No. of Recommendations: 1
return inflation to target.
Technical Analysis: Rich Ross – “BUY the DIP”
While Wednesday’s -3% selloff was not ideal, we don’t view this as the beginning of a deeper correction or change in trend, given:
“The Strong” (Tech and Growth) remain strong.
“The Weak” (Cyclicals and Small Caps) have been weak for weeks – and Wednesday’s collapse marked the exclamation point to that move.
Most extreme oversold conditions since the COVID lows – Value, S&P Equal Weight.
Stocks still on support – during a powerful time of year.
Call outs:
VIX – The 74% spike in the VIX was consistent with panic seen at lows.
Bitcoin – The riskiest of assets remains composed trading above 101K.
NVDA – Buyer – Outperformed by 200bps in a tough tape, and remains a conviction Buy atop support with a 36 RSI.
Semis – Coiled for a breakout from 6 months of consolidation, sitting right on support at the 200ma. Buyer. 233 stop.
10-year – They have been sideways and trendless for 2 years, and we continue to believe that they will remain sideways and trendless, with next resistance at 4.70.
IWM – Most oversold all year and sitting on support at the 100 ma.
KRE – most oversold and on support (59).
XRT – has pulled back to support at the breakout at 80.
No. of Recommendations: 23
...Most oversold since COVID LOWS-S&P VALUE...
Beware drawing any conclusions at all about value stocks based on the results of a "Value" factor index without checking what they are measuring. Hint: it isn't companies with high value per share.
By any reasonable definition, a value stock is one which is currently underpriced relative to its intrinsic value: you're getting a lot of value for your money. A passable way to estimate intrinsic value is owner earnings per share a few/several years in the future. As Mr Buffett notes, value and growth are joined at the hip.
Conversely, most "Value" factor indexes primarily seek poor quality businesses. Often seeking:
* Poor growth rates, which of course is not a recipe for high owner earnings in a few years. Their dubious reasoning is that a high growth rate means it's a growth stock, and growth is the opposite of value, so a value stock must have a low growth rate. That's not a value stock, that's a cash cow at best.
* Low price/book, which is a recipe for selecting low ROE and capital intensive businesses. i.e., bad ones. (other things being equal, two businesses with high and low ROE will trade at similar multiples of earnings, meaning the high ROE one will be trading at a high P/B and the low ROE one at a low P/B. The high ROE one almost certainly is the better business with the better future, so on average buying low P/B companies is a sure fire way to buy poor quality businesses)
* Low price/sales, similar reasoning to above. It's not as clear-cut as P/B, but in the same direction. At similar multiples of earnings other things being equal, the one with higher net profit margins will be trading at a higher P/S, and will be the better quality firm on average.
In the case of S&P Global, they look for both low P/B and low P/S to define a "value" firm, though at least they don't explicitly seek low growth rates as with some other style-index providers. They also seek low P/E to find value stocks which is sensible, but not actually very useful to estimate intrinsic value unless you try to take a stab at the growth rate. And seeking low P/B and low P/S is mainly looking for crummy businesses.
So, the bad stocks they are calling "value" are doing worse than high quality businesses lately? Makes sense!
A different way to seek value: lots of probable future earnings per dollar of stock price today. There is no way to know what earnings will be several years down the line, but we can use a mixture of the past and some guy's guess to estimate it: better partly right than ignoring the issue?
Find the 500 decently sized stocks with the highest earnings yield (Lowest P/E). Sort and rank them.
Find the 500 decently sized stocks with the highest five year growth rate of EPS. Sort and rank them.
Find the 500 decently sized stocks with the highest projected earnings growth rate. Sort and rank them.
Sum the ranks, buy equal weights of the 50 stocks with the best sum. Hold for a while, repeat.
This will seek firms with lots of earnings, lots of earnings growth, or a mix of both, with a strong emphasis on a (bad guess of) the future rather than present earnings. To me, that's a much more sensible definition of "value".
What does the performance of that strategy tell us?
* 1998 to mid 2024, ignoring trading costs, that would have beat the S&P by 5.6%/year. Value stocks are good investments. Seeking a lot of intrinsic value for your investment dollar isn't dumb.
* Current P/E, as noted, isn't a big help by itself. Despite the strategy requiring a decent level of current earnings, if the strategy is modified to start off by eliminating high P/E firms, it gets worse unless you allow current P/E ratios up to 50x. So you want to allow the firms with modest current earnings but particularly high growth rates.
* And yes, the thread's title observation does still hold somewhat true: the value strategy has not had a great 2024. In the first half of 2024 it lagged by about 9%. I don't have the figures for the last few months handy. But leading and lagging by that much in a short period is pretty common, so it's not exactly newsworthy or extreme.
Jim
