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B. G., Opalesque Geneva: Robert Zuccaro, a quantitative investment pioneer and founder of Target QR Strategies, raises a new angle to this year's debate on growth stocks versus value stocks.
Russell Investments predicted that value stocks would outperform growth stocks this year. "Much of their case rests on the 'regression to the mean' theory given significant underperformance by value stocks relative to growth stocks over the past 15 years." But the rationale ignores the underlying fundamentals that favour growth stocks, says Zuccaro in a recent commentary seen by Opalesque.
The Russell 1000 Growth ETF returned 38% in 2020 compared to almost 3% for the Russell 1000 Value ETF. But in February 2021, the Value ETF beat the Growth ETF by 9.8% versus -1.1%. That was its best relative showing in any month since 2001.
Since then, there have been predictions that value stocks would outperform growth stocks this year. However, Zuccaro reminds us, research shows the growth style established a premium of 33% relative to the value style over 46 years (1959-2004).
Why have growth stocks significantly outperformed value stocks in the past 15 years, he asks. There has been a seismic shift in the US economy that has carried over to the stock market and value companies have displayed sensitivity to economic cycles that continue to this day. Until recently, the U.S. economy was heavily influenced by industrial companies before technology companies came of age. The five largest companies by market cap in the S&P 500, which are also tech stocks and relatively recent additions, fall into growth stock nomenclature and represent an unprecedented 22% of the overall weighting of the S&P 500 as of year-end. Each of the big five (Apple, Microsoft, Amazon, Facebook, and Google) reported record earnings in 2020 with an average gain of 38% whereas S&P 500 earnings declined 16%.
Earnings growth is the key driver of stock prices, Zuccaro says. Many growth companies continue to report record earnings year in and year out. By comparison, earnings for many companies in the airline, banking, energy, and auto companies peaked many years ago. By 2019, earnings for the value companies had been in a downward trend for years.
"Unlike most market commentaries which lean toward value stocks, we conclude that value stocks have gotten ahead of themselves and that their dominance may not last very long. Thus far this year, their stock prices have risen considerably more than their expected earnings improvements… In addition, expected earnings gains for the three companies that were profitable last year appear lackluster when compared to expected growth of 22% in overall corporate profits."
Source: Target QR
He doubts that value stocks can maintain their "newfound leadership in the stock market."
"Many growth companies, and technology companies in particular, are anticipated to produce record earnings in 2021 and 2022, whereas value company profits will remain depressed against prior peak levels. The chasm in profits between the two styles will continue to widen which should work to the advantage of growth stocks." He believes, therefore, that growth stocks will retake the lead before the year is out.
Zuccaro will present in the upcoming webinar, Small Managers, Big Alpha Episode 2, on 22nd June.
Value stocks, as defined by Russell, are those which trade on lower multiples relative to earnings, have lower growth expectations, and have higher dividend yields. They tend to be more cyclical and generally include financials, materials, and energy. Growth stocks, on the other hand, trade at relatively high multiples to earnings, exhibit higher earnings growth expectations, and often do not pay dividends, as profits are reinvested in the business for future growth. They generally include consumer discretionary and technology stocks.
Target QR - one year on
Target QR's Golden Eagle Growth Fund, which actively invests in the world's fastest-growing companies using a quantitative method, began trading in May 2020. After returning 121% last year, it is up 6% YTD (to end-April), according to numbers seen by Opalesque.
Target QR, based in New York and Florida, has recently hired Craig Peretz as its new CFO. He has more than 30 years of experience in the operational side of the alternative investment industry, including at Sierra Global Management, a global long/short equity fund with a focus on European securities.
The firm has also appointed Brynne Zuccaro as global head of marketing. She emerged as a marketing leader at both Google and Foursquare, overseeing international launches for both tech giants. Recently, she served as the vice president of marketing within the executive teams at two high-growth NYC startups Teachers Pay Teachers and Transfix.
Past article:
14.Jan.2021 Opalesque Exclusive: Quant pioneer profits by eschewing traditional investing beliefs
Upcoming webinar:
Small Managers - Big Alpha - Episode 2
With larger quantities of capital chasing the same alpha strategies and continuing to erode alpha, savvy investors are turning to smaller and/or emerging managers as they look for alternative sources of return. Opalesque presents a carefully screened panel of such investment managers.
With:
Robert Zuccaro, Target QR Strategies
Mukhtader Mohammed, Arbitrium Capital Partners
Craig Reeves, Prestige Funds
Mark O. Witten, Portal Asset Management
• When: Tuesday, June 22nd at 10:30 ET
• Free registration: www.opalesque.com/webinar/
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