Have your cake & eat it too.

I’ve noted here that a handful (11, actually) of  growth stocks have been responsible for the majority of the post-March rally. The S&P 500 is down only 5% since the high, but the average stock is still down 11% (small caps are down 20%).

This market has many legendary Portfolio Managers scratching their heads; Buffett, Tepper, Druckenmiller, Minerd.  Jeremy Grantham notes in GMO’s quarterly letter , “the current P/E on the U.S. market is in the top 10% of its history. The U.S. economy in contrast is in its worst 10%, perhaps even the worst 1%…this is apparently one of the most impressive mismatches in history.”

Another comment from the WSJ  – brackets indicate my notations:

“In 2009 (the bottom of the market), the rally started with the S&P 500 looking historically cheap, trading below 10 times its trailing 12-month earnings. Now, the index would be on the expensive side even if the (COVID) outbreak had never happened: It fetches 21 times the high tide of profits achieved last year (which I discussed on this blog). And at the end of 2009, the S&P 500 was still about 30% below its pre-crisis peak—it took until 2013 to recover—whereas it is currently only 8% (now 5%!) below its February high. Investors are wise to keep 2009 in mind—but not just the fear of missing the rally.”

Our strategy

1. Hold some cash,
2. Add some commodity exposure.
3. Focus on value names.

We’re sending out updates and having frank conversations with clients where needed so that the risks of this market are clearly understood. This market could easily go up another 20%, Or, it might go down 20%. Hey, if Buffett and company can’t figure this out, who can…?

By owning value over growth, keeping a cash component of about 25%, and owning under loved cyclical s (metals etc) ….. we could easily under-perform rising markets. But if the opposite happens and markets fall, or if growth stocks roll over, our way will have saved quite a chunk of skin.

The argument for value stocks:  have your cake and eat it too ?

Have you noticed the recent rotation from “growth” to “value”?

• Did anyone reading this blog notice the relative weakness in names like Shopify, Netflix and Facebook (etc) last week?
• How about the strength in Insurance names, value stocks like Berkshire (we hold), and certain resource stocks, along with a sudden turnaround for beaten down emerging markets like Brazil?

This chart comparing growth (black line) to value (red line) via the Vanguard ETF’s illustrates that growth is losing some steam. The bottom pane is relative strength of growth vs. value. Note that growth is peeling back on a relative basis since mid-May.

If you pull the gems out of the value stock, and compare them to the best of the growth world, you can see a tremendous rotation. Here’s a correlation chart of Berkshire (BRK’B – black line) which we hold, vs. Netflix (NFLX – red line) which we do not own. The pane below price charts is the correlation study. If its above 0, they are correlated. Note that, prior to COVID crash, they were more often correlated than not. Note that since then, they are negatively correlated.

The bottom pane is comparative strength. Note the relative strength comeback on BRK vs. NFLX. This is just ONE of the rotations that may become apparent over time. Consider owning some value within your portfolio. Consider peeling some of your growth out of your portfolio.

Finally: For what its worth, Mark Cuban  who is NOT an analyst, but an all-round smart guy (Shark Tank guest, investor, entrepreneur) sees in the tech stocks speculative equity market volume, much like the late 1990s (Citing that NASDAQ vs. SPX comparative volume is crazy high….the same differential before the 2000 tech crash). Mark was public about his bearishness on the tech sector before the 2000 tech bubble implosion, and he is of similar mindset now. Take that for what its worth.

Bear-o-meter reads…

Tomorrow I will do my best to post the new reading of the Bear-o-meter. I post this every month. Please read this blog for a description of how it works. On that blog, I wrote a pretty detailed description of the indicators that I use within the compilation. Be sure to read that blog–I’d expect it may be materially different from last months reading.