Click HERE to access the FSInsight COVID-19 Daily Chartbook.
STRATEGY: Vast majority (>80) of Growth outperformance to Value is multiple expansion
As markets finish the first week of December, overall trends in both financial markets and even macro are mostly positive. Here are some ‘half-full’ factors:
– COVID-19 is still expanding Wave 3, but at a much slower pace
– Stimulus before year-end back on the table
– Vaccine getting REAL
– Positive seasonals –> history says 100% of time December rally (see other notes) if YTD 10%-15% (check)
– Asia booming
– VIX sinking, steadily and ready to fall below 20
– USD crashing = bullish risk assets
So you can see, there are multiple tailwinds for risk assets at the moment. But COVID-19 cases are still rising. They are somewhat distorted this week as there are many “payback” cases, that would have been reported last week, but Thanksgiving delayed it. Nevertheless, US COVID-19 cases blasted past 200,000 today. And look at the figures for states with the biggest gains:
– NY state hit nearly 10,000 cases today, it was like <1,000 for most of the Summer
Source: COVID-19 Tracking Project and Fundstrat
So Wave 3 continues and this is not good. And a reason for everyone to remain vigilant, even with COVID-19 fatigue. But financial markets are taking this in stride. It is for the reasons mentioned above.
And we have seen the continued violent rotation into Epicenter stocks (see below), with the performance gap vs FANG about 2,500bp in just the past month alone. The YTD differential is 7,000bp, so we are only seeing ‘baby steps’ so far.
Source: Bloomberg
As mentioned yesterday, over the next few weeks, we will be making ongoing analysis about the longevity of this epicenter (aka Value aka Cyclical) rotation. A few of you had asked whether valuations justified a further rally in Epicenter.
This is a good question.
After all, many have argued that Value stocks have languished because they don’t grow. So, I asked our data science team, led by tireless Ken, to look at the factors behind the massive outperformance of Growth (vs Value) since 2007. The data are summarized below, and as a simple framework, this is what we looked at:
– Sales growth –> % chg 2007-2020
– Book value growth –> same
– Price return –> same
– How much was due to fundamentals vs valuation?
Personally, I think comparing Book value is more relevant than sales growth. Why? Book value is the measure of the ‘organic’ cost vs ‘acquire’ and if assets are trading attractively to this intrinsic cost, they should be better buys. Sales is similar but less informative.
Book value growth nearly identical since 2007 (to now), but P/B of Growth 2.5X vs flat for Value…
Below are the comparative statistics of Book value. The table is straight forward, but here are the insights:
– Book value growth since 2007 nearly identical –> 44% vs 40% Growth vs Value
– P/B of Growth 3.9X to 10.0X –> 2.5X WOW
– P/B of Value 2.0X to 2.2X –> FLAT
Almost all of the outperformance of Growth is due to valuation expansion.
Source: Fundstrat and Russell Investments
Sales growth for Growth Index superior to Value since 2007 (to now), 3/4 of superior return is due to P/S expansion
Below are the comparative statistics of Sales. The table is straight forward, but here are the insights:
– Growth sales growth since 2007 –> 48%
– Value sales growth since 2007 –> 11%
– Big differential
– P/S of Growth 1.7X to 4.3X –> 2.5X WOW
– P/B of Value 1.3X to 1.8X –> 50% higher
Again, 3/4 or >75% of the outperformance of Growth is due to valuation expansion.
Source: Fundstrat and Russell Investments
Look at the P/B and P/S time series below and you get a much clearer picture of this valuation expansion differential. As you can see, the outperformance of Growth:
– really ignited in the past 5 years, but it is 14 years in total
– P/B and P/S have soared for Growth
Source: Fundstrat, Bloomberg and Russell Investments
We see multiple factors supporting Epicenter (aka Value) multiple expansion…
As we have noted a few times in the past few months, we see multiple factors supporting a sustained improvement in the valuation of Epicenter stocks:
– Operating leverage –> cost cutting –> EPS surprise
– Unkillable –> survived Greater Depression –> lower equity risk premia
– US early cycle –> GDP surprise
– USD/inflation –> asset-heavy outperforms
– Millennials –> de-urbanization = asset heavy
So again, multiple factors that are supportive of valuation expansion. Hence, we think the 2020 price highs are not the constraint for buying Epicenter stocks.
Below is the GICS 4 list of the S&P 1,500 and shows the groups relative to their 2020 highs. As you can see, a significant number are still 20% or more off their 2020 highs. These are the most beaten-down groups of Epicenter stocks:
– Energy dominates the list
– Followed by travel-related
Source: Fundstrat, Bloomberg
92 Epicenter “Trifecta” stocks…
Below is the current Trifecta Epicenter stock list (*). These are the stocks that were hit the hardest by the pandemic and have the greatest operating leverage to a re-opening. And we like the earnings upside in these stocks, because of the massive cost reset. The stocks are based on positive views coming from the trifecta of: (i) Quant (tireless Ken), (ii) Global Portfolio Strategy (Brian Rauscher, aka Rocky) and (iii) Technicals (Rob Sluymer).
Consumer Discretionary: AN, BWA, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, HAS, PII
Financials: FITB, WTFC, ASB, BOH, FNB, PB, PBCT, STL, WBS, PNFP, SBNY, NYCB, IBKR, BK, SYF, BHF, MTG
Industrials: AGCO, OC, ACM, WAB, EMR, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, UNP, UBER, JBHT
Energy: HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX
Basic Materials: LYB, MLM, CF, MOS, NEU, NUE, RS, SON
Real Estate: STOR, HIW, CPT, KIM, NNN, VNO
Source: Fundstrat
(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
ADDENDUM: We are attaching the stock lists for our 3 portfolios:
We get several requests to give the updated list for our stock portfolios. We are including the links here:
– Granny Shots –> core stocks, based on 6 thematic/tactical portfolios
– Trifecta epicenter –> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Sluymer (Technicals)
– Biden vs Trump –> based on correlation to either candidate odds
Granny Shots:
Full stock list here –> Click here
Tickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX
Trifecta Epicenter (*):
Full stock list here –> Click here
Tickers: ACM, AGCO, AN, ASB, BBY, BHF, BK, BOH, BWA, CF, CFX, CPT, CRI, CSL, DAL, DOV, DRI, EMR, EOG, F, FITB, FL, FLS, FNB, GE, GM, GPC, GPS, GRMN, HAS, HFC, HIW, HLT, HOG, HP, IBKR, IEX, JBHT, JBLU, KIM, LB, LEG, LUV, LYB, MAR, MGM, MIDD, MLM, MMM, MOS, MPC, MTG, NCLH, NEU, NNN, NOV, NUE, NVT, NWL, NYCB, OC, PB, PBCT, PHM, PII, PNFP, PNR, PSX, PXD, RCL, RS, SBNY, SBUX, SIX, SLB, SNA, SON, STL, STOR, SYF, TOL, TPX, UBER, UNP, VFC, VNO, WAB, WBS, WH, WTFC, WYND, XYL
Biden White House vs. Trump White House:
Full stock list here –> Click here
(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile.
POINT 1: Daily cases 205,469, +74,729 vs 7D ago… NOISY data.. but getting bad everywhere
The latest COVID-19 daily cases came in at 205,469, +74,729 vs 7D ago.
– the massive 7D jump is due to the fact that last week was Thanksgiving, so cases were suppressed (closures)
We won’t have a clearer picture of COVID-19 trends until after this “payback” period ends, which is a few weeks away. This is not that different than the distortions seen after Labor Day weekend.
Source: COVID-19 Tracking Project and Fundstrat
7D delta at +74,729…yikes
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.
– This is payback, as Thanksgiving is the 7D ago date…
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
POINT 2: Wave 3: Fewer counties are reporting a rise in cases… a possible leading indicator again?
Wave 3 is still raging across the US and our base remains that Wave 3 will not peak until Feb 2021 — essentially following the forecast of the IHME (healthdata.org) and the work of Dr. Chris Murray. But at the same, there are some characteristics of Wave we are watching, namely:
– Wave 3 swept across parts of the US previously unscathed in Wave 1 and 2, including many parts of CA and TX
– Wave 3 initially led by 6 states, WI, IL, ID, ND, SD, UT, or WIINSU
– Daily cases are rolling over in WIINSU (below)
So here is the key question — will Wave 3 peak when the Wave 1 and Wave 2 ‘unscathed’ regions rollover?
Wave 3: WIINSU is rolling over = good
We want to continue to highlight this, since it is a good thing. The earliest states at the heart of Wave 3, WI, IL, ID, ND, SD, UT, or WIINSU, are seeing daily cases rollover:
– See the red line states? Those are daily cases per 1mm for WIINSU, they are rolling over
– the surge is now in Wave 1 and to a lesser extent, Wave 2 states
Source: COVID-19 Tracking and Fundstrat
Looking at county-level data, we see a similar picture. Below is the diffusion (or % of counties, based on population) where COVID-19 cases are lower vs 7D ago. The higher the figure, the better, as it indicates COVID-19 is in retreat.
– interestingly, this figure is rising and hit 49% (7D avg).
– the peaks of severity for Wave 1 and Wave 2 are highlighted
Has Wave 3 peaked, geographically?
Source: Johns Hopkins and Fundstrat
I don’t know the answer, but this chart is quite interesting. As our clients know, this chart was useful in Wave 1 and Wave 2, as this is essentially measuring “internals” at the county-level. Thus, early trends might be spotted
POINT 3: Policymakers ‘COVID-19 fatigue’ — ‘do as I say, not as I do’
As COVID-19 very likely to see a resurgence, post-Thanksgiving holiday (similar to post-Labor Day surge), we are likely to see policymakers point the finger at Americans ignoring CDC guidelines. But let’s be honest, more Americans are getting COVID-19 fatigue. I am seeing it increasingly from my friends, contacts and even neighbors.
And compliance with soft lockdowns is at risk of weakening, particularly since many policymakers have seemingly violated their own strict COVID-19 guidelines. Below are a few of many such examples. I am highlighting two from California, because that state now has >20,000 daily cases. Recall, that figure would have been equivalent to 50% of the total daily cases in Wave 1 — it is a monstrously large number.
San Francisco Mayor London Breed attends a birthday party at French Laundry, literally the day after CA Gov Gavin Newsom did the same. And in the same restaurant and in the SAME dining room.
– Wow
https://abc7news.com/london-breed-french-laundry-sf-mayor-gavin-newsom-dinner-party/8421970/
San Jose Mayor urges residents to cancel gatherings for Thanksgiving, in a very public campaign. And yet, hosts a large Thanksgiving gathering for his family.
– Again, Wow
https://www.kron4.com/news/bay-area/san-jose-mayor-apologizes-for-breaking-covid-19-rules-on-thanksgiving/
And the mayor of Austin, Steve Adler, traveled to Mexico, even as he urged residents to stay home to ‘slow the spread of COVID-19.’
https://www.kxan.com/news/local/austin/austin-mayor-steve-adler-says-he-regrets-traveling-to-mexico-while-urging-residents-to-stay-home/
The point of these comments is that we are seeing policymakers disregard guidelines, yet somehow, the ‘cancel culture’ points the finger at neighbors who break the rules. Or the media criticizes the White House for violating rules.
I am all for being vigilant and taking precautions. So don’t count me as a skeptic. But I am also not going to be calling out anyone who has COVID-19 fatigue. If policymakers can’t stick with these guidelines, I don’t know if we should be playing citizen vigilante.