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The Equity ObserverWeekly Review – January 6, 2019
Eric J. Weigel
► The seesaw continues for risky assets as small caps take the lead for 2019
► Over the last month, all major equity categories have lost money
► Surprisingly, EM stocks have held up the best in this equity correction
► Valuations while more reasonable than 3 months ago are not that favorable
► The key for equity markets is growth and whether we are entering a slowdown or not
Equity markets have a good start to the year
2
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Retur ns
1 Month 5 Days
-1
0
1
1
2
2
3
3
US LCAP US SCAP INTL EQ EM EQ
%
Major Equity Asset Class Retur ns
YTD
Equity volatility spikes up again while yield spreads continue
widening, inflationary expectations trend down
3
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2016-01-08 2016-07-08 2017-01-08 2017-07-08 2018-01-08 2018-07-08
US Interest Rates
10 Yr Gov AAA BBB
8.0
13.0
18.0
23.0
28.0
33.0
2016-01-08 2016-07-08 2017-01-08 2017-07-08 2018-01-08 2018-07-08
Stock Index Implied Volatility
VIX SCAP VIX
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2016-01-08 2016-07-08 2017-01-08 2017-07-08 2018-01-08 2018-07-08
Option Adjusted SpreadsUS HYLD EM Debt
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2016-01-08 2016-07-08 2017-01-08 2017-07-08 2018-01-08 2018-07-08
US Inflationary Expectations
5/5 Yr FORW 10 Yr
► A global recovery but with large differences in global market performance
► Commodity indices recovered last week as oil prices firmed up helping resource oriented markets
► In the US Value slightly outperformed Growth last week – higher quality and dividend yield also made a difference
► In international markets Value out-performed Growth by a wider margin than in the US
► Energy performed best and Tech did the worst (Apple effect)
Global Equities
4
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%
Global Equities (USD)
5 DAYS
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%
Global Sectors (USD)
5 DAYS
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
%
Global Sectors (USD)
5 DAYS
► In the US, we saw a strong size effect last week with small caps dramatically out-performing
► Value performed a bit better than Growth
► Within equity styles, Quality and Div Yield strategies resulted in better performance
► The Momentum trade has gone in reverse with last year’s biggest loser performing the best thus far in 2019
► Latam shot up last week recovering from poor 2018 performance and the rise in oil prices
Style and Geography
5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
%
US Equities
5 DAYS
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
%
Inter national Equities
5 DAYS
► Investors are still skittish and our RAI remained in the Fear Zone
► Our risk aversion index has consistently stayed in the Fear Zone for 4 straight weeks
► Asset class volatility has risen significantly from the lows of 2017 – in our view volatility is here to stay
► We still see a huge disconnect between volatility, valuations and economic conditions
► Global growth is still good but leveling off, valuations are high and economic policy is highly uncertain
Investor Risk Aversion stays in the Fear Zone
6
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
7
Deteriorating
Break Down
Down Trend
Up Trend
Break Out
Improving
5%
(5%)
65%
(72%)
5%
(4%)
10%
(17%)
2%
(1%)
13%
(1%)
The Bear Market is here and it is showing signs of industry rotation from
Growth to Value sectors
GF CAP US All Equity Universe
STAGE LATEST
UP TREND 4.81%
BREAK OUT 1.63%
IMPROVING 12.85%
DOWN TREND 65.59%
BREAK DOWN 10.04%
DETERIORATING 4.96%
Numbers in
parenthesis
correspond to last
week
► The mean stock in our universe was down 2.9% over the last 5 trading days
► All sectors except Utilities showed positive median returns with Energy stocks leading the pack
► The widest variability in performance was 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
9
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
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%
5.0%
5.5%
6.0%
CD CS EN FN HC IN IT MA RE TS UT
1 Week Retur ns MADUS Equity Universe
► Valuation was a big factor in determining performance last week
► There was huge discrimination among return deciles in terms of median P/E’s
► We saw the identical pattern when using P/B
► Better performers had uniformingly lower P/B and P/E ratios
► We have started 2019 with a strong Value effect
What did the markets reward last week:
Valuation Multiples
10
12
13
14
15
16
17
18
19
20
21
22
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward P/E
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median P/B
► The median stock in our
universe is under-valued by
3.3% according to a DCF
valuation
► The markets last week
rewarded undervalued stocks
last week
► In terms of analyst price
targets, there was a direct
relationship
► Stocks doing the best had the
highest positive deviations
from sell-side price targets
What did the markets reward last week:
Valuation Models
11
-10%
-5%
0%
5%
10%
15%
20%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median DCF UPSIDE
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Analyst Upside
► Higher dividend yield stocks
performed better last week
► This may further reflect the
ongoing sector rotation going
on in markets
► Short interest, a measure of
sentiment, showed an
increasing pattern of returns
► The best performing stocks
last week had higher levels of
short interest
What did the markets reward last week:
Yield and Sentiment
12
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
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
► Beta worked extremely well
last week
► The higher the beta the
higher the return
► In terms of market cap over
the last week we have seen a
declining pattern with the
exception of the worst
performing decile
► The Russell 2000 index out-
performed the S&P 500 by 2%
over the last 5 trading days
What did the markets reward last week:
Beta and Size
13
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
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
$4,000
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Market Cap
► The 1 year momentum effect
worked in reverse last week
► Stocks down the most over
the last year vastly out-
performed last year’s winners
► The industry rotation that
started about 12 weeks ago is
gaining strength
► Revenue growth as a factor
exhibited a direct relationship
to return – higher growth
companies showed better
performance last week
What did the markets reward last week:
Momentum and Growth
14
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
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%
12.0%
13.0%
1 2 3 4 5 6 7 8 9 10
1 WEEK RETURN DECILE
Median Forward Revenue Growth
Down
Big Movers – Last 5 Days
15
Up
Netflix, Inc. NFLX Consumer Discretionary
Celgene Corporation CELG Healthcare
Liberty Global plc LILA Consumer Discretionary
Continental Resources, Inc.CLR Energy
Incyte Corporation INCY Healthcare
Hess Corporation HES Energy
Wynn Resorts, Limited WYNN Consumer Discretionary
Arconic Inc. ARNC Industrials
Targa Resources, Inc. TRGP Energy
Transocean Ltd. RIG Energy
Murphy Oil Corporation MUR Energy
Array BioPharma Inc. ARRY Healthcare
Eldorado Resorts, Inc. ERI Consumer Discretionary
Newfield Exploration CompanyNFX Energy
Navient Corporation NAVI Financials
Patterson-UTI Energy, Inc.PTEN Energy
Penn National Gaming, Inc.PENN Consumer Discretionary
Whiting Petroleum CorporationWLL Energy
PDC Energy, Inc. PDCE Energy
Amicus Therapeutics, Inc. FOLD Healthcare
Align Technology, Inc. ALGN Healthcare
Universal Display CorporationOLED Information Technology
Weight Watchers International IncWTW Consumer Discretionary
Pacira Pharmaceuticals, Inc.PCRX Healthcare
MyoKardia, Inc. MYOK Healthcare
Atara Biotherapeutics, Inc. ATRA Healthcare
Francesca's Holdings CorporationFRAN Consumer Discretionary
Cloud Peak Energy Inc CLD Energy
Reporting Soon
This Coming Week
16
► Risk Aversion should stay high and we expect choppy markets this coming week again
► Equity Technicals have deteriorated to the point that close to 65% of stocks in the Down Trend Phase
► Political drama in Washington is exacerbating the uncertainty of market participants
► Brexit is up for the spring but prospects of passing Parliament are slim. Could we be starring at Referendum 2.0?
► Tariff wars are taking a bite with the IMF recently citing trade wars as the main reason for a cut in their forecast of global growth
► Small caps have massively under-performed large caps over the last 3 months but had a nice recovery
► Surprisingly EM equities have outperformed developed markets in the last month.
► Our models still favor a reduction in risk in our portfolios with positive active allocations to cash and bonds
► This too shall pass but market participants are hyper nervous on things companies have no control over
► The price of higher equity returns is discomfort – volatility has been too low in the last few years
Delta Air Lines, Inc. DAL Industrials
Constellation Brands Inc STZ Consumer Staples
Lennar Corporation LEN Consumer Discretionary
Acuity Brands Inc AYI Industrials
MSC Industrial Direct Company, Inc.MSM Industrials
Helen of Troy Limited HELE Consumer Discretionary
WD-40 Company WDFC Consumer Staples
Commercial Metals CompanyCMC Materials
PriceSmart, Inc. PSMT Consumer Staples
KB Home KBH Consumer Discretionary
Bed Bath & Beyond Inc. BBBY Consumer Discretionary
AZZ Inc. AZZ Industrials
Lindsay Corporation LNN Industrials
Skyline Corporation SKY Consumer Discretionary
Schnitzer Steel Industries, Inc.SCHN Materials
Franklin Covey Company FC Industrials
FuelCell Energy, Inc. FCEL Industrials
Eric J. Weigel
Website: https://gf-cap.com
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NOTHING HEREIN SHALL BE CONSTRUED AS INVESTMENT ADVICE, A RECOMMENDATION OR SOLICITATION TO BUY OR SELL ANY SECURITY.
PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS.
SEEK THE ADVICE OF AN INVESTMENT MANAGER, LAWYER AND ACCOUNTANT BEFORE YOU INVEST.
DON’T RELY ON ANYTHING HEREIN. DO YOUR OWN HOMEWORK.
THIS IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSIDER THE INVESTMENT NEEDS OR SUITABILITY OF ANY INDIVIDUAL.
THERE IS NO PROMISE TO CORRECT ANY ERRORS OR OMISSIONS OR NOTIFY THE READER OF ANY SUCH ERRORS.
Disclaimer
18