My spread along the Hudson River attracts flocks of migrating Canada geese. Hundreds gather in the fields stretching down to the river’s bank. The gaggle gorges for days on long grasses Then, flap, flap they take off, noisily, southward bound.
Historically, migration from growth to value stocks and back doesn’t hit annually but noisily follows business cycles. Over a 15-year period starting in 2001, both growth and value indexes (Standard & Poor’s), come out same, up 5.2%. But, there can be sizable annual divergences running over 10 percentage points. Coming off the financial meltdown of 2008 – ’09, growthies outperformed because the financial sector had tanked. Since then, growth has outperformed value, but not by a lot until internet and e-commerce paper took off early in 2017.
Analysts and fund managers periodically enmesh themselves in euphoric rationalizations of valuation. At the tech bubble peak in 2000, Yahoo sold at 100 times revenues and Cisco Systems near 100 times forward earnings power. Nobody blinked. Stocks like Yahoo and Amazon then corrected 90% from highs posted during 2000. As capital spending flattened out, many tech houses reverted to cyclical growth, even industrial status. New orders had dried up.
From all this you learn discipline. Never pay more than two times the growth rate for anything that walks. You make the most money buying properties at one times their growth rate, but to do this you gotta be early or buy when there’s panic in the streets. Late in 2000, Microsoft touched down at $40, one-third of its ‘99 peak. The market was saying Microsoft had lost it, but they hadn’t. Maybe, IBM has lost it and Coca-Cola meanders in a narrow trading range till the end of time. Knowing what’s dynamic vs. what’s doggy counts.
Net, net, growth and value players need viable properties with above average returns on capital. The name of the game shouldn’t be growth vs. value, but making money. In value investing you can freeze up capital in dead paper because you think it’s too cheap to discard. The auto sector, particularly Ford, comes to mind, but not General Motors. Sizable percentage gains past 12 months in U.S. Steel and Alcoa proved overdone while ExxonMobil treads water. No story.
Spring of 2009, the entire stock market sold at book value and 10 times earnings. It hardly mattered, growth vs. value, you would think, but the growth index outperformed by a lot. In 2010, growth vs. value was a standoff, both up 15%.
Emotionally, I prefer zipping to the moon with growthies like Amazon, but it’s as yet unanalyzable. Banks, airlines and insurance underwriters can wilt to option value in a deep recession. Right now they’re pricey. JPMorgan Chase ticks at 18 times earnings, the market’s multiplier. Historically, banks sold at 60% of the market’s price-earnings ratio.
I prefer banks and brokerage houses at 12 times earnings, and they’re available. Citigroup, Morgan Stanley, even Goldman Sachs are viable properties with potentially explosive earnings once trading and underwriting sectors turnaround. (Not this quarter.)
For growth stock players, Internet and e-commerce paper like Alibaba, Amazon, Facebook and Alphabet carry nearly double the volatility of the S&P 500 Index. Markdowns on any disappointing numbers must be harsh. I’m pared down to Alibaba and Amazon. Apple, the biggest market cap in the S&P 500 Index, sells at 18 times earnings, the market’s multiplier. Is Apple growth or value? I’m opinionless. Apple today is a convincing straddle between growth and value. If earnings flatten out it belongs in the consumer durables sector, no longer a convincing tech house. ¿Quién sabe?
Defining what a company is seems more critical than a growth or value label. Nike I’d define as an advertising agency that also makes sportswear and sneakers, once called tennis shoes. An airline I see as a packager of seats. Charles Schwab is an asset gatherer, not a brokerage house. General Electric past 30 years existed as a conglomerate on leverage that rated a lower multiple than it got.
The price for anything in the financial world actually boils down to prevailing interest rates and the “cost of carry.” Take-out prices for growth stocks amount to much less when interest rates are 14%, not 7% or even what we’ve got today - 3%. For many businesses, particularly media, a rising acquisition price for the sector is its critical variable, not earnings growth.
I’ve stashed away mucho AT&T. No longer judged on its long-lines telephone traffic, but rather as an emerging media and entertainment conglomerate. Its leading bearish indicator is how fast cable TV hook-ups detach.
In the sixties, growth stocks sold at 60 times earnings while Wall Street rationalized this premium as owing to their scarcity value. Wall Street then was enthralled with the razor blade concept. Gillette was bid up, but so was United Aircraft for its jet engine franchise and recurrent engine overhaul revenues.
Low interest rates and dormant inflation invariably create high-growth stock valuation, what we’ve experienced. Viscerally, I crave more value paper. I’ve added to AT&T and carry outsized positions in MLPs like Enterprise Products Partners and Energy Transfer Equity. General Motors gets no benefit of doubt on the roiling scene of tariff jockeying and commodity pricing for raw materials like steel and aluminum. GM is a probe at what looks like seven times average earnings power next three years. Too cheap!
GM is a better play than Coca-Cola. As a drink, cola topped out in per capita consumption. As for growth stock investing, unless you like reading 40-page quarterlies and 60-page proxy statements, buy the NASDAQ 100 Index, but keep fingers crossed. We’re not in a tech bubble like in 2000. Then, the S&P 500 sold near 20 times earnings, about where we’re at today. Splitting invested assets between growth and value properties never made more sense. Tech is pricey while value paper is easier to rationalize.
Financial markets seem laden with ironies. The flattish yield curve is supposed to forecast recession but it’s nowhere in sight. Strangely, the two biggest market cap stocks are Apple and Amazon. But, Apple sells as a value stock while Amazon discounts earnings five years out.
Some numbers on growth vs. value performance, latest 12 months: The palm goes to the NASDAQ 100, pretty much a high-tech index. It’s ahead 30% from its 52-week low. Meantime, the S&P 500 Index which comprises growth as well as value properties rose 10%. Russell 1000 Value Index is ahead 10%, too.
Clearly, you needed your capital working in Amazon, Microsoft and Netflix, not AT&T and General Motors. ExxonMobil exhibits a negative chart since 2014, peaking at $105, with a descending head-and-shoulder pattern. It’s up 15% from its low past year. Contrast such results with a high-quality MLP, Enterprise Products Partners, ahead 30% from the 52-week low point.
Schlumberger, perennially considered a high-quality energy growthie, acts like a dog, two points off its low for the year, down 25% from its high-water mark. Conversely, Apple, a low-multiple growth stock, gathered momentum from its low of $149, nearly ahead 50%. Unanalyzable Amazon, from its 52-week low of $93 easily a double.
There’s no categorical pattern in all such jitterbugging. Facebook is barely off its low of $149 down 30% from 52-week high ground. On volatile stocks, entry points can be the deciding factor for annual performance. I consider the analyst fraternity simply odd-lot investors. Not so long ago 42 out of 43 analysts loved Coca-Cola with earnings variance of a penny.
Let’s call Amazon and Apple true long-stemmed American beauty roses. Apple’s blooming while Amazon’s petals just partially opened. My files on growth stocks date back to late fifties - semiconductors, airlines, RCA’s color television intro and later the birth control pill from Syntex. Boeing’s 707 took care of railroads while nuclear power hardly flourished. Steam coal was a growth business then.
Investing is about sensitivity to change at the margin. Categorization of stocks into growth and value sectors for me carries no weight.
Sosnoff and / or his managed accounts own: Amazon, Microsoft, General Motors, JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs, Alibaba, Facebook, Alphabet, Charles Schwab, AT&T, Enterprise Products Partners and Energy Transfer Equity.
msosnoff@gmail.com
