Market watchers and investors have been watching and participating in the rotation out of growth stocks and into value names for several quarters, although many differ on just how long this rotation has been going on. The latest data on hedge fund positioning from the first-quarter 13F filings reveals that the rotation continues. Stephane Bancel, chief executive officer of Moderna Inc., during a Bloomberg Television interview on … [+] © 2022 Bloomberg Finance LP Despite the decline in growth names that’s been going on for several quarters, Goldman Sachs analysts believe many growth stocks are still overvalued. Thus, this so-called “Great Rotation” could just be getting underway. John Buckingham of Kovitz, author of the “Prudent Speculator” newsletter, believes it will be a while before we can really call this rotation “great.” Hedge fund trends
In their quarterly Hedge Fund Trend Monitor, Goldman Sachs analysts provided an update to the ongoing rotation from growth to value stocks. Of course, equities have been selling off for months, and the firm warned that equity exposure among a number of investor groups remains elevated. As a result, the equity selloff could continue if the macro outlook doesn’t improve.
Interestingly, retail investors accounts for most of the U.S. equity market through both direct and indirect ownership. According to Goldman Sachs, households began the year with extremely elevated allocations to equity. The firm looked at stocks where it estimates that households own at least 70% of their market cap and that also appear in an above-average number of hedge fund long portfolios.
The list is dominated by value sectors, which include financials, industrials, energy and consumer staples. Among the top 10 stocks are UPS, ExxonMobil XOM +1.4% , Wells Fargo WFC -1.5% , Phillips 66 PSX +0.8% , Procter & Gamble PG -1% , Chevron CVX +0.9% , and Philip Morris. Hedge fund rotation
Goldman Sachs also highlighted hedge funds’ ongoing rotation away from long-duration growth stocks. At the sector level, the firm found that hedge funds continued to rotate out of information technology and consumer discretionary, pulling their tilts to those sectors down to their lowest levels in at least 10 years. Meanwhile, hedge funds rotated into energy, industrials and materials.
Goldman also observed the rotation out of growth in fund ownership of stocks with ultra-high valuations. The firm reported that between 2009 and 2019, stocks with EV/ sales multiples higher than 10 times grew as a share of the equity market and even more significantly as a share of hedge fund portfolios.
In 2020, the weights rose ever higher as fiscal and monetary stimulus drove equity multiples skyrocketing, especially on long-duration growth stocks with extremely high multiples. However, Goldman Sachs found that recent months have compressed valuations multiples across the stock market. Stocks with extremely elevated multiples lagged the market dramatically.
The firm also noted that the hedge fund overweight in those pricey, long-duration growth stocks is significantly smaller than it has been since 2014. Despite their underperformance, Goldman continues to believe low-margin growth stocks are overvalued relative to their peers, especially high-margin growth stocks. Why the “great” value rotation isn’t great yet
This observation backs up something John Buckingham of Kovitz said in a recent interview . He said the idea that there’s been a massive rotation to value isn’t really accurate, at least not yet. Buckingham agreed that value stocks have done much better since Halloween but pointed out that the deviation in return between value and growth has been extraordinarily high over the last five to 10 years.
“So we have a long way to go before value gets to equilibrium with growth, much less exerts its historical dominance,” Buckingham said. “I think the party’s just getting started. The catalyst is a less accommodative Federal Reserve and a higher interest rate environment. Obviously, the concern for value investors is the strength of the economy.”
He noted that value has historically done well leading up to recessions, and, on average, it has also held up well after a recession has begun. Of course, investors who believe we’re heading for a recession will naturally want to rotate into value. However, Buckingham added that the pandemic is still fresh in everyone’s mind, so that’s another reason some investors are still willing to pay elevated multiples for companies that are not seen as economically sensitive. Why Buckingham prefers value over growth
He doesn’t believe a recession is coming this year, but he does see plenty of room for value to come back and reassert its dominance over growth. More importantly, […]
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