The Big Question: What Will Become Of The Rotation?

The Big Question: What Will Become Of The Rotation?

One of the (many) pressing questions coming off a fraught (or exhilarating, depending on how you want to look at it) first quarter, is this: What will become of the equity rotation? As bond yields rose and growth optimism proliferated, pandemic winners and stay-at-home favorites became laggards and otherwise underperformed. Or, worse, they morphed into outright losers. While not all perennial market favorites from the "slow-flation" macro regime were bludgeoned during the pro-cyclical rotation
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3 thoughts on “The Big Question: What Will Become Of The Rotation?

  1. By any historical measure, the PE on many of these stocks had crossed over into “what are you smoking” land. Which is not to say that they are bad buinesses or companies, only that they were — and are — too richly valued in terms of their future growth prospects.

  2. Think not just “value” but the components, which I empirically but unscientifically think of as:
    – “Recovery” names that were hit hard by Covid, plunged to low valuations by some measures (not P/E or P/S, but P/outyearE, P/preCovidS, DCF, etc. These names have rebounded a lot but in some cases have a good bit (20-40%) left to go. However, most of these trades are, I’d suggest, going to be ripe to exit by 2H or late 2021. Sell the news, etc.
    – “Cyclical/Industrial” names that were sometimes hit by Covid and sometimes not, but anyway didn’t enjoy the Pandemic Party and aren’t Sexy Techy, so their performance lagged a lot in 2020 and perhaps in previous years too. Some of these had strong 4Q20-1Q21 performances, others have been slower to turn up. There are a lot of attractive-looking buys here. Note that many of these are very good, world class companies – yes, it’s possible to be an excellent company without being a groovy Tech name. And many will benefit directly from the global recovery and the US Build Back Better initiatives,
    – “Small Cap” names that, aggregated to the Russell 2000, at one point barely equalled the market cap of AAPL. The long underperformance of small cap, the pattern of small cap outperformance at the start of a new economic cycle, and all the buying of small cap names that can be funded by just modest sales of the mega-names, all drove the RUT outperformance, and I’d suspect it’s not done. Add the prolific opportunities for stockpicking in these names, and it makes for good fun, in my opinion.
    – “Traditional Deep Value” names that fit the screens of low price/book and other old-school valuation metrics, NOT adjusted for changes in the economy, accounting, and the basic value creation drivers that have happened since Graham & Dodd. I have little interest in this group, other than using P/B in screens. I don’t think that “book value” is a reliable predictor of a company’s future cash flows, returns, margins, growth, upside surprise, positive revisions, or anything that I care about. I think it often means only that a company makes low profits from an asset-heavy model.

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