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The Equity Observer · All major equity asset classes lost money last week EM Equities lost the...
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The Equity Observer Weekly Review – September 21, 2018 Eric J. Weigel
Transcript of The Equity Observer · All major equity asset classes lost money last week EM Equities lost the...
The Equity ObserverWeekly Review – September 21, 2018
Eric J. Weigel
► All major equity asset
classes lost money last
week
► EM Equities lost the least
last week (-0.3%) but
continue being the worst
performing equity class YTD
(-7.7%)
► YTD US Small Cap leads US
Large cap by less than 1% -
the gap has been closing
in the last month
US Stocks keep outperforming international
YTD, but last week was mixed
2
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Retur ns
1 Month 5 Days
-10
-5
0
5
10
15
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Retur ns
YTD
► Poor showing in the last 5 days with Japan being the only major market showing gains
► Equities under-performed bonds last week
► Growth out-performed Value over the last 5 trading days in the US as well as internationally
► Traditional Value sectors such as Materials and Financials gave up some of the gains from prior weeks
► Energy performed best in the US as well as in global indices
Global Equities
3
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
%
Global Equities (USD)
5 DAYS
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
%
Global Sectors (USD)
5 DAYS
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
%
Global Sectors (USD)
5 DAYS
► In the US, mega-caps outperformed (lost less unfortunately)
► Value once again under-performed Growth –mainly due to losses in the Materials and Finance sectors
► Growth and Momentum keep dominating YTD among US stocks
► Asian Developed markets (mostly Japan) boosted international market returns but EAFE was still down for the week
► EM LATAM recovered last week but trouble continues in the area (Brazil and Argentina)
Style and Geography
4
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
%
US Equities
5 DAYS
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
%
Inter national Equities
5 DAYS
► Investors are seriously under-pricing risk
► Most measures comprising our index are significantly below normal levels
► Asset class volatility has risen from the lows of last year but remains on a down trend
► We see a huge disconnect between volatility, valuations and economic conditions
► Global growth is good, valuations are high and economic policy is uncertain. Growth is winning for now.
Investor Risk Aversion remains in the Exuberant Zone, but
expect a rise to more normal conditions
5
0.00
0.25
0.50
0.75
1.00
Risk Aversion Index - Last 12 Months
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
ASSET CLASS VOLATILITY
US LCAP US SCAP INTL EQ EM EQ
US EquitiesWeekly Performance
6
Deteriorating
Break Down
Down Trend
Up Trend
Break Out
Improving
31%
(38%)
25%
(20%)
20%
(18%)
12%
(7%)
4%
(6%)
7%
(10%)
The Bull market may be getting a bit tired – jump in stocks in the
Deteriorating phase, some industry rotation happening quietly
GF CAP US All Equity Universe
STAGE LATEST
UP TREND 30.80%
BREAK OUT 4.35%
IMPROVING 7.18%
DOWN TREND 25.26%
BREAK DOWN 12.02%
DETERIORATING 20.28%
Numbers in
parenthesis
correspond to last
week
► The median stock in our universe was down 1.3% over the last 5 trading days
► The median Energy stock was up 1.5% - best among all sectors
► Only Energy, Health Care and Telecom had positive median performance
► Financials and Material stocks took the biggest hits last week
► The widest variability in performance was again seen in the Energy sector – good for stock picking
► We use the median absolute deviation as a robust measure of within sector variability
The Sector Look – median performance and
dispersion
8
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
CD CS EN FN HC IN IT MA RE TS UT
1 Week Median Retur nsUS Equity Universe
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
CD CS EN FN HC IN IT MA RE TS UT
1 Week Retur ns MADUS Equity Universe
► Valuation as a factor had a
terrible week especially when
looking at P/E ratios
► The best performers over the
last 5 days had the highest
median P/E
► We saw the same pattern for
P/B – better performers had
higher P/B ratios
► More expensive stocks
continue to do better YTD –
last week was no exception
What did the markets reward last week:
Valuation Multiples
9
12
14
16
18
20
22
24
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward P/E
1.5
2.0
2.5
3.0
3.5
4.0
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median P/B
► The median stock in our
universe is 2% over-valued
according to a DCF valuation
► The worst performing stocks
last week (Decile 10)
appeared most under-valued
► In terms of analyst price
targets, there was a perverse
relationship
► Stocks doing the best had the
lowest price targets
What did the markets reward last week:
Valuation Models
10
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median DCF UPSIDE
0%
5%
10%
15%
20%
25%
30%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Analyst Upside
► On an equally weighted
basis, dividend yield had a
poor week
► The best performing stocks
(Decile 1) had below-market
average yields
► Short interest, a measure of
sentiment, showed a “U”
shaped pattern of returns
What did the markets reward last week:
Yield and Sentiment
11
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Dividend Yield
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Shor t Interest Ratio
► We saw a U shaped pattern of returns in relation to beta
► Higher beta stocks appeared in the tails of the distribution
► In terms of market cap over the last week we have seen an inverted V pattern – repeat from previous weeks
► The Russell 2000 index underperformed the S&P 500 by 0.4% over the last 5 trading days
► While trailing YTD over the last 3 months large caps have been soundly beating small caps
What did the markets reward last week:
Beta and Size
12
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Equity Beta
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Market Cap
► The 1 year momentum effect
worked well last week – past 1
year winners had the highest
median weekly performance
► Winners keep winning, loser
keep losing
► We see some faint industry
rotation but not last week
► Revenue growth as a factor
exhibited a U shaped pattern
What did the markets reward last week:
Momentum and Growth
13
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Trailing 1 Year Median Retur ns
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward Revenue Growth
Down
Big Movers – Last 5 Days
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Up
Square, Inc. SQ Information Technology
Edwards Lifesciences CorporationEW Healthcare
Alexion Pharmaceuticals, Inc.ALXN Healthcare
ABIOMED, Inc. ABMD Healthcare
Teladoc, Inc. TDOC Healthcare
Intelsat S.A. I Telecommunication Services
Denbury Resources Inc. DNR Energy
ACADIA Pharmaceuticals Inc.ACAD Healthcare
Intrexon Corporation XON Healthcare
California Resources CorporationCRC Energy
Steelcase Inc. SCS Industrials
Workiva Inc. WK Information Technology
Theravance Biopharma, Inc.TBPH Healthcare
National CineMedia, Inc. NCMI Consumer Discretionary
Scholastic Corporation SCHL Consumer Discretionary
Sonic Corp. SONC Consumer Discretionary
W&T Offshore, Inc. WTI Energy
Vanda Pharmaceuticals Inc.VNDA Healthcare
Verso Corporation VRS Materials
GoPro, Inc. GPRO Consumer Discretionary
A. O. Smith Corporation AOS Industrials
Nutanix, Inc. NTNX Information Technology
Cypress Semiconductor CorporationCY Information Technology
Navistar International CorporationNAV Industrials
Neogen Corporation NEOG Healthcare
Chegg, Inc. CHGG Consumer Discretionary
Visteon Corporation VC Consumer Discretionary
Xencor, Inc. XNCR Healthcare
The Medicines Company MDCO Healthcare
Bed Bath & Beyond Inc. BBBY Consumer Discretionary
Opko Health, Inc. OPK Healthcare
Momenta Pharmaceuticals, Inc.MNTA Healthcare
Vicor Corporation VICR Industrials
Gulfport Energy CorporationGPOR Energy
Spectrum Pharmaceuticals, Inc.SPPI Healthcare
Bazaarvoice, Inc. BV.2 Information Technology
Inovalon Holdings, Inc. INOV Healthcare
United Natural Foods, Inc. UNFI Consumer Staples
Tronox Limited TROX Materials
MACOM Technology Solutions Holdings, Inc.MTSI Information Technology
Reporting Soon
This Coming Week
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► Risk Aversion continues to surprise on the downside – maybe old historical metrics don’t apply anymore? We don’t agree!
► Momentum and growth were king once again last week – can this continue? Will Value only out-perform in a crisis?
► The battle may not be between growth and value – feels more like momentum versus reversal
► Tariff wars do not seem to have much of an effect on US stocks – will this persist? I
► Small caps have quietly under-performed large caps over the last 3 months – has anybody noticed? YTD they are still ahead but barely
► Will EM equities recover? Seems to be all about the direction of the US dollar at the moment
► Are Chinese equities going to further lose ground or is this temporary? Is the down trend due to tariffs or domestic growth issues?
Pepsico, Inc. PEP Consumer Staples
Paychex, Inc. PAYX Information Technology
Vail Resorts, Inc. MTN Consumer Discretionary
Lamb Weston Holdings, Inc.LW Consumer Staples
Cal-Maine Foods, Inc. CALM Consumer Staples
WageWorks, Inc. WAGE Industrials
Xcerra Corporation XCRA Information Technology
USA Technologies, Inc. USAT Information Technology
Park Electrochemical CorporationPKE Information Technology
Landec Corporation LNDC Consumer Staples
Aceto Corporation ACET Healthcare
Eric J. Weigel
Website: https://gf-cap.com
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