Derek Bergen, CFA and John Holt, CFA
Following financial markets over the last three weeks has certainly been a wild ride. After peaking at 3,393.52, the S&P has sold off by almost 27%, down nearly 913 points. On a points basis, this is 37% larger than the overall value of the S&P 500 at the start of the recently ended 11-year bull run (666.79 on March 6, 2009).
While COVID-19 panic is clearly dominating markets and the news cycle, disciplined investing requires objective, forward-looking analysis to make investment decisions that can continue to build upon successful long-term track records. With that in mind, AFG has aggregated recent performance over the last several weeks to help understand the recent market drop 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. Hopefully, recognition of recent performance trends along with taking inventory of current investment opportunities can help our clients navigate this market environment with a higher degree of confidence.
For now, we present this data with limited commentary, as we will explore these themes in more detail in next month’s quarterly write-up. In the meantime, we would like to highlight a few primary observations.
Recent Performance Observations
- As of 3/12, normalized Percent to Target median levels have exceeded the +1.5 standard deviation levels in the Russell 1000 and Russell 2000.
- This theme is broadly consistent across all AFG sectors, with a notable exception in small cap healthcare and utilities.
- Growth (based on MVIC) has outperformed Value by nearly 6% on a cap-weighted basis from 2/21 to 3/12.
- Stocks with poor momentum characteristics have drastically underperformed high momentum peers from 2/21 to 3/12.
- Market sell-offs tend to see a flight to safety, which generally implies quality or yield. While mild flight to quality signs exist, high yield stocks have underperformed their low yield peers from 2/21 to 3/12.
- A-graded management quality/earnings quality stocks have outperformed F-graded peers by a few hundred basis points on a cap-weighted basis.
- 3%+ yield stocks have underperformed no/low yield peers by 300-400 bps, likely due to the significant drops in higher yield Financial and Energy stocks as well as REITS connected to travel and leisure industries.
- Highly leveraged stocks have underperformed low leveraged peers by nearly 700 bps on a cap-weighted basis from 2/21 to 3/12.
Given the significant pace of the news cycle and its market impact over the last few weeks, we hope that analyzing this data can inspire confidence to remain disciplined and take advantage of valuation-based opportunities that are now available in the marketplace.
Russell 1000 Valuation Analysis
Russell 2000 Valuation Analysis
Russell 1000 Sector Valuation Analysis
Russell 2000 Sector Valuation Analysis
Russell 3000 Style Analysis
- Intrinsic Value – The cash flows implied by fading Economic Margins and diminishing capital growth over each firm’s Competitive Advantage Period can then be discounted to a present value estimate of a firm’s enterprise value. Debt and other obligations with superiority to common equity holders can be subtracted to estimate the intrinsic value of a firm’s equity, and this can be divided by current shares outstanding to estimate the firm’s stock price…. more
- Percent to Target – Current – Compares the intrinsic value estimate to the most recent closing price for each firm.