“Price is what you pay, value is what you get”- Warren Buffet

This is a technical analysis site, colored with the occasional tidbit of fundamental analysis/ political policy/ world policy view where I deem it useful. I usually like to concentrate on the technical view, given my personal history and expertise in that subject. Lets look at some technical and fundamentals surrounding the growth vs. value market divisions of late. And before somebody says it – yes-  the definition of growth or value is a bit interpretive, but lets just go with the iShares index definitions for this purpose.

Starting from the technical perspective, we at ValueTrend have been focusing our more conservative Equity Platform on value-plays. This, in a world of 1999-like speculative hype surrounding technology and stay-at-home stocks, as discussed here. I’d like to re-visit that stance, given the recent moves on the markets of late. Why are we still buying value?

Here are the updated value vs. growth charts:

 

Growth stocks, after a brief pause noted in my prior blog at old resistance, continued their surge. We can see the breakout on the chart above. Momentum oscillators continue to suggest an overbought condition, but have not rolled over yet.

The NASDAQ, below, is even more overbought. Note RSI on NASDAQ vs. the Growth stock ETF, which have commonalities, but differ in sectors by some degree.

Now lets look at the value side of the equation:

Value stocks, per the iShares chart above, have bounced off of the support line noted in the last blog. So they are certainly catching a bid. The relative strength (third pane up from the bottom of chart) is still well behind that of growth stocks. Money flow, bottom pane, is improving, but still choppy when compared to the non-stop money flowing into the growth sector (top chart).

Technical conclusion: Growth is still in control, but its overbought. As it was a month ago – so who’s to say it cant get more overbought? The question is, do you want to be the last one to buy a bus ticket when its already looking like seats are scarce?

A brief look at the fundamentals.

Again, this is less my world, but I know just enough about the fundamentals side to be dangerous. Here are my pondering(s):

Companies with little income and high debts have been the out performers, while stalwart companies with predictable growth are lagging. It has been this trend, in my observations, that has turned many prior dependable “growth” stocks into “value” stocks. While there are many example of this swap, the move from long termed stalwart growth stocks like banks (both sides of the border) into “value plays” are one. Royal Bank (RY-T) for example, has a forward PE of about 13X, and Bank America (BAC-US) is about 15 x forward earnings.

This, while stay-at-home thematic plays like SHOP-T (1800 forward PE!!!), ZOOM-US (200 x forward PE!) go crazy. This also occurred in late 1999 as companies with relatively low earnings and revenue exploded higher in a speculative fueled buying frenzy. And we know how that ended up.

Beyond the forward PE ratio (and this is when I start getting dangerously out of my technical world, so forgive the simplicity…) some of the leading growth stocks are trading at double digit top line numbers.  At 10-times sales revenues (assuming no growth, which is unrealistic, but bear with me…), to get a 10-year payback as a stock investor, the company would need to pay 100% of revenues for 10 straight years in dividends –  assuming it has zero cost of goods or services or development for its sales. That assumes zero expenses, which is (tongue in cheek here) hard with paying employees. That also assumes no taxes, and no taxes on its dividends. And it assumes no R&D expenses for the next 10 years.  So you’d better see some pretty strong linear growth accomplished with a very savvy accountants to keep your expenses crazy low in order to accomplish this. Even well run growth companies are sporting high Price to Sales ratios. The list includes: Adobe (17x), Verison (20x), Mastercard (18x), Nvidia (20x), and others. You get the point.

Summary

The above is just my not-too deep fundamental prognosis, so shoot it down if you wish. I could have gotten Craig’s more knowledgeable input here, but I feel my input is at least something to consider, simplicity and all. The point is, no matter how simplistic this view is, its hard to acknowledge that the overbought technical conditions noted at the top of this blog can be maintained without some pause to allow market froth to settle down. A fundamental reality check might be the cause of that pause.

For our part at ValueTrend, we hold some tech stocks (having reduced our exposure again last week), but we have been focusing more on the very best value plays we can find. Plus we hold some cash. This is important for readers to understand: If and when these overdone stocks sell off, money has to go somewhere. Unattractive bond and GIC returns will likely force a rotation from the overvalued bubble-stocks into value and dividend stocks, and less so into cash. If you are an aggressive player, you should continue holding growth stocks while watching the trend for any change. However, if you are conservative investors like us and want to reduce risk through value stocks, that sometimes requires patience.

Case in point was 2008-9. I got out of oil early (late 2007 in fact) and missed a huge chunk of upside and under performed markets grossly for more than a year. But my strategy paid off when the walls came tumbling down in 2008. In 2009 I was already out of the overbought sectors, into cash, and buying cheap– this, while most investors were losing money hand over fist. I went from zero to hero in 2009. But man, it was tough when markets were overdone in 2007 and I was missing out….
Until I wasn’t!

We shall see if I am right again.

4 Comments

  • Hi Keith,

    It’s almost scary how fast sentiment has changed in my circle of friends. At 2550 I was getting calls asking me how much they should sell. And now, they’re convinced tech will replace most current industries. And, on Facebook, my wife keeps seing this WealthSimple ad that says “Buy tech with a click”.

    We decided to pay down the mortgage and sell 10% of my SP500 each time it goes 1% higher from here. I’m about 30% in cash.

    What a hard market to be in.

    Reply
    • Its interesting to think that tech would replace most industries—it ain’t everything.

      Reply
  • Gold is on fire lately. Do you think it will continue?
    (Ross Healy suggests minimum 20% of your portfolio give the current economic climate.)
    Thanks Keith.
    Chris in Jordan.

    Reply
    • Gold is now approaching the high point of 2011 near $1900. I think it might pause a bit in the nearterm, but it is my opinion that gold will break $1900 eventually.

      Reply

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