Revisiting Our Growth vs Value Thesis: Divergence And Selectivity

It’s been more than five months since “Pfizer Monday,” when the company announced its highly effective COVID-19 vaccine. The tide has indeed turned in terms of the growth versus value dynamic. After trailing growth stocks for years by astonishing margins, value stocks (using the Russell 3000 Value Index as a proxy) has outperformed their growth counterpart (using the Russell 3000 Growth Index as a proxy) by over 1800 basis points, +25.7% vs. +7.4%, between 11/9/2020 and 3/31/2021.

However, not all value stocks are shining and not all growth stocks are struggling – there has been significant divergence in performance among different groups within both value and growth stocks.

Source: Bloomberg

Above is the total return of S&P 500 economic sectors from Pfizer Monday (11/6/20) to the end of the first quarter 2021. Energy and Financials, two value-heavy sectors, were the top-two performers, surging 73 percent (over five times the broad market gain) and 38 percent (nearly three times the broad market gain), respectively. These two led the losses during the sharp market downturn during February 2020 to March 2020, so the reversal of fortune isn’t all that surprising. Specifically, Energy has been driven by sharply higher crude oil prices, which jumped more than 50 percent for the period, while Financials were helped by rising Treasury yields. 

Interestingly, the bottom-two performers are also value-heavy sectors, Utilities and Consumer Staples. The former barely broke even, while the latter captured less than half of the broad market gain. These two are both high-dividend-paying sectors, and they faced the headwind of rising interest rates. Plus, since these two are economic-defensive sectors, they become less attractive to investors during the current risk-on market environment. 

Our takeaway of the divergence within value is that while the recent outperformance of value over growth can be framed as a re-emergence of value stocks, just because a stock is labeled as a value stock does not guarantee strong performance. Rather, its performance is driven more by the specific macroeconomic environment and industry dynamics.

For growth stocks, there has been a significant divergence among different groups. Since growth land is dominated by technology and some really large companies (Apple, Amazon, Facebook, Google, Microsoft), it makes more sense to illustrate the divergence among major groups rather than sectors. Below is the total return of some household names of three major groups between 11/9/2020 and 3/31/2021:

Source: Bloomberg

As we can see from above, even though growth stocks as a whole trailed value stocks sharply for the period, cheap growth (low P/E low growth companies) actually did pretty well, while high flyers (high P/E high growth companies) struggled (Tesla is an exception). As for the Big Five, it was a mixed bag. This makes a lot of sense, as the major concern for growth is high valuations, and thus, high flyers struggled while cheap growth thrived. Among the Big Five, relatively cheap ones, like Google, did well, while expensive ones, like Amazon, struggled.

For the past year or so, stock performance is rightfully driven predominantly by macro factors, such as growth or value, stay-at-home or reopening, etc.; macro factors far outweighed individual company dynamics during the pandemic. However, as macroeconomic pictures become much clearer, individual company dynamics will drive stock performance. Stock performance divergence will continue, not only among different groups, but also among companies within the same group, and selectivity will be a key to successful investing.  


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