Thread by @ReformedTrader

1/ Did I Miss the Value Turn? (Arnott, Kalesnik, Wu)

"Value stocks remain priced at very attractive valuations across most regional markets—discounts in the bottom half of the cheapest decile. We may wait decades for another opportunity of this scale."

researchaffiliates.com/publications/a…

2/ "Value posted the worst drawdown in its history over the years 2017–2020.

"Value’s pre-pandemic drawdown in developed markets was slightly shorter than in the U.S. but was even deeper at 19%. In emerging markets, value continued to work until late 2018."

3/ "From Jan 2007 to Sept 2020 in the U.S., relative valuation moved from the most expensive quartile to the cheapest percentile; this explains more than 100% of value’s underperformance.

"Net of this downward revaluation, value would have beat growth by a respectable margin."

4/ "During the two recessions spurred by the bursting of an asset bubble, value markedly outpaced growth during the associated bear market. In recessions triggered by shocks to economic fundamentals and unassociated with a bubble, value typically performed in line with growth.

5/ "Value’s outperformance during recoveries should not be surprising, because as recessions ease, the risk of bankruptcy—typically afflicting value stocks with their slower growth, thinner profit margins, and weaker prospects—recedes."

6/ "The value rebound that began in Sept. 2020 was consistent with historical precedent. By late summer of 2020, value was priced at extreme discounts—by some measures (e.g., P/B & P/S), the deepest ever.

"Through mid-May 2021, value was rebounding across all regional markets."

7/ "The discount for value no longer falls in the 100th percentile, yet it still displays impressively cheap discounts across all regions but one. In most markets, the discounts are not only in the cheapest decile in history; they are in the bottom half of the cheapest decile."

8/ "Today, $13 trillion of bonds worldwide are priced at a negative yield to maturity. Other assets—including the most expensive tech stocks—are also priced to generate negative real returns, even if the companies are able to achieve the lofty growth the market currently expects.

9/ "Yet global markets are hardly devoid of opportunity. International and EM stocks are far cheaper than US stocks. The biggest outliers in long-term expected real returns are value stocks.

10/ "In the U.K., 71% of the population had at least one dose of the vaccine and 63% were fully vaccinated as of August 2021. 91% of adults in England & 94% in London tested positive for antibodies, which means a significant portion of the
unvaccinated had Covid and recovered.

11/ "In that country, the estimated ratio of deaths to _known_ Covid cases is 0.2%, not too different from the same ratio for seasonal flu. As more people become vaccinated or acquire natural immunity, the world’s prospects for living with the endemic presence of Covid are good.

12/ "As the pandemic wanes, many of the tech companies that greatly benefitted from the lockdowns and work-from-home will likely cede some of those benefits. While some pandemic-era behavior changes will prove lasting, we believe most people will revert partway to past habits.

13/ "Many of the economic and behavioral trends that supported these high-flying companies are likely to reverse course. The high valuations and high market concentrations typical of these (mainly tech) stocks create further risks to investors who hold them.

14/ "Cisco has had double-digit growth in sales, profits, & book value since it was briefly the largest-cap stock in the world, yet its share price is still down from its 2000 peak price.

“Some of these share prices are not only discounting the future, but also the hereafter.”

15/ "The energy sector has ridden a wave of bankruptcies over the lockdown period. Industry survivors should be able to operate with richer margins. Further, OPEC+ agreed during the pandemic to tighten control on oil production to stabilize prices as energy demand plummeted.

16/ "The combination of potential underinvestment from bankruptcies and tighter supplies led to short-term oil shortages, with oil prices reaching higher levels. Given the cheap valuations of some major energy companies, these shocks could be great news for value investors."

17/ Related reading:

Thread on the value spread

https://twitter.com/ReformedTrader/status/1259165422412128259

Will value survive its long winter?

https://twitter.com/ReformedTrader/status/1304557723392962561

The Long Run Is Lying to You

https://twitter.com/ReformedTrader/status/1370526212376850436

Explaining the Recent Failure of Value Investing

https://twitter.com/ReformedTrader/status/1436066188648337420