Last Updated on 18 January 2021 by F.R.Costa
Optimism is so high that it is time to rotate from growth to value. Article originally published at Master Investor Magazine September 2020 Issue 66.
Markets have risen very fast after the February-March crash. Currently tech stocks are up 40% in the year, which may be a little too much, as valuations are stretched. Thus rotating from growth to value stocks may be a very good option.
At this point, the risk of investing in growth stocks is huge, not only because of the geopolitical and economic risks but also because of the lack of a safety net for potential downward revisions in profit expectations. With many tech stocks trading on triple-digit forward price-to-earnings multiples, it’s difficult to find a reason to follow the momentum trend.
Forward price-to-earnings multiples have skyrocketed this year as equities reverted their pandemic losses and are currently hitting record high levels, particularly tech stocks. Optimism regarding vaccine development and a slower growth of infections improved recovery hopes and investors’ risk appetite
Value stocks usually present themselves with low price ratios; that is, with low price-to-book, price-to-earnings, price-to-cash flow, price-to-sales, price-to-net tangible assets, or similar metric. Much can be said about the reasons for the low price ratios, but in general, when investors select a diversified portfolio of stocks with reasonable valuations, they’re much less exposed to downside risk, and are properly positioned for long-term performance.