Well, there’s (more) bad news for anyone who is waiting around on the tide to turn in favor of value stocks (versus growth) or just generally waiting for the world to start making some measure of sense again (we’re looking at you David Einhorn).
In their latest weekly kickstart note (which contains the “conversations with clients” section), Goldman suggests that growth will continue to outperform value for the foreseeable future.
The bank notes that although the low vol. regime seems to have inflected (and implicit in that is the notion that “Goldilocks” is looking tired) and although that raises questions about whether the market environment has fundamentally changed in 2018, “one dynamic that has persisted is the outperformance of high growth stocks.”
In fact, Goldman says their long/short Growth factor logged a 5% gain in the past month, which ranks in the 98th percentile of monthly returns over the past four decades. They also remind you that “this performance comes on the heels of a 9% return in 2017, the best calendar year for the factor since it returned 20% in 2007.”
This ongoing outperformance has prompted clients to ask whether a turning point is imminent (amusingly, David Einhorn has been wondering that himself) and the answer, according to Goldman, is “no”, for two reasons:
Contrary to popular intuition, Growth outperformance has not historically signaled subsequent Value outperformance. In fact, more often than not growth stock outperformance leads to more growth stock outperformance. Since 1980, high growth stocks have outgained their low growth peers in 50% of months. Following months in which growth stocks outperformed, however, that monthly hit rate was slightly above average.
From a macro perspective, the pace of economic activity is the most important driver of Growth and Value factor performance. In environments of healthy but modest economic growth, investors typically allocate a scarcity premium to firms able to generate superior growth. The 2.6% US GDP growth our economists forecast for 2018 and 2.2% in 2019 should continue to benefit growth stocks.
So that’s all fine and good (well, if you’re betting on a rotation to value it’s not, but you know what I mean), but the interesting part comes courtesy of the following chart:
Here’s what that visual depicts:
In a surprising twist, some high multiple growth stocks actually represent an appealing “value” opportunity. The fastest-growing stocks typically carry the highest valuations, and that dynamic is still the case currently. However, whereas the median S&P 500 company trades in the top decile of historical valuations, many high growth stocks trade at P/E multiples only modestly above long-term averages given their fast growth. For example, firms with long-term growth estimates of 20%-30% carry a median forward P/E of 22x, which ranks in just the 58th percentile for this growth profile since 1985, while lower growth cohorts trade at valuations close to record highs.
See there?! It all depends on how you look at things!
The cynical among you would read that and say: “ok, so basically what that means it that if I go ahead and accept the fact that I’m going to have to pay an exorbitant multiple for growth, I’m paying less of an exorbitant multiple for that growth now than the multiples people were paying when those people were paying the most exorbitant multiples among stocks where the most exorbitant multiples are generally paid.”
And if that’s the way you read that, you’d be exactly right.
On the other hand, I guess what it does show is that historically speaking, people have paid more for growth than they’re paying now. If that’s enough to encourage you to pay and exorbitant multiple for a given growth stock, well then you’ve got your excuse.
