- Not your typical March as the month came 'in like a lamb, and out like a lion.' No, we aren’tdiscussing precipitation in March, but the precipitous equity market behavior for the U.S stock market on the precipice of all-time highs and what that means for the top stocks moving into April.
- The inverse of the ancient meteorological proverb aptly describes this past month’shedge fund blowup, a once-in-a generationcanal blockageof worldwide trade, aFed pivot, a treasurymarket selloff, historicelectric vehicleandmarijuana legislation, SPAC-mania, the 1-year anniversary of the pandemic-fueled market selloff and a 6% monthly trough to peak move in the S&P 500(NYSEARCA:SPY). That led high beta names to lag in the latter half. But what strategy or selection of stocks would have served you best for the month?
High beta stocks lagged more stable names toward month-end
- The exogenous events described above can throw a wrench into any defined strategy, whether you’re a value or growth investor, play momentum, sentiment, technicals or earnings revisions, or just buy what you know. What explicit strategy would have told you to be long Hartford Financial(NYSE:HIG), Nucor(NYSE:NUE)or Kansas City Southern(NYSE:KSU), and either short or unexposed to Penn National, Discovery Inc.(NASDAQ:DISCA)and Viacom(NASDAQ:VIAC), the respective winners and losers in the S&P 500 in March?
- The answer for the above six is insider trading, which we do not condone for obvious reasons.M&A(twice), aboveconsensus earnings,political uncertaintyandhedge fund implosionsdictated the above fortunes and misfortunes.
- But to outperform the broader market, the answer this month was value investing. So much so, thatone fascinating aspect of Marchwas how the standard “value stocks” started to screen as “momentum” – those stocks that have registered the strongest performance over the past 12 months. Value, in fact, has been so strong, that the last time they screened as momentum was more than 5 years ago.
- And it’s not just March. Value is the best performing factor strategy this year, up nearly 20%. It narrowly beat the performance of the highest levered stocks – those with the highest ratio of debt/total assets – curious bedfellows.
- Value itself is not a monolith. It comes in varying forms. For March, a strategy whereby you long stocks in the highest quartile for Ebitda/Enterprise ratios and short those in the lowest quartile returned more than 9%. However, that same strategy in March of last year was the 3rd-worst performing among the 30 factors covered by S&P Global, which could mean some old-fashion mean reversion could have been at play after years of underperformance in the value category.
Source: S&P Global
- We looked at some specific stocks that performed well, just using the Seeking Alphascreener paired with our proprietary Quant ratings, which happen to have atrack record of outperformancesince inception in 2010. We screened for stocks in the U.S., with more than $500 million market cap, a value rating of A or greater that screened with a bullish or very bullish quant rating.
- The top 5 performing names in March that screened in the above criteria at the beginning of March registered more than 15% returns in the month, led by TimkenSteel(NYSE:TMST)at 40%, Amneal Pharma(NYSE:AMRX), Resideo Technologies(NYSE:REZI), Super Micro Computer(NASDAQ:SMCI)and Jabil(NYSE:JBL). That compares to the S&P ‘s 4.26% return.
- Of note, 3 of the 12 highest performing names were homebuilders, though their ratings weren’t lifted to a bullish rating until a third of the month had passed. One, Green Brick(NASDAQ:GRBK), was featured among the best value picks by Seeking Alpha's head of quantitative strategies, Steven Cress, in his September discussionabout how many value names screened better than mega-cap tech, like Microsoft(NASDAQ:MSFT)and Apple(NASDAQ:AAPL).
- Beyond picking individual stocks, allocating to ETFs that focused on this strategy would have yielded an approximate 6.3% return, outperforming the S&P 500(SP500)by 200bps. The largest value ETFs, found viaSA’s ETF screener,include Vanguard Value ETF(NYSEARCA:VTV), iShares S&P 500 value ETF(NYSEARCA:IVE) and SPDR Portfolio S&P 500 value ETF(NYSEARCA:SPYV), with performance across the instruments of 6.3% during March. That compared with the Vanguard S&P 500 ETF (NYSEARCA:VOO)up 2.75% on the month.
- Another value ETF, the iShares Russell 1000 Value ETF(NYSEARCA:IWD), lagged at 4.9%. Hamstringing its performance was likely the higher concentration in tech, which was impacted by the aforementioned treasury selloff this month. Higher interest rates hit growth names particularly hard. Compared to VTV, which boasts 3x more of a concentration in financials than in tech, IWD is nearer to 2x. The tech-heavy Nasdaq composite rose just 0.4% in March. The Invesco QQQ ETF(NASDAQ:QQQ), which tracks large cap tech, was down 1.6% on the month.
The Future
- And how does that set up for April? Something to consider is seasonality --not surprising given the beginning of earnings season in just two weeks, which may set the tone. It is also bullish: Since 1928, April is the second-best month of average returns of the year, BofA analysts wrote this week.
- And on a shorter-term horizon, there is seasonality intra-month. The analysts also surfaced research that the first 10 days of each month typically outperform the last 10. That pattern for January-March has already held. But for April more broadly, LPL Financial’s Ryan Detrick highlighted that in the last 15 years, the S&P 500 has closed higher in 14 of those 15 Aprils.
- That isn’t to say that value specifically will outperform, but it speaks broadly to market and portfolio performance. Morgan Stanley in a late March note remarked that “violent rotations” left many portfolios “gored” this year despite the fact that the rotations themselves were “fundamentally triggered.” They upgraded Consumer Staples names as part of that note to account for their expectations that inflation, personal income and GDP rates of growth will slow in the quarter/quarter and year/year comparisons to come.
- If you believe, like JP Morgan analysts, that the trends for value will remain intact and that the risks for a pullback are low, it may be worth screening some stocks to determine the best opportunity for your portfolio.
- When we conducted an analysis with the highest quant rating using the above screen criteria (expanded to include names outside the U.S.) the stocks appear to your humble author to be bets on a global recovery. Shipowner Danaos Corp.(NYSE:DAC), Resolute Forest Products(NYSE:RFP), TimkenSteel (TMST), publisher Gannett Co.(NYSE:GCI)and Barclays PLC(NYSE:BCS). Danaos just so happens to be relevant to therecent Suez Canal blockage.
- For those who fancy stocks with a heftier market cap (i.e. >$5B), BNP Paribas(OTCQX:BNPQY), Impala Platinum(OTCQX:IMPUY), ING Groep(NYSE:ING)and Vale S.A.(NYSE:VALE)are among those on the list; cyclical names if you had to name any.
- Stocks screened in a vacuum may not make sense without looking more broadly. BNP Paribas in its latest outlook piece is “more optimistic” about global growth than they were 3 months ago, with U.S. forecasts “up sharply.” And just this past week, U.S. President Bidenput forth an ambitious infrastructure plan, which calls for additional stimulus to be added to the economy. Naturally, it is subject to political will and there are risks it dies on the vine or passes the Senate in some slimmed down version. But BofA, in discussing the prospects for further stimulus, advised owning GDP-sensitive cyclical stocks, that are strong on value, and benefit from higher capital expenditures.
- Stay tuned next month for another look at the best stocks and strategies. There’s also something to be gleaned by how at year-end, thesame companies keep making appearances on the winners and losers lists.