Investors who put their chips inzac pic growth stocks have been very happy – writes Zac St. Hilaire

 

Growth stocks, costing high P/E multiples and promising significant outperformance of the market, initially fell over 25% in the wake of the Coronavirus pandemic.

Since then, however, the iShares Russell 1000 Growth ETF has seen not only a complete rebound off its March 23rd lows, it has even had positive growth so far this year.

Value stocks, on the other hand, have not had the same rebound.

Consisting of companies that trade at low multiples of their book value and pay consistent dividends, the iShares Russell 1000 Value ETF is still about 20% negative year-to-date.

The graph below tracks the performance of these two ETFs in 2020, with growth in yellow and value in blue.

 

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Source: Wall Street Journal

 

To make matters even worse, value stocks have been underperforming growth for over a decade; the Coronavirus did nothing but accelerate previous trends.

Because of value investors’ tendency to invest in what is certain (think financials, oil, and real estate) they have missed out on the riskier tech assets that have grown so quickly in recent years.

 

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It would seem plausible that, with big tech’s increasing role in the work-from-home environment, growth will continue to outperform value for the coming future.

In fact, according to Dow Jones Market Data, if the year were to end on May 19th, the Russell 1000 Growth Index would have outperformed the opposing Russell 1000 Value Index by the most since 1999. But of course, we all know what happened to tech stocks in 2000.

‘the stage is set for potentially historic outperformance of value relative to growth over the coming decade’

Investors have begun to question if growth can keep up the meteoric rise as states begin to reopen and foot traffic begins to rise.

Shops are beginning to open, airlines are slowly reporting more travelers, and according to market research firm MFour, foot traffic in cities across the country is rapidly increasing.

In Dallas and Atlanta, for example, foot traffic is only down around 15% from pre-coronavirus levels.

This bodes well for industries currently trading at historically low multiples of their book value, like travel and leisure, restaurants, and retail.

The current shutdown has driven companies that have not traditionally been value plays to become value plays. Disney, for example, is trading at 2.3x price to book value, almost half of its 4.4x price to book value in August 2015.

David Kostin, Chief US Equity Strategist at Goldman Sachs, recently wrote to investors, “In our view, the extreme current valuation gap between the most expensive and least expensive stocks will most likely be closed when an improving economic environment causes the low valuation stocks to ‘catch up’ to the current market leaders.”

‘Be fearful when others are greedy. Be greedy when others are fearful’

So what does this mean to the average college or millennial investor looking for stocks in the time of the coronavirus?

It means that if you were to invest in golden-boy Amazon right now, you would be paying about 112x last year’s per-share earnings, otherwise said as $112 for each $1 of after-tax profit.

Verizon, on the other hand, only trades at 12x earnings (nearly one-tenth as much) and is a dominant player in the growing US telecommunications sector.

Founder of investment firm Research Associates Rob Arnett wrote in a note, “the stage is set for potentially historic outperformance of value relative to growth over the coming decade.”

You can join the hype and buy into Amazon, Google, and all the other darlings of the market right now, but don’t bet against the companies that have survived recessions like this before.

Companies like JP Morgan, Caterpillar, and Chevron are value plays that will not be going away anytime soon.

I’ll leave you with a quote from Warren Buffet, “Be fearful when others are greedy. Be greedy when others are fearful.”

 

diy investingZac St. Hilaire is an English, Economics, and Business Finance student at the University of Southern California, and our latest correspondent.

He is an aspiring Wall St banker and will be bringing regular stock news articles, and ‘other bits that are more specifically geared towards my generation’s involvement in the stock market’.

We welcome him aboard.





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