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Is there a value rotation going on today?


BG2008

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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

 

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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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  • 11 months later...

Hmm, exactly one year later another strong rotation towards value. Must be the time of the year...

 

Last year, long rates rose fast during Jan-Feb but then the TGA started draining and yields fell back again.

 

This time it might be more of a longer-term effect.   As posted boringly by me in a number of Fed-related threads littering CoB&F,  the December passage of the US Congress of a new, much higher debt limit is reversing (slowly) the huge "shortage" of US Treasury securities available to the private sector. (blue line = actual, orange line = required to match deposits creating by deficit spending. graph starts before pandemic on Jan 1, 2020)   Add to that a possible "pause" by the Fed in its buying activities, and the shortage will be slowly relieved.

 

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The DCFs of high-growth, no-present-cash-flow companies which rely on a very low discount rate (= 10-year or even 30-year Treasury yield) to discount those, ahem, cash flows to the present are going to get re-rated lower pretty hard.  Its just math.

 

Bill

Edited by wabuffo
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With Rising interest rate and value vs growth the same logic applies on how not get eaten by a bear: You can't outrun the bear, but if you can outrun the other person next to you, you won't get eaten.

At higher interest rates, value stocks are better than growth stocks, so money rotates into them. Now if this persists, I do think the bear gets hungry again ... or value stocks eventually will get mauled as well.

Edited by Spekulatius
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3 hours ago, Spekulatius said:

With Rising interest rate and value vs growth the same logic applies on how not get eaten by a bear: You can't outrun the bear, but if you can outrun the other person next to you, you won't get eaten.

At higher interest rates, value stocks are better than growth stocks, so money rotates into them. Now if this persists, I do think the bear gets hungry again ... or value stocks eventually will get mauled as well.

 

Jeez, I did not know I was in literal "Hunger Games"

Edited by BG2008
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