The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks...

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The Equity Observer Weekly Review – January 6, 2019 Eric J. Weigel

Transcript of The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks...

Page 1: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

The Equity ObserverWeekly Review – January 6, 2019

Eric J. Weigel

Page 2: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 3: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

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

Page 4: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 5: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 6: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 7: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

US EquitiesWeekly Performance

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Page 8: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

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

Page 9: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 10: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 11: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

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-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

Page 12: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 13: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

Page 14: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

► 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

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-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

Page 15: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

Down

Big Movers – Last 5 Days

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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

Page 16: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

Reporting Soon

This Coming Week

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► 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

Page 17: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

Eric J. Weigel

[email protected]

Website: https://gf-cap.com

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Page 18: The Equity Observer · 06/01/2019  · valuation The markets last week rewarded undervalued stocks last week In terms of analyst price targets, there was a direct relationship ...

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PAST PERFORMANCE DOES NOT PREDICT OR GUARANTEE FUTURE SIMILAR RESULTS.

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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

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