利用多年价值与增长估值差距

Summary

The valuation spread between value and growth stocks is at its extreme.

The multi-decade valuation gap creates a unique opportunity to profit from market inefficiencies.

According to historical averages, the market is overpricing growth and underpricing value.

Deep value stocks presented in this article provide an exposure to the market's most hated companies, which offer an excellent opportunity for a rational contrarian investor.

These value stocks offer an average yield of 3.4%, which is significantly above the S&P 500's yield of 1.89%.

Source

Some of the world's most successful investors are or were contrarians. To name a few, Sir John Templeton, George Soros, Warren Buffett, and Jim Rogers all achieved above-average returns, usually by betting against the market extremes.

Successful contrarian investors position themselves to profit from opportunities when the market significantly overreacts or underreacts, which stacks the odds in their favor.

Currently, the valuation spread between value and growth stocks is at its extreme. This value discrepancy that is at the multi-decade high creates a unique opportunity to profit from market inefficiencies.

Present market valuation ratios are significantly above the historical averages. For example, the current Shiller P/E Ratio is at 29.84 versus a historical median of 15.76. Similarly, the trailing P/E ratio shows overvaluation as well - however, less dramatical than the Shiller version. The current TTM P/E is at 22.49, while the historical median is 14.78. The first ratio shows that the current market multiple is approximately 90% above the long-term median, and the second ratio points to a less extreme 50% overvaluation.

Source: Current and historical Shiller P/E ratio

However, the critical point is that not all market segments are equally overpriced, and during the last few years, not all segments achieved balanced growth. According to the four market valuation ratios published by the OSAM Research, the spread for each valuation ratio is at the multi-decade high. All four ratios show that, according to historical averages, the market is overpricing growth and underpricing value.

These four valuation ratios are the price to book, price to cash flow, price to earnings, and price to sales. Researchers divided the market into the five segments (quintiles) and have calculated the historical and the current valuation ratios for the cheapest and the most expensive quintiles.

Valuation ratios for these two quintiles reveal an interesting picture. Although during the last few years, the market achieved above-average performance, the returns distribution gap between the value and growth stocks was a record high. All four valuation ratios show that the difference between the cheapest and the most expensive quintile is at the highest point in the last 20 years. From the graphs below, we can see that during the previous few years, a valuation multiple expansion was a significant boost for the growth stocks.

Source: O'Shaughnessy Quarterly Investor Letter Q3 2019

For example, the current price to book ratio is 3.2 times bigger for the expensive quintile compared to the cheap quintile. During the previous market bubble (2006-2007), the ratio was approximately 2, while during the Dot-com bubble, it was around 1.7. For the three other valuation ratios, current valuation gaps between the value and the growth quintiles are significantly higher compared to the 2006-2007 bubble period and around the levels seen during the Dot-com bubble.

The most significant valuation divergence began at the end of 2017 and the beginning of 2018 and has continued into the second half of 2019. However, such a divergence is not sustainable in the long run, and sooner or later, a convergence of the valuation multiples will begin.

Source: O'Shaughnessy Quarterly Investor Letter Q3 2019

First, by investing in the cheap quintile, one avoids stocks and sectors that are approaching bubble territory, and second, one positions itself for the convergence of valuation multiples during which value stocks should significantly outperform growth stocks.

I have assumed that the largest part of Seeking Alpha readers are long-only investors. Thus, I will present only the cheapest S&P 500 stocks without giving the most expensive ones that could be alternatively used for shorting in a long-short portfolio.

Sir John Templeton, one of the world's greatest investors, used to buy low-value stocks that were hated by the market participants. Similarly, according to the previously discussed four valuation ratios, I constructed a table consisting of the S&P's 30 cheapest companies. Thus, we could say that these stocks are currently the most hated S&P 500's constituents.

In the table below, I included the dividend yield, which is an additional advantage in the record low Treasury yield environment. Above-average dividend yields for value companies could be a trigger that could stop the expanding gap between the value and the growth stocks.

Data source: American Association of Individual Investors

The table was constructed by arranging the stocks by four valuation ratios from the cheapest to the most expensive ones. The cheapest stock by any valuation multiple would get a number one, and the most expensive one would get a number 500. I summed the numbers for all four ratios and arranged them from the lowest to the highest aggregated number. The 30 cheapest stocks by the aggregated number are the ones presented in the previous table.

Strategy Risks

Compared to the S&P 500 index, this strategy has a concentrated allocation in deep value stocks. Thus, it provides a great potential if the valuations start to converge. However, the current divergence could continue, and the valuation multiples for value stock could shrink further. Additionally, even if the value and growth multiples start to converge, there is a risk that only growth stocks (multiples) would decrease without the value stocks (multiples) increasing.

Key Takeaways

By buying stocks with the lowest valuations, one avoids exposure to the growth quintile that is currently valued at the multi-decade high multiples.These 30 stocks offer protection from the repricing of the growth companies.Additionally, they offer an average yield of 3.4%, which is significantly above the S&P 500's yield of 1.89%.Record low Treasury yields could push investors from the bond market to above-average yielding stocks, in which case, value stocks could start to perform.Most importantly, these 30 stocks provide an exposure to the market's most hated companies, which offer an excellent opportunity for a rational contrarian that can wait for a convergence of the multiples.

Disclosure:

I am/we are long M, GT, DXC, GPS, DVN, NUE, FL.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.