Underperforming Stocks Beat Overperformers Last Week
The fact that “value” stocks on the whole outperformed “growth” stocks last week shouldn’t really raise any eyebrows, but this sure did. Was this really that interesting?
The biggest story last week in the stock market was how “value” stocks outperformed “growth” stocks on the whole. It actually only took a couple of days for this to make the news, and it continued on as a story throughout the week.
Several conclusions were drawn from this, even though you wouldn’t think that something like this wouldn’t even rustle the bushes very much and should have not even been anything that noticeable. This does provide us an opportunity though to seek out some perspective on all this and see what we may really learn from the move.
People track all sorts of things with stocks and it this is one of them. If stocks that have been laggards start moving up, that is worthy of our attention, but the surprising thing this time is how short of a trend it took to get people out of their seats.
The degree of attention that these laggards got may be quite interesting to a trader, who might have seen this in the media and then checked out some stocks that got particularly beat up this year to have a look and see if there are any good opportunities out here among what is normally a pile of junk, such as Kraft Heinz for instance.
Kraft Heinz has been a hard stock to like this year, but for those who were paying attention, it did put in a double bottom on Aug 27 and then broke past the previous move on Sep. 3. Since then, this has been a nice trade indeed, up over 10% from there in less in just 8 trading days.
If you waited until last Wednesday when the story about value stocks beating growth stocks reached its peak, you would have been too late, as these things require a careful eye and a good understanding of how to trade these potential moves, not just reading media articles about the market that potentially hype this sort of play.
We have to wonder who this information is actually directed at. It’s not really something that traders care about much as they rely on their own resources to find trades, and we wouldn’t think it would be aimed at investors, because anything that happens in 3 days short of a market crash shouldn’t be interesting them either as this is way too short of a timeframe to ever matter to them normally.
We also need to look at stories like this and try to figure out what the conclusions are supposed to be, and it seems to be that those in growth stocks need to beware here, and perhaps those who have seen themselves get bloodied by these so-called value stocks might have something to hope for now.
Neither conclusion makes much sense though, at least based upon this event anyway, but it still is interesting to look into how something this insignificant could have inspired such views as value stocks are the way to go now or growth stocks are at a real risk of tanking now. Some are even comparing this to the crash of 2000 in some meaningful way, and this was apparently not intended to be a joke.
Just What Are Value Stocks and Growth Stocks Anyway?
To be able to have an intelligent discussion about this, we need to start by understanding what the difference is between these categories of stocks. Calling laggards value stocks isn’t just a loaded term, it’s a false one as well, and we might wonder how in the world we could call a poor stock one of enough value to warrant being in the value category.
This category of stocks got their name from the idea that if a stock gets beat up it has an above average potential to become more valuable. There was a time, many years ago, where stocks that performed poorly in the past would wake up and do pretty well often times, back when people focused more on these things and had a stronger belief that this would happen if they bought it.
The future value of a stock depends on its level of demand, which is really what we want to look at, and this demand also affects the supply side of it insofar as people who hold something also demand it, so we can therefore simplify things and just call it demand.
If people see a stock like Kraft Heinz and see how beat up it is and think that it is due to gain back some of their losses, and if enough people believe this, this will increase its demand and put the price of the stock up.
This really isn’t much of a force in the stock market anymore, not that it was all that reliable of a force anyway, as the problem is that your gaze becomes focused on the worst stocks in the market, and the worse they are, the more purported “value” they have. This may find you a few gems where things actually do turn around but it will also have you in mostly garbage, the bottom quartile of quality or worse. You certainly can’t just select stocks on this basis and not hurt yourself.
When you ask people why they buy stocks, they will tell you that they are seeking a good return on their investment, and that’s where the value of a stock lies, in how much return it can provide. The stocks that have been doing this are the valuable ones, and the ones not have the least value and often negative value if the expectation with them is negative.
We do rely on historical data a lot, although calculations of value are always in the future, what a stock would likely be worth down the road and how much potential it may have for value. Since price measures demand, those stocks that are doing well are getting more demand than those doing poorly.
This will continue until something changes. If a stock has been doing badly and suffering from low demand, something will indeed need to change for our outlook to change, and the fact that it has done badly is certainly not the kind of change that turns around a stock.
It doesn’t really matter what the reasons are for a stock making a comeback, just that it does, and does so in a manner that suggests more of the same. We need to see this recovery first though before we are entitled to deduce that it will come, because we need evidence to base these deductions on.
The timeframe that we are looking at is also going to matter a lot, and the recent move with Kraft Heinz illustrates this. This little breakout told us that we might be ready to retrace the downward move that it suffered in August somewhat, perhaps half or more, and then just ride it up as long as it keeps going.
If we instead are wondering about where it may be headed at the end of the year or a few years from now, none of this really speaks very much to it being a good trade or investment for that long, and any trend lines we’d be using here would not bode well at all. We’d need much more than this to be convinced that all is well enough with this stock to actually want to be in it beyond just taking shots at it at appropriate times though.
We Need to Both Watch Enough and Think Enough
People have measured the progress with the hot stocks and the cold ones we’ll call them, and found that the cold ones were up 2.4% this week, while the hot stocks lost 0.5% on average. Somehow, this is held to mean that the hot stocks are no longer hot and the cold stocks are no longer cold.
We can use a sports analogy here where two teams face off, with one being at the top of the league and the other being at the bottom. The better team wins most of its games and the poor team loses most of theirs, but sometimes the poor team does win.
This does not mean that the poor team is somehow better now and the strong team is notably less strong, because we’re only taking one game here and the season is a lot longer than that. We compare their seasonal records or at least results over a meaningful length of time and gain much more perspective than just looking at a single game can provide.
There will be times therefore when this happens quite naturally, as the hot stocks aren’t going to be hotter every week. There are plenty of weeks where they are colder and that’s not unusual or noteworthy.
Chris Harvey of Wells Fargo Securities, in the face of all this, remarked that momentum stocks “take the escalator up and the elevator down,” and “momentum investing requires a tacit deal with the investment devil: a portfolio manager usually wins with a higher frequency for some time, but when they lose, payback is painful.”
The truth is, barring a crash, momentum stocks take the escalator down as well, and anyone who watches them ride the escalator down deserves whatever pain that results. The role of the devil here is to convince them to willingly take on this pain.
Momentum stocks did have a little rougher go of it last week than just your average growth stocks, or at least some did, the ones in the iShares MSCI Momentum ETF for instance, the index that is being singled out by those who wish to portray these stocks being on the road to demise.
Sure, this ETF lost a couple of percent this week but this has been happening for quite a while as it is been moving in a particularly volatile way lately, both up and down. All trendlines are still pointing up though including the one from the August 5 bottom where it has been making higher lows since, including this last one which it has moved up a bit from.
If it jumps on the down escalator at some point, we will be able to see it, and after that point whatever happens is on us. It is actually amusing that people hold stocks too long and then try to blame the stocks, but this happens all the time.
Doug Ramsey of the Leuthold Group goes even farther and is comparing this to the dot.com bust of 2000. At least he doesn’t see in imminent recession due to what he sees as stock market resilience, but warns that “stock market trouble can sometimes preclude a recession.”
It certainly can, but we need the stock market trouble first and this surely can’t qualify. Since we’re worried about stocks as stock investors, whether or not a recession comes isn’t the real issue, it is the “stock market trouble” itself. Neither stock market trouble, the real kind anyway, or a recession, a real one, is within the viewable horizon at least.
When real stock market trouble comes, we should want to be out of both growth stocks and beat up ones, as when the market starts to tank, it takes most stocks along with them. It’s hard to find any stock of any reasonable market cap that made money from October 3-December 24 of last year, and the ones that we do find are pretty special and often well worthy of more attention.
It’s hard to imagine why any investor would worry about an index that has given back a couple of percent but is still up 30% since Christmas, and anyone who stayed in during early August, which saw it give back 6%, isn’t going to be put off at all by this little move down this week, nor should anyone whose timeframe and strategy would allow them to hold through a couple of percent against them, which includes all investors.
If we keep an eye on the mutts, we might find a dog that wants to run here and there, although they still are mutts so they must be kept on a fairly short leash. Betting on the greyhounds makes more sense, but they can tire too, so we have to watch even these, and especially watch these. We do have to see things that are actually significant though in the real world and not just the media.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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