12-05-2021 · 市場觀點

Spring has sprung for Value investing

Despite the recent rally in cheap stocks, we believe the Value upswing still has a way to go. Spreads in valuation multiples between growth and Value stocks remain high, while fundamentals and sentiment have improved in recent months for the latter. Thus, after a long and harsh ‘quant winter’, spring has sprung and Value seems ready for summer.

    作者

  • Matthias Hanauer - Researcher

    Matthias Hanauer

    Researcher

  • Sebastian Schneider - Researcher

    Sebastian Schneider

    Researcher

The long-awaited value comeback was triggered by the announcement of successful Pfizer-BioNTech Covid-19 vaccine candidate results on 9 November 2020. This culminated in strong returns for the value factor in the first quarter of 2021. Despite this rally, the spread in valuation multiples between expensive and cheap stocks remains at exceptionally high levels. Indeed, Figure 1 shows that the gap has surpassed levels last seen at the height of the tech bubble in the late 1990s, based on an enhanced value factor.1

Figure 1 | Composite valuation spread for the enhanced value strategy

Figure 1 | Composite valuation spread for the enhanced value strategy

Source: Refinitiv. The figure shows the composite valuation spread between the top and bottom quintile portfolios of the enhanced value strategy. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995).

Value investing remains very attractive from a valuation perspective

In our view, this recent widening in multiples has several implications. First, diverging valuation multiples between cheap and expensive stocks are inconsistent with the concern that the value premium may have been arbitraged away as a result of it being so well known and due to substantial funds being invested in value strategies. Were this the case, it would be reflected in a narrowing valuation spread over time instead of the widening trend we have witnessed. Therefore, it is highly unlikely that arbitrage activity was the driver of the recent underperformance of value strategies.

Second, diverging valuation multiples suggest that return prospects for value are currently high. The widening of the valuation spread in the late 1990s was followed by mean reversion in the early 2000s, which resulted in the massive outperformance of cheap stocks over their expensive counterparts.

Third, the net spread widening that occurred over our full sample period means that realized returns might even underestimate the true magnitude of the value premium over this period.2

When we look at the recent developments in Figure 1, we do see that the value spread has shrunk slightly in 2021. However, it remains considerably wide compared to historical levels, still above the 97th percentile. Therefore, we believe that value investing remains very attractive from a valuation perspective.

The ‘cheap for a reason’ tag does not hold

One question that remains is that maybe ‘this time is indeed different’ and value stocks deserve to be cheaper than historically observed. Maybe expensive companies (based on simple valuation multiples) could be much more profitable today than in the past (compared to the dot-com bubble, for example), or their expected long-term growth could be much higher.

Figure 2 shows the spread in operating performance (proxied by gross profitability, GP/A)3 between cheap and expensive companies. On average, cheap stocks – according to the enhanced value strategy – display about the same levels of profitability as expensive ones, at a global level.4

Admittedly, cheap stocks have been less profitable between 2017 and 2020. However, their profitability has improved considerably in recent months. In fact, cheap stocks were actually slightly more profitable than their expensive peers at the end of March 2021. Therefore, the current valuation spread cannot be justified by differences in profitability.

Figure 2 | Spread in gross profitability for the enhanced value strategy

Figure 2 | Spread in gross profitability for the enhanced value strategy

Source: Refinitiv. The figure shows the spread in gross profitability between the top and bottom quintile portfolios of an enhanced value strategy. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995).

Moreover, current profitability is mainly backward-looking, so what about future growth expectations? If profitability levels are the same as those in the present day, then stocks with higher expected growth should trade at higher valuations.

Cheap stocks tend to have lower future growth expectations than expensive ones, which explains why the latter are also called ‘growth stocks’. However, relative growth expectations are currently not lower than they have been in the previous 15 years, especially for developed markets. Thus, the widening of the value spread over the last three years cannot be traced back to a deterioration in growth expectations for value stocks.

Market sentiment for Value receives a shot in the arm

The recent value recovery has led to a change in sentiment regarding value stocks. Price momentum – measured as a stock’s return over the last 6 to 12 months – is one way to gauge market sentiment. While value and momentum tend to be negatively correlated – therefore providing diversification benefits – there have been a few periods in history when value stocks exhibited strong momentum. We expect this to happen again in the coming months.

Figure 3 depicts the difference between the median six-month performance of value and growth stocks. The difference has shifted from very negative to positive over the few last months. Since most momentum strategies use price momentum measures over 6 to 12 months and the value turnaround only started about six months ago, they have yet to purchase value stocks significantly. But one should expect them to start buying value stocks in a larger scale now that the market regime shift is clearly reflected in price momentum metrics.

Figure 3 | Spread in Momentum (6-0) for the enhanced value strategy

Figure 3 | Spread in Momentum (6-0) for the enhanced value strategy

Source: Refinitiv. The figure shows the spread in 6-0 month price momentum between the top and bottom quintile portfolios of an enhanced value strategy. The investment universe consists of constituents of the MSCI Developed and Emerging Markets indices. Before 2001, we use the FTSE World Developed index for developed markets (going back to December 1985), and for emerging markets, the largest 800 constituents of the S&P Emerging BMI at the semi-annual index rebalance (going back to December 1995).

Current sentiment is in favor of value

Another way of measuring sentiment is to look at analyst earnings estimate revisions. Analysts tend to issue more upward than downward earnings revisions for expensive stocks than for cheap ones. However, over the last few months, analyst earnings per share (EPS) revisions for value stocks have been as optimistic as they have ever been in recent history. Although we still have to see if analyst earnings expectations will play out as forecasted, current sentiment is in favor of value.

All in all, after a long and harsh quant winter, spring has sprung and value seems ready for summer.

Read the full article


Footnotes

1 The enhanced value strategy is based on a composite of book-to-market (R&D adjusted), EBITDA/EV, CF/P, and NPY. Value stocks are sorted into quintile portfolios based on the valuation composite and in a region and sector respectively country neutral manner for developed and emerging markets. Quintile portfolios are equal-weighted and reformed monthly. The details of the enhanced value strategy are described in Blitz, D., and Hanauer, M., January 2021, “Resurrecting the Value Premium”, Journal of Portfolio Management.
2 Please see also the analysis in our paper ‘Resurrecting the Value Premium’.
3 GP/A is gross profit to assets.
4 The difference would be negative for a value strategy solely based on book-to-market. The difference is less pronounced or non-existent for the enhanced value strategy as it is based on a composite of value metrics that use profit measures such as EBITDA and cash flow in the numerator.

探索量化價值

訂閱我們的電子報,獲取尖端的量化策略和見解。

探索量化的奧秘

免責聲明

本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。