Some hedge funds have come away with big profits by focusing on the least-loved part of the equity market. What does this strategy look like and how can you implement it in your own trading ideas?
- Maverick Capital managed to turn in a 36% return for the first quarter by playing the value stocks card.
- History shows that after a crisis, economically sensitive stocks tend to outperform the rest of the market.
- Value has beaten Growth in the past few months.
- Growth stocks may prove to be once again good investment for now, but value remains a safer bet in the long term.
Value stocks vs. Growth stocks
Some quick definition to begin with: what are growth and value stocks?
Growth stocks are stocks for which investors are ready to pay a premium – meaning above their seemingly “fair” price – because of the prospect of high future earnings potential (e.g., Tesla).
Value stocks are stocks which are considered to be under their “fair” value in comparison to the market, and therefore make an interesting buy, hoping that their stock price will go back to its truer valuation.
What happened with hedge fund Maverick’s performance?
Despite losing 9% in January in its main hedge fund in a hazardous January, the Dallas-based Maverick still managed to show a great performance in the following two months: 25% for February and 20% for March. So far, the hedge fund is up about 36% for the first quarter of 2021, making it one of the top performing hedge funds in the world.
What was Maverick’s strategy?
The bet is quite simple. The fund favoured value stocks which were previously unloved, such as in the retail, airline, and banking sectors. A good part of their performance was bolstered by a long position in Coupang, the SoftBank-backed ecommerce company, as well as a timely investment in the now famous GameStop, whose share shot up earlier this year. The hedge fund owned 4,658,607 shares of GameStop at some point, which is quite a lot considering that the stock was hated enough for hedge funds to short it 140%.
Value stocks have long remained ignored as investors preferred going for more expensive growth stocks with faster earnings. For years, the technology sector has dominated Wall Street in this respect.
However, value stocks have experienced a rally in recent months, as the world expects the economy to bounce back after receiving positive news on the development of vaccines, which should ease lockdown restrictions and bring back the world as we knew it.
What Maverick did is simply to learn from history, looking back at the 2003 and 2008 rebounds. They saw that once beaten down, economically sensitive stocks tended to recover quickly. So, they just began buying stocks which price had been pushed down by the damaged economy. And it paid.
Value beating growth over the past few months
We can also observe this trend in the main value and growth index. Since November, at the time were Covid-19 vaccines were found to be 90% effective, the global MSCI World Value index had risen by 29%, while the same index for growth was up by 19%.
In the first quarter, the iShares S&P 500 Growth ETF was up 2%, dwarfed by its brother, the iShares S&P 500 value ETF which saw a 10% rise.
Other funds have adopted this strategy, such as the Platinum fund, which cut its positions in Facebook, Google and Tencent to buy more cyclical stocks like Samsung Electronics or Micron Technology.
“Valuations were such that you knew you would make money,” said Andrew Clifford, the firm’s chief executive, and he added that buying cyclical stocks at book value was “as obvious as it gets in investing”.
Will value keep outperforming growth?
Value stocks gain were high recently, but does this mean that the cycle has run its course, or is there still money to be made?
It is impossible to predict of course, but Maverick believes that the recent value rally is over, and that tech stocks with a stable growth should become more attractive, being more reasonably priced.
This idea is supported by Quint Tatro, president of Joule Financial: “We caught a lot of flak at the very beginning of the year for not chasing some of these growth names higher, and everybody wanted to pile in, and we didn’t feel that that was appropriate. The valuations were ridiculously stretched. Now we have seen this incredible demise. Many of these names down 40%, 50%.”
Therefore, it seems like there are upsides to be played in the growth sectors, especially as funds like that of Cathie Wood keep championing them, but Over the next few years, value stands to benefit most from a world economy returning to economic growth, supported by government stimulus.