U.S. 'value' stocks in focus despite 'growth' rebound

Shares of Apple, the catalyst for last week’s global market sell-off are steadier this week having posted their biggest fortnightly loss in 14 months.

Shares of Apple, the catalyst for last week’s global market sell-off are steadier this week having posted their biggest fortnightly loss in 14 months.

With evidence that large investors remain very ‘overweight’ big tech shares however, the sector looks prone to further sell-offs as the end of the quarter looms. At such times, investors typically review portfolios with a view to selling higher rated assets and buying cheaper ones.

Last week’s slide is also echoed in recent data showing that around 60% of U.S. equity activity is linked to passive ETF and quantitative strategies (says JPMorgan). Essentially the bank suggested that sudden far-reaching shifts in investing tactics—often driven by algorithms—can make markets even more difficult to predict for individual investors.

On that basis, recent swings can also be seen as another shift in investors’ perennial dance between ‘value’ and ‘growth’. The continuum was thrown into sharper focus by the election of Donald Trump last November. His projection of huge fiscal spending–as yet unfulfilled—initially propelled value stocks higher on hopes that more established industries could return to the ascendant. But as value’s short-lived rise fizzled out, growth resumed its advance. That leaves the S&P 500 information technology sector up 19% so far this year, even after the tech tumble, against an 8% rise by the main index.

Whichever end of the continuum is in favour, a value-growth perspective offers individual investors, who do not have sophisticated algos at their disposal, a way to know when one strategy is overdone and therefore when to become more cautious about stocks associated with it.

One way to visualise value-growth shifts is to create a chart of the spread or ratio between two assets that strongly represent the continuum. iShares S&P 500 Growth ETF and iShares S&P 500 Value ETF fit the bill. The chart below shows a clear uptrend driven by the growth part of the spread from December 2016 lows. Growth then saw a reversal at a record peak for the ratio earlier this month, before rebounding at support.

DAILY CHART: ISHARES S&P 500 GROWTH ETF/ISHARES S&P 500 VALUE RATIO

Source: Thomson Reuters and City Index

The resistance breach (1.3056) underlines the strength of the comeback, suggesting further upside as the ratio retraces back towards all-time highs around 1.337s. The RSI momentum gauge of the ratio rising in neutral territory also supports continued ascent.

On the other side of the coin, with growth stocks having been in high demand for around six months, many solid stocks on the value side have necessarily been neglected. That implies a potential double opportunity should the market go cool on ‘growth’ again soon. At the very least, we would then expect the top 10 holdings of the S&P 500 value ETF to come into play. Most of these reflect typical value characteristics such as having an outlook for grinding rather than rapid growth. And most emit a steady stream of dividend cash.

In the table below, we rank them in order of dividend yield and we also include their price performance over the last year. In the next ‘tech fright’ algos (and human investors) can be expected to gravitate to the best dividend-paying shares with promising if not extensive price returns over the last year.

Company Name

Last close ($)

1-Yr % Change

Dividend yield (%)

AT&T

38.91

-4.46

5.037

CHEVRON

107.46

5.7

4.02

EXXON MOBIL

82.76

-8.77

3.721

CISCO SYSTEMS

31.99

10.50

3.626

WELLS FARGO

54.24

16.39

2.802

JOHNSON & JOHNSON

134.07

16.0

2.506

JPMORGAN CHASE

88.07

41.40

2.2709

BANK OF AMERICA

23.91

78.43

1.254

CITIGROUP

64.48

51.78

0.992

BERKSHIRE HATHAWAY

257320

21.83

NA

Source: Thomson Reuters and City Index – data as of 19.06.2017


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