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Is there a value rotation going on today?


BG2008
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Guest cherzeca

banks/financials up.  anything that faces a consumer with $2K in his pocket should be up today

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Russell 3000 Value    +3.1%

Russell 3000 Growth +0.25%

 

Long end of the yield curve going up.  I think people sometimes forget that stocks have duration as well.  A growth stock has much of its discounted cash flows out in the future - thus much of its NPV is past the, say, 10-year mark.  But a value stock has shorter duration.  Its value is driven by liquidation value and near-term earnings so much of its NPV is within the 10-year mark of a DCF.

 

If this is more than a head-fake in terms of rising long-end yields, then "value" might do better than "growth", much like a shorter-term bond than a long-term bond when rates rise.

 

wabuffo

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Russell 3000 Value    +3.1%

Russell 3000 Growth +0.25%

 

Long end of the yield curve going up.  I think people sometimes forget that stocks have duration as well.  A growth stock has much of its discounted cash flows out in the future - thus much of its NPV is past the, say, 10-year mark.  But a value stock has shorter duration.  Its value is driven by liquidation value and near-term earnings so much of its NPV is within the 10-year mark of a DCF.

 

If this is more than a head-fake in terms of rising long-end yields, then "value" might do better than "growth", much like a shorter-term bond than a long-term bond when rates rise.

 

wabuffo

 

+1

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The rotation began back in November...alot of value stocks have been rising since then.  Our portfolio shot up some 45-50% in the 4th Q and 1st Q 2021 so far.  Where you have you guys been?

 

Ironically, it began just as we started to get some large redemptions in September/October...typical!  Cheers!

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Russell 3000 Value    +3.1%

Russell 3000 Growth +0.25%

 

Long end of the yield curve going up.  I think people sometimes forget that stocks have duration as well.  A growth stock has much of its discounted cash flows out in the future - thus much of its NPV is past the, say, 10-year mark.  But a value stock has shorter duration.  Its value is driven by liquidation value and near-term earnings so much of its NPV is within the 10-year mark of a DCF.

 

If this is more than a head-fake in terms of rising long-end yields, then "value" might do better than "growth", much like a shorter-term bond than a long-term bond when rates rise.

 

wabuffo

 

Do periods where value outperform correlate with rising interest rates and vice versa? Might be one of the reasons value is taking such a beating the past few years.

This seems like such a logical fundamental underpinning of growth versus value investing but it’s a concept that I never really thought about. Thanks for sharing.

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Theoretically yes as near term cash flows of value stocks are more valuable (relatively) with higher rates

 

I would prefer to phrase it as . . . hopes and prayers about the tangible addressable market in the far distant future become less valuable as rates increase. Therefore with increasing rates, growth stock are expect to decrease in value more than value stocks.

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^The following is useless for stock picking.

 

It may be food for thought though for the following academic question: WTF is going on in today's markets?

 

https://www.factorresearch.com/research-improving-the-odds-of-value-ii

TL;DR: Minding the usual limitations about how to measure 'value', the author suggests that, usually, typical contrarian value seekers of the bottom seas will tend to struggle when interest rates are flattening. Article published before the very unusual 2020 year.

 

In theory, with the yield curve steepening, the typical 'value' investor should be recomforted but: 1-the 30-yr rate is only at 1.87%*, 2-the 10yr-2-yr the author uses is at only 0.99% now and 3-real rates have had a tendency to be more and more negative (a perplexing situation for which, AFAIK, nobody has a reasonable explanation).

https://www.quandl.com/data/USTREASURY/REALYIELD-Treasury-Real-Yield-Curve-Rates

*It's interesting to note that, in the various interest rate threads of the past (before 2019), simply mentioning the possibility of the 30-yr rate below 2% would have sounded as weird as saying now that this specific yield may go negative in the (foreseeable) future.

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