can help retirees meet their goals of 7-9% returns.

Growth Getting Selectively Pummeled

While the value indices are feeling the pain, growth has not escaped unscathed.

The indices continue to be held up by the generals while the foot soldiers are falling fast. We can see the impact of this in the two most bubblicious funds, ARK Innovation ETF (ARKK) and ARK Next Generation Internet ETF (ARKW). Both have lagged despite receiving a boost from holding Tesla (TSLA). 

Data by YCharts

Extremely optimistic long term growth rates pretty much never materialize and are associated with very poor forward returns.

While fear is never easy to deal with, we have been presented some great bargains today. Where you might ask? We will tell you where.

Healthcare as a whole is very cheap and we are finding a lot to like here.

Now, we are not talking about the speculative stocks like Moderna (MRNA) which has priced in a pandemic every year for the next century. We are referring to solid cash flow producing, low-multiple, companies that are getting no respect in the market today. While we cannot predict exactly how much more air will be blown into the remaining stalwarts of the growth index, we do know its days are definitely coming to an end. When that happens, we don't want to me left holding the S&P 500 ETFs and would rather hold the best value stocks. 

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