While we rarely make huge market calls and remain reluctant to do so at this point, its worth noting that growth stocks are trading at below -1.5 StdDev from historical normal levels signaling a significant move outside of normal range. This is especially noteworthy, as the growth relationship in the Russell 1000 is now at levels last observed in the peak of the tech bubble. […more]
Big 5 companies surge in index concentration… what will be the effect on style boxes and cap-weighted portfolios?
The recent surge has notable impacts on commonly-used style index construction methodologies. Due to the increased reliance on passive allocations, investors should be aware of the significant distortions regarding style index diversification and skews in the classification assigned to individual stocks. […more]
Are the Big 5 stocks in S&P500 (FAAMG) overvalued?
Despite concentration levels unseen since the early 1970s, this group of 5 stocks currently offers reasonable valuation characteristics. The valuation characteristics of these five stocks warrants ongoing monitoring to ensure valuation does not deteriorate. […more]
It is important to remember that markets attempt to see through temporarily good or bad times to estimate future cash flows and set current valuations. The global health and economic crisis resulting from COVID19 has created one of the greatest periods of uncertainty for market participants to see through, therefore, the fastest plunge of the US stock market ever recorded took place last month. Entering the 2nd week of April, we believe the market participants have likely concluded this is indeed a “temporary” situation, and have now started shifting focus to the recovery of the US economy and other developed regions, which will likely happen in the 2nd half of 2020 and 2021 […more]
Applied Finance has aggregated recent performance over the last several weeks to help fully understand the recent market drop’s impact through various sector, style, factor, and industry lenses. We have also compiled updated percent to target median charts to better understand current valuation levels normalized against historic averages. We present this data today with limited commentary, as we will explore this in much more detail in next month’s quarterly write-up. In the meantime, a few main observations […more]
The US equity markets have fallen sharply the past week on concerns of the coronavirus disease 2019. This novel coronavirus affects the respiratory system, was first identified in Wuhan, China more than two months ago, […more]
VALUATION DIVIDEND QUARTERLY REPORT: Q4 2019 Valuation Dividend™ returned 6.52% in 19Q4, vs. 7.41% for its benchmark Russell 1000 Value, on a total return basis. In 2019, the Valuation Dividend returned 24.92%, below the R1000 […more]
The insights delivered by this study are truly fascinating. On one hand, the evidence that price multiples are incomplete in forming a definition of value is obvious, and this should align with intuition. If broader market participants heed this advice, this study will have been a noble effort to improve the flow of accounting information and analyst forecasts into market prices. On the other hand, there has never been obvious justification for measures of cheapness to define value in the first place. Many investors simply use these factors out of convenience or tradition, while many others invest in products built upon them with little understanding of the classification error they introduce. […more]
Despite decades of academics and practitioners promoting the ”value factor”1, it generates marginal to no long-term alpha. We believe four reasons have contributed to slow the discovery process from the current accepted “value” regime (low price to something) towards a more robust and realistic true value regime (worth measured independent of market price and focused on the value of future cash flows).
1. No theory. There is no clear link between commonly used “value” variables and true value. Yet academics and practitioners have developed no viably accepted competing perspective to explain future returns […more]
100 mph pitchers are a rare and treasured commodity, simply because they have been among baseballs’ most effective players. The mention of Randy Johnson, Nolan Ryan, JR Richardson, Bob Feller, all elicit reverence for their amazing careers. Yet what of Steve Dalkowski who Ted Williams once faced off against and said – I could not see the ball […more]