• Introduction: Value vs. Momentum
  • Small & Mid Cap: A Historical Outlier Suggests Outsized Opportunities
  • The Myth of Melting Ice Cubes?
  • Conclusion: A Basket Worth Buying?
  • Exhibit

Introduction: Value vs. Momentum

In Kailash’s recent pieces discussing the dispersion in value vs. growth stocks carrying the scintillating titles of Growth vs. Value and Growth vs. Value Part II, these papers built on some of our prior work that pointed out:

•     Private Equity firms were reporting historically large inflows while having fewer promising targets and an uncommon reliance on unusually accommodative debt markets
•     Elevated market valuations as defined by Warren Buffett posed a potential risk to investors of all stripes
•     The methodologies of some indexes’ construction could make passive investors particularly vulnerable as discussed in Kailash’s July and October papers about the “Passive Patsies”

Your author wants to acknowledge a recent article in the Wall Street Journal1 which cited data suggesting value investing might not be dead. Of particular interest was a chart showing that “value” stocks as defined by forward P/E ratios vs. stocks with high 12-month momentum were at spreads rarely seen before. In Growth vs. Value Part I and Part II page one displayed a chart highlighting that growth ceded a decade’s outperformance over value in just 6 months post the tech bubble.

Reflecting on this Kailash decided to analyze the spreads between the forward P/Es of the cheapest decile of stocks and high momentum stocks.2 In the Kailash S&P500 Universe we discovered a materially different finding as displayed in Fig. 1 below. S&P500 momentum stocks are roughly in line with history when comparing forward P/Es to their value counterparts. However, upon further investigation Kailash did discover a meaningful and actionable finding within the Small and Mid Cap universe explained in the ensuing pages.

S&P500 Value vs Momentum near historical average


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