Tagged: growth

Growth vs Value

Are you Value or Growth?  

Depends what we mean, I know. S&P Dow Jones says it distinguishes Value with “ratios of book value, earnings and sales to price.”

It matters because Growth is terrorizing Value.  According to data from the investment arm of AllianceBernstein, Growth stocks outperformed Value stocks by 92% between 2015-2020.  Morningstar says it’s the biggest maw on record, topping the 1999 chasm.

If you’re in the Growth group, you’re loving it.  But realize.  By S&P Dow Jones’s measures, anybody could be a Value or Growth stock at any time.  It’s all in the metrics.

The larger question is why the difference?  AllianceBernstein notes that the traditional explanation is earnings growth plus dividends paid.  That is, if your stock is up 50% more than a peer’s, it should be because your earnings and dividends are 50% better.

If that were the case, everybody would be a great stock-picker. All you’d need do is buy stocks with the best earnings growth. 

Well, turns out fundamentals accounted for just ten percentage points of the difference.  The remaining 82% of the spread, as the image here from AllianceBernstein shows, was multiple-expansion.  Paying more for the same thing.

Courtesy AllianceBernstein LP. https://www.alliancebernstein.com/corporate/en/insights/investment-insights/whats-behind-the-value-growth-performance-gap.html

Put differently, 90% of the time Growth stocks outperform Value stocks for no known reason. No wonder stock-picking is hard.

Take Vertex (VRTX) and Fortinet (FTNT), among the two very best and worst stocks of the past year.  I don’t know fundamentally what separates them. One is Tech, the other Healthcare.

I do know that running supply/demand math on the two, there’s a staggering behavioral difference.  FTNT spent 61 days the past year at 10.0 on our ten-point scale measuring demand called Market Structure Sentiment.  It pegged the speedometer 24% of the time.

VRTX spent five days at 10.0.  Two percent of the time.  You need momentum in today’s stock market or you become a Value stock.

We recently shared data with a client who wondered why there was a 20-point spread to the price of a top peer.  We ran the data.  Engagement scores were about the same – 85% to 83%, advantage to our client. Can’t say it’s story then.

But the peer had a 20% advantage in time spent at 10.0.  The behavioral patterns were momentum-style. Our client’s, GARP/Value style.

Okay, Quast.  Suppose I stipulate to the validity of your measure of supply and demand, whatever it is.  Doesn’t answer the question. Why do some stocks become momentum, propelling Growth to a giant advantage over Value?

I think it’s three things. I can offer at least some data, empirical or circumstantial, to support each.

Let’s call the first Herd Behavior.  The explosion of Exchange Traded Funds concentrates herd behavior by using stocks as continuously stepped-up collateral for ETF shares.  I’ll translate.  ETFs don’t invest in stocks, per se.  ETFs trade baskets of ETF shares for baskets of stocks (cash too but let’s keep it simple here). As the stocks go up in value, ETF sponsors can trade them out for ETF shares. Say those ETF shares are value funds.

The supply of Value ETF shares shrinks because there’s less interest in Value.  Then the ETF sponsor asks for the same stocks back to create more Growth ETF shares.

But the taxes are washed out via this process. And more ETF shares are created.  And ETFs pay no commissions on these transactions. They sidestep taxes and commissions and keep gains.  It’s wholly up to traders and market-makers to see that ETF shares track the benchmark or basket.

The point? It leads to herd behavior. The process repeats. Demand for the same stuff is unremitting.  We see it in creation/redemption data for ETFs from the Investment Company Institute. ETF creations and redemptions average over $500 billion monthly. Same stuff, over and over. Herd behavior.

Second, there’s Amplification.  Fast Traders, firms like Infinium, GTS, Tower Research, Hudson River Trading, Quantlab, Jane Street, Two Sigma, Citadel Securities and others amplify price-moves.  Momentum derives from faster price-changes, and Fast Traders feed it.

Third is Leverage with derivatives or borrowing.  Almost 19% of trading volume in the S&P 500 ties to puts, calls and other forms of taking or managing risk with derivatives. Or it can be borrowed money. Or 2-3x levered ETFs. The greater the pool of money using leverage, the larger the probability of outsized moves.

Summarizing, Growth beats Value because of herd behavior, amplification of price-changes, and leverage.

By the way, we can measure these factors behind your price and volume – anybody in the US national market system.

Does that mean the Growth advantage is permanent?  Well, until it isn’t. Economist Herb Stein (Ben’s dad) famously said, “If something cannot last forever, it will stop.”

And it will. I don’t know when. I do know that the turn will prompt the collapse of leverage and the vanishing of amplification. Then Growth stocks will become Value stocks.

And we’ll start again.

Blunderbuss

Do stores sell coats in the summer? 

No, they sell bathing suits. They match product to consumer.  Do you, investor-relations professionals?

I’ll tell you what I mean.  First, here’s a tease:  I recorded a panel yesterday with the Nasdaq’s Chris Anselmo and Kissell Research Group’s Dr. Robert Kissell on How New Trading Patterns Affect IR.

It airs at 4p ET June 22 during the 2021 NIRI Annual Virtual Conference.  Root around in the couch cushions of your IR budget and find some coins and join us.  We’ll be taking questions live around the panel.  Sling some heckling if you want!  It’s a great program.

Now, back to matching product to consumer.  The IR outreach strategy for maintaining relationships with investors often resembles a blunderbuss. Unless you went to elementary school when I did and saw pictures of pilgrims sporting guns with barrels shaped like flugelhorns, you probably don’t know what I’m talking about.

You threw some stuff in the barrel and loaded it with powder and ignited it and hoped some of what belched out went in the general direction you were pointing.

Illustration 165213327 © Dennis Cox | Dreamstime.com

If you don’t have anything better I guess it works. But the IR profession shouldn’t be blunderbussing wildly around.

I get it, Tim.  Be targeted in our outreach.

No, I mean sell your product to consumers who’ll buy it.  Your product is your stock.  Your story is a narrative that may or may not match your product.

Huh?

Stay with me.  I’ll explain.  This is vital.   

Think of it this way. REI is an outdoors store.  It’ll sell you cycling stuff and camping gear in the summer, and skiing gear and coats in the winter.  The data analytics they use are pretty simple: The season changes.

In the stock market, the seasons are relentlessly changing but the temperature doesn’t rise and fall in predictable quadrants to tell you if igloos or swimsuits are in. But the BEHAVIORAL DATA wax and wane like many small seasons.

The Russell 2000 value index is up 30% this year. The Russell 2000 growth index has risen just 3.8%.  Is value more appealing than growth?  No, as both Benzinga and the Wall Street Journal reported, GME and AMC rank 1-2 in the index.

The crafters of the indices didn’t suppose that movie theaters in the age of Covid or a business built on selling games that have moved online were growth businesses.

They’re not. But the products are. These are extreme cases but it happens all the time.

CVX, market cap $210 billion, is in both Value and Momentum State Street SPDR (S&P Depositary Receipts) Exchange Traded Funds. It’s got both characteristics AT DIFFERENT TIMES.

AAPL, in 299 ETFs, is used for focus value, dividend strategies, technology 3x bull leveraged exposure, high growth, luxury goods, risk-manager and climate-leadership investing, among a vast array of other reasons.

Look up your own stock and see what characteristics are prompting ETF ownership.  That’s data you can use.  Don’t know what to do? Ask us. We’ll help.

How can ETFs with diametrically opposed objectives use the same stocks? That’s something every investor-relations professional needs to know. ETFs control $6 trillion in the US alone. They’re not pooled investments and they don’t hold custodial accounts like mutual funds.

Should the IR profession understand what the money is doing in the stock market?

Set that aside for now. There’s an immediate lesson to help us stop behaving like blunderbusses.  Stocks constantly change. I think rather than targeting specific investors, you should build a big tent of folks you know.

And you should RECONNECT with them in highly specific, data-driven ways.  If you just call investors you know to follow up, you’re doing IR like a cave man. Stop doing that.

The deck is already stacked against investors focused on story.  They need all our help they can get! I’ve explained it many times.  Rules promote average prices and harm outliers.  Passives want average prices. Stock pickers want outliers.

If we want investors interested in our stories to succeed, use DATA to help them.

Like this. We met with a Financials component yesterday.  The data show a big surge in Passive money in patterns.  You won’t see it in settlement data.  It never leaves the custodian because it the same money moving from indexes to ETFs and back.

But ModernIR can see it in near realtime.

The IR department should be calling core GROWTH names, even though it’s a value story.  That wave of Passive money is going to lift the stock. Growth money buys appreciation. Value money buys opportunity.

You want to move from blunderbuss to data expert in modern markets?  Ask us.  You don’t have to be way behind like the Russell indices.  You can be way ahead, like a modern IRO.

Get rid of that blunderbuss, pilgrim.   

Targeting Today

EDITORIAL NOTE: This edition of the Market Structure Map ran nearly a year ago, on May 30, 2012, right ahead of the NIRI National Conference, the IR profession’s annual gathering. We’re at NIRI again now, in sultry south Florida with our professional compatriots conferencing at the Westin Diplomat in Hollywood.  After spending several hours at the ModernIR booth, this still seems apropos. Catch you next week.  -TQ 

“So we should target value investors next week.”

Those eight words say much about IR today. I heard them on a weekly web meeting with a Nasdaq-traded company whose name most everybody knows. The point isn’t who said it. The idea applies to all of us. More in a moment.

First, at NIRI National next week I’m a panelist Monday along with Jason Lenzo, Director of Equity and Fixed-Income Trading at Russell Investments. Russell indices benchmark tomorrow for rebalancing, by the way. Our panel hits market structure and how it affects institutional trading and IR targeting today. Come ask tough questions.

Back to those words. There’s an action in them: Target. An audience: Value investors. A timeframe: Next week.

The kicker: This company is a growth story. What’s wrong with growth stories right now? Well, consider the environment. Yesterday, markets were briefly rattled by the Conference Board’s consumer confidence survey, which dipped more than expected. US stocks were up anyway, but not on growth. Money saw Chinese stimulus, Swiss capital controls to keep the franc from climbing, and rising yields on Spanish and Italian bonds as reasons to buy short-term shelters. US stocks.

Growth stocks, or value stocks?

Exactly.

Next week the situation might be wholly different. A growth story might indeed be a growth stock. Or a GARP stock. Stock and story are not the same, any more than summer and winter clothing at your favorite retailer are hot items simultaneously. Sure, it’s all clothing. But context matters. Got a tough environment? Inventory to move? You’re a value story. (more…)