The Great Rotation: explosive first wave of an inflationary cycle?

It’s time for a “great rotation” away from shares of faster-growing U.S. companies and toward cheaper stocks, according to Crescat Capital LLC. The money manager cited a comparison of enterprise value relative to sales for the Russell 1000 growth and value indexes in a blog post Saturday. Eight days ago, the growth-value gap widened to 3.41 points, according to data compiled by Bloomberg. The differential exceeded a peak of 3.40 points from July 2000, shortly after the end of an Internet-driven bull market. 

U.S. growth stocks' P/E gap to value is nothing like 2000

Shares of faster-growing U.S. companies have yet to reach the “big top” versus cheaper stocks that many investors expect, in Bank of America Corp.’s view. The gap between price-earnings ratios for the Russell 1000 growth and value indexes shows as much, analysts Stephen Suttmeier and Jordan Youngwrote in a report Thursday. May’s widest P/E spread as of Thursday was 13.6 points, far from a peak of 46.5 points in July 2000, according to data compiled by Bloomberg. The smaller differential shows that growth stocks have room to rebound after slumping this week relative to value shares, they wrote.

Einhorn, value-investing peers suffer years of hurt

David Einhorn has reason to be frustrated. The hedge-fund manager and his value-investing peers aren’t benefiting from the current bull market in U.S. stocks as they did the last time around. The ratio between the S&P 500 value and growth indexes is close to a 17-year low, set last month, after falling as much as 24 percent from a peak in 2009. By contrast, the ratio rose as much as 36 percent during the five-year advance that ended in 2007. Einhorn raised the issue of “whether value investing is a viable strategy” in a letter written to clients of his firm, Greenlight Capital LLC, and seen by Bloomberg News.

 

Value stocks beating growth stocks

 A transition among U.S. stock investors toward value and away from growth may just be getting started, according to Barry Bannister, Stifel Financial Corp.’s chief equity strategist.

The chart illustrates the shift by tracking the ratio between the Standard & Poor’s 500 Pure Value and S&P 500 Pure Growth indexes, which closed yesterday at its highest level since August 2010. The gauges are comprised of S&P 500 stocks that best fit into either category.

“There’s a value rotation going on,” Bannister said yesterday in an interview on Bloomberg Radio. The move is “a sign that there’s a little more confidence” in the economy’s ability to grow globally, the Baltimore-based strategist said.

A performance contrast among raw-material producers and health-care stocks highlights the trend, he said. The S&P 500 Materials Index rose 7.8 percent from Feb. 3, when the broader index fell to this year’s low, through yesterday. The S&P 500 Health-Care Index ranked last during the period among 10 main industry groups, with a 2.1 percent gain.

Bannister said he favors materials, along with energy and industrial stocks and shares of technology providers that serve companies rather than consumers. The latter group is in position to benefit from increased capital spending, he said.

S&P uses three criteria to determine pure-value stocks: share price relative to earnings, sales and book value, or the value of assets after subtracting liabilities. The pure-growth category is based on share price relative to earnings gains, sales increases and stock momentum.