IVW / IVE _ A Growth vs. Value Analysis
Top Holdings:
IVW - iShares S&P 500 Growth ETF : Apple (11%), Microsoft (10%), Amazon (8%), Google (6%), Facebook (3%), Tesla (3%), Nvidia (3%), PayPal (2%), Netflix (2%), Adobe (1%),
IVE - iShares S&P 500 Value ETF : BERKSHIRE HATHAWAY INC CLASS B (3%), JPMORGAN CHASE & CO (3%), WALT DISNEY (2%), JOHNSON & JOHNSON (2%), BANK OF AMERICA CORP (2%), VERIZON COMMUNICATIONS INC (2%), EXXON MOBIL CORP (1%), AT&T INC (1%), PFIZER (1%), WALMART (1%)
*Value stocks are defined by trading below what they are really worth. These are what are considered the best "value" stocks right now.
Growth vs Value: Since September 2020 highs, there has been a shift from Growth Stocks to Value Stocks. Growth stocks have been outperforming Value from September 2007 to September 2020. From the September highs to now, we have seen Value stocks (+14%) out perform Growth Stocks (+8%). Since September 2007 highs to now Value stocks (+60%) have lagged Growth stocks (260%) by a lot. Broad Indices have attributed most of there success to the "growth" companies in IVW. These growth stocks have been holding up markets. Is it finally time for Value names to start outperforming Growth stocks
Why do markets shift to prefer value over growth:
1. Growth names start to be "fundamentally" overvalued.
2. Investors prefer lower risk, lower potential drawdown. Before and after recessions/corrections people gravitate toward discounted value and avoid low earnings, expensive value or expensive growth. Cheap stocks should have less room to correct.
3. Value stocks are "undervalued" and offer a higher rate of return.
IJS is the S&P 500 Small-Cap Value ETF, it holds names like Macys, Pacific Premier Bank Corp, BBBY, and a bunch of other small cap "value" names nobody knows. IJS (40%) has been massively outperforming since September. There are a lot of speculators that believe small businesses are in an environment to flourish. Real GDP growth remains below expectations. Earnings have not returned to pre-pandemic levels. Biden plans to increase the min wage to $15 adding pressure to smaller businesses. A lot of small cap names in the IWM and IJS have problems with profitability.IWM's Trailing Price to Earnings is negative because most companies have negative earnings and Price to Sales is at all time highs. There is a lot of speculation going in IJS and LWM making it prime for an event like a blow off top.
The US 10 Year Treasury Yield has been on the rise in recent months. Could the yield be rising too fast? Borrowing can't become too expensive when the economy is still struggling. Violent moves upward in yield are never good. A move higher in long-term Treasury yields undercuts the present value of future earnings. As Interest rates started going up faster we saw a shift away from growth names to small cap value stocks. Investors may be chasing higher returns on "underperforming/undervalued" stocks. In general when interest rates rise companies cutback on spending because the cost for borrowing as increased. This causes earnings and share prices to drop. As a result, higher interest rates are putting downward pressure on both value and growth but more so on growth because low rates move investors up in their risk tolerance in search of higher return, benefiting growth over value.
What market bulls would like to see is for growth stocks to start chugging higher and value will eventually follow. Any "healthy" bull market is characterized by strength in growth stocks. At least since 2008, Growth has propelled markets. One can argue that a cyclic change is occurring and now is the time for Value to outperform Growth and propel markets upward (Not as easy as it seems). Berkshire Hathaway sold Apple and bought into Pharma and Energy stocks. Apple is trading at over 30 times net profits and over 8 price/sales (investors are paying 8 dollars for every 1 dollar in sales) which is an incredibly high valuation for even a giant like Apple. Growth stocks are so overvalued investors are starting to realize that they need another place to store their money. As the economy has plans of reopening many of these value names have garnered speculative attention. This caused the rotation from growth to value to occur. The questions is " Is the rotation into Value real and will it be sustained?" It is important to keep in mind that a large part of "value stocks" are debt laden, zombie companies like airlines, cruises, casinos, brick n mortar stores and banks. The "pent-up" demand, enthusiastic reopening targets and high inflation expectations seemed to of convinced speculators to front-run the supposed rotation and pile into value names with subpar fundamentals.
I am not claiming to make any conclusions based on this chart but, it is definitely worth examining. Will Growth start to out perform again? Will Value sustain its outperformance? Or will both Growth and Value begin to underperform?
Charting ratios is an amazing ways to examine relationships in the market. Some interesting ratios I keep track of are TLT/XLF, IVW/IVE, SPY/TLT, XLY/XLP, SPY/GDX, XSD/XLP, JNK/LQD, ZN1!/ZB1!
Top Holdings:
IVW - iShares S&P 500 Growth ETF : Apple (11%), Microsoft (10%), Amazon (8%), Google (6%), Facebook (3%), Tesla (3%), Nvidia (3%), PayPal (2%), Netflix (2%), Adobe (1%),
IVE - iShares S&P 500 Value ETF : BERKSHIRE HATHAWAY INC CLASS B (3%), JPMORGAN CHASE & CO (3%), WALT DISNEY (2%), JOHNSON & JOHNSON (2%), BANK OF AMERICA CORP (2%), VERIZON COMMUNICATIONS INC (2%), EXXON MOBIL CORP (1%), AT&T INC (1%), PFIZER (1%), WALMART (1%)
*Value stocks are defined by trading below what they are really worth. These are what are considered the best "value" stocks right now.
Growth vs Value: Since September 2020 highs, there has been a shift from Growth Stocks to Value Stocks. Growth stocks have been outperforming Value from September 2007 to September 2020. From the September highs to now, we have seen Value stocks (+14%) out perform Growth Stocks (+8%). Since September 2007 highs to now Value stocks (+60%) have lagged Growth stocks (260%) by a lot. Broad Indices have attributed most of there success to the "growth" companies in IVW. These growth stocks have been holding up markets. Is it finally time for Value names to start outperforming Growth stocks
Why do markets shift to prefer value over growth:
1. Growth names start to be "fundamentally" overvalued.
2. Investors prefer lower risk, lower potential drawdown. Before and after recessions/corrections people gravitate toward discounted value and avoid low earnings, expensive value or expensive growth. Cheap stocks should have less room to correct.
3. Value stocks are "undervalued" and offer a higher rate of return.
IJS is the S&P 500 Small-Cap Value ETF, it holds names like Macys, Pacific Premier Bank Corp, BBBY, and a bunch of other small cap "value" names nobody knows. IJS (40%) has been massively outperforming since September. There are a lot of speculators that believe small businesses are in an environment to flourish. Real GDP growth remains below expectations. Earnings have not returned to pre-pandemic levels. Biden plans to increase the min wage to $15 adding pressure to smaller businesses. A lot of small cap names in the IWM and IJS have problems with profitability.IWM's Trailing Price to Earnings is negative because most companies have negative earnings and Price to Sales is at all time highs. There is a lot of speculation going in IJS and LWM making it prime for an event like a blow off top.
The US 10 Year Treasury Yield has been on the rise in recent months. Could the yield be rising too fast? Borrowing can't become too expensive when the economy is still struggling. Violent moves upward in yield are never good. A move higher in long-term Treasury yields undercuts the present value of future earnings. As Interest rates started going up faster we saw a shift away from growth names to small cap value stocks. Investors may be chasing higher returns on "underperforming/undervalued" stocks. In general when interest rates rise companies cutback on spending because the cost for borrowing as increased. This causes earnings and share prices to drop. As a result, higher interest rates are putting downward pressure on both value and growth but more so on growth because low rates move investors up in their risk tolerance in search of higher return, benefiting growth over value.
What market bulls would like to see is for growth stocks to start chugging higher and value will eventually follow. Any "healthy" bull market is characterized by strength in growth stocks. At least since 2008, Growth has propelled markets. One can argue that a cyclic change is occurring and now is the time for Value to outperform Growth and propel markets upward (Not as easy as it seems). Berkshire Hathaway sold Apple and bought into Pharma and Energy stocks. Apple is trading at over 30 times net profits and over 8 price/sales (investors are paying 8 dollars for every 1 dollar in sales) which is an incredibly high valuation for even a giant like Apple. Growth stocks are so overvalued investors are starting to realize that they need another place to store their money. As the economy has plans of reopening many of these value names have garnered speculative attention. This caused the rotation from growth to value to occur. The questions is " Is the rotation into Value real and will it be sustained?" It is important to keep in mind that a large part of "value stocks" are debt laden, zombie companies like airlines, cruises, casinos, brick n mortar stores and banks. The "pent-up" demand, enthusiastic reopening targets and high inflation expectations seemed to of convinced speculators to front-run the supposed rotation and pile into value names with subpar fundamentals.
I am not claiming to make any conclusions based on this chart but, it is definitely worth examining. Will Growth start to out perform again? Will Value sustain its outperformance? Or will both Growth and Value begin to underperform?
Charting ratios is an amazing ways to examine relationships in the market. Some interesting ratios I keep track of are TLT/XLF, IVW/IVE, SPY/TLT, XLY/XLP, SPY/GDX, XSD/XLP, JNK/LQD, ZN1!/ZB1!
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