For months, anytime the hot mega-cap names had a hiccup, there was a line of experts saying it was the start of the long-awaited rotation into value. It’s finally happening in a big way as those unstoppable locomotives continue to slide off the rails.

Still, a few of those names found buyers later in the day to finish higher. There was only one more loser in yesterday’s session than Monday’s session. Although that was not the case early in the session as buyers waited to  make their move, and others followed. 

S&P 500 Heat Map

Even the so-called fear index stopped an early panic dead in its tracks and turned around to finish lower.

• High: 27.01
• Low: 22.50
• Close: 23.11

Message of the Market

Market breadth was the most negative we’ve seen in weeks, especially on the NASDAQ Composite, where the down volume swamped the up volume more than 3:1.  

Market Breadth	NYSE	NASDAQ
Advancing	1,257	1,139
Declining	1,974	2,921
52 Week High	205	224
52 Week Low	43	79
Up Volume	3.02B	1.71B
Down Volume	3.27B	5.78B

Somehow, the forces behind the NASDAQ 100 read and took to heart Aesop’s story of The Tortoise and the Hare. It runs fast and never takes a break – until now.  The index is off 4.20% over the past five sessions, and it’s clear the S&P 500 is a big beneficiary. It is real rotation, let’s see if it lasts.

• 5 Year +217%
• 3 Year +93.7%
• 1 Year +39.2%
• 2021 +2.30%

S&P 500 versus NASDAQ 100 3 Month Chart

Moving to Value?

So, now investors are moving to value, right? 

Not so fast!

There have been several problems with this theory, including the most obvious question: what is value?

There is no way anyone using traditional valuation metrics would be a buyer of the new crop of hot stocks based on the price-to-earnings ratio.

The historical price level doesn’t mean much in this market where new highs beget new highs. The hottest names in the past week sound like folks are getting stocks cheap. Why would Six Flags Entertainment (SIX) already be changing hands at a new all-time high?

The term value has morphed into the same category as the word “cheap,” which these days are based more on near-term upside potential and relative value.

I will submit that this does speak to the need for investors to start building valuation models. And assumptions based on two-and three-year trends, not just trailing performance on one-year assumptions.

S&P 500 Index	+0.13%
Communication Services XLC	+0.78%
Consumer Discretionary XLY		-0.66%
Consumer Staples XLP	+0.14%
Energy XLE	+1.65%
Financials XLF	+0.61%
Health Care XLV		-0.17%
Industrials XLI	+0.31%
Materials XLB	+0.35%
Real Estate XLRE	+0.37%
Technology XLK		-0.28%
Utilities XLU	+0.83%

Seeking Value?

As I’ve mentioned on several occasions and in my book Unstoppable Prosperity, I do like the forward price-to-earnings (F P/E) ratio as a guide to start investors along the trail of seeking value. With that in mind, there are several intriguing possibilities.

S&P 500 forward P/E 22.3

Staples	Financials	Health Care	Discretionary	Info Tech
19.9	14.5	16.2	35.7	27.2
Energy	Industrials	Materials	Comm Services	Utilities
26.1	24.1	19.7	23.3	18.3

Yardeni Research

Looking at the table above, it seems clear that pure value seekers need plenty of exposure -perhaps they even need to be overweight in Financials. But even within that group, individual industries are changing hands at vastly different forward P/E ratios.

Financial Industries:

• Investment Banks: 13.5
• Life Insurance: 8.1
• Multi-line Insurance: 9.7
• Diversified Financial Services: 10.1

Conversely, the most expensive sector, Consumer Discretionary, has a pocket of value stocks.

Consumer Discretionary:

• Apparel: 23.5
• Leisure Products: 20.6
• Household Appliances: 9.7
• Homebuilders: 9.1

Reading the industries above, a cascade of potential buys rain down my brain. But right now, the hottest names in the sector have no forward P/E ratio because the Street doesn’t know when there will be earnings:

• Hotels: n/a
• Casinos: n/a

Then there’s Information Technology. where the semiconductors at a forward P/E ratio of 22.3 looks very enticing to me on continued weakness.

Watch the Consumer

A big reason for outsized valuations for reopening stocks is pent-up demand and the notion that the swoon in Consumer Confidence has run its course. Yesterday, we saw February’s read climb to 91.3 against the consensus of 90.0.

Speaking of rebounds, take a look at job postings on Indeed. It comes a long way from the plunge that took it down 40% year-over-year.

I suspect the government JOLTs report (which is delayed) will see a similar rebound.

Portfolio Review

We have made rapid changes to the ideal mix for the Hot Model Portfolio. To that end, we do not see the need for a position in Utilities.  As mentioned above, this is not a broad market scare, just adjustments for buyers looking for different ideas and risks. 

We are adding to Financials this morning. If you are not a current subscriber to our premium Hotline Service, email Info@wstreet.com to get started today. 

Comments

Thanks Charles Lorin K on 2/24/2021 10:36:14 AM

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