By Mooris Tjioe, Analyst, Phillip Futures
This week in summary
- Evergrande jitters seem to have faded as foreign investors, state entities buy up debt and struggling entities.
- Skyrocketing natural gas prices are pushing UK energy companies out of business – leaving 1.7 million customers without an electricity supplier.
- Stocks fell by the most since March last Tuesday (28th Sept), with 10-Year Treasury yields rising to their highest level in months.
Growth stocks continue to tempt investors
But here’s why value industries could be tasty enough for a nibble right now
Unless you’ve gotten into meme stocks, investing often requires some degree of research. Value investing has long been the benchmark – buying stocks in companies that tend to have stable revenue, dividends, profits, and cash flow.
Finding value stocks is hard work
Value investing often starts with finding stocks with low price-to-earnings (PE) or price-to-book (PB) ratios relative to industry peers. For instance, if we compare General Motor’s (GM) valuations (8.6x PE) to that of Ford Motor’s (9.2x), GM to some may look to be a more attractive buy.
Your discussion would then centre on finding reasons for Ford’s higher valuation than GM
Once you’ve picked out a suitable stock such as GM however, that’s where the real work begins – you might have to analyse the following to get a better picture of the company:
- Financial statements
- Earnings guidance
- Business model and growth prospects
- Competitor performance
- Many other metrics!
However, value investing is far from the only viable strategy – and by some measures, is hardly the most popular method of investing for many these days. Just to name a few, momentum, commodities, and growth investing are gaining popularity amongst individual investors, having been brought to prominence over the pandemic thanks to the massive risk-on rally across various asset classes.
Can you really go wrong with growth stocks?
Starting with now-famous names such as Tesla (145x), Square (130x), and MercadoLibre (564x), growth stocks defy traditional valuation methods by growing their business at a faster-than-average pace, gobbling up market share and burning through investor cash at rates that would make the most seasoned spendthrift blush (for instance, Spotify lost around $2.2 million per day in 2020).
Investors accordingly pile into the stock, hoping to justify high stock prices through rapid growth in the business and its profits.
And so far, their faith has been repaid.
From the chart to follow, we can see that growth stocks (orange line) have trampled value stocks (blue line) into the dust with a devastating +1,312% return as compared to the latter’s paltry +407%.
Pictured: Faithful growth investors have reaped returns many times greater than value investors
While growth has always tended to outperform value, the gap between their returns has always been decently narrow – until 2009, when the Federal Reserve embarked on its titanic Asset Purchasing programme to support the economic recovery (more on that in future newsletters).
Value stocks have at the same time, become very cheap
Interpretation:
The chart is a plot of the S&P500 Value Index against the S&P500 Growth Index. A decline in the graph since 2007 shows that value stocks have been underperforming against growth stocks for over the last 14 years (give or take).
There is no doubt: growth stocks have been clearly outperforming value stocks over the past 10 years, with the gap between the two widening particularly after the ’08 crisis and over the COVID-19 pandemic.
This has resulted in the ‘double-bottom’ seen in the lower-right of the above chart, where value stocks reached perhaps its lowest valuation against growth stocks ever.
Simply put, value stocks have never been this cheap.
While a vaccine-led rally for value in end-2020 proved to be short-lived (thanks to surges in the Delta variant), this does show us a glimpse of what a strong post-pandemic rally would look like for value stocks.
Hot off the press
Two value industries worth looking at
Perhaps the worst-performers over the pandemic have been airline and hotel/hospitality stocks. The recent spread of the Delta variant cut their vaccine-led recovery rallies short in the middle of 2021, but they do still appear to be on a path to recovery.
Pictured: Airlines and Hotels have broadly lost ground to other kinds of stocks, but appear to be recovering
Interpretation:
The S&P500 Hotels, Resorts, and Cruise Lines Index (S5HOTL) and S&P500 Airlines Index (S5AIRLX) are overlaid against the benchmark S&P500 index.
A decline in the plots shows that airlines and hotels have fallen further than the rest of the Index in general and are now strongly below their pre-pandemic trendlines – although they do appear to have bottomed out and are in the process of recovery.
It is worth noting that while the S&P500 has been trading above pre-pandemic levels for some time now, both the airline and hotel sectors still have not recovered to pre-pandemic proportions against the wider stock market, and are continuing to trade between -10% to -20% lower than pre-pandemic levels.
Both industries have however started to rally in recent days. Since mid-July lows, major airlines such as American Airlines Group (+12.4% since 19th July) and United Airlines (+12.4%) have experienced cautious rallies, while hotel chains such as Marriott International (+15.9%) are again rising as well.
Will airlines and hotels stay beaten down for much longer?
What we’re reading
(with no paywalls!)
- Extreme weather in Brazil is threatening emerging markets worldwide
- China’s power crunch is causing second thoughts on Chinese investment
- Chinese local government debt estimated to be 52% of GDP
- How Evergrande may slow China’s real estate machine (and economic growth)
- US Consumer confidence falls to 7-month low
Earnings in sight
Tuesday 5 Oct | PepsiCo Inc | Pre-market |
Tuesday 12 Oct | United Airlines Holdings Inc Fastenal Co | NA TAS |
Wednesday 13 Oct | BlackRock Inc JP Morgan Chase & Co | Pre-market Pre-market |
Thursday 14 Oct | Bank of America Merrill Lynch Corp Walgreens Boots Alliance Inc Citigroup Inc Wells Fargo & Co. Domino’s Pizza Inc Morgan Stanley | Pre-market TAS Pre-market Pre-market TAS Pre-market |
Friday 15 Oct | Goldman Sachs Group Inc | Pre-market |
What we offer
1 | Ford Motor Company | (MT5: FORDMOTOR-NYSE) |
2 | General Motors | (MT5: GE-NYSE) |
3 | Tesla Inc | (MT5: TESLA-NDAQ) |
4 | Square | (MT5: SQUARE-NYSE) |
5 | MercadoLibre Inc | (MT5: MERCADOLIB-NDAQ) |
6 | American Airlines Inc | (MT5: AAL-NDAQ) |
7 | United Airlines Holdings Inc | (MT5: UNITEDAIR-NDAQ) |
8 | Marriott International Inc | (MT5: MARRIOTINT-NDAQ) |
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