World economies are starting to reopen. We have written about our view of how recovery might evolve in prior posts. In this edition, we pause to assess the research decisions we’ve made, and how US markets have responded over the past 10 weeks since the market bottom on March 23.
Our US equity strategies have had an encouraging trend during this period, overall.
- From 3/23 to 6/1, our Large Cap Composite Strategy is up 43%, ahead of the S&P 500’s 37% and the Russell 1000 Value’s 35%.
- Our Small Cap Composite Strategy is up 41%, well ahead of its value benchmark.
This is not to declare victory by any means. As we move to recovery, the transition to a post-Covid “new normal” will continue to be challenging and unpredictable. This post is simply to illustrate that as the market shifts toward recovery and away from defense at any cost, we believe we are well positioned.
Recall that for the past two years, the stocks performing the best were a narrow group of Big Tech and select defensive options in health care or staples—generally popular, name-brand companies that had become very expensive by our analysis.
In contrast, our research has steered us toward smaller stocks and stocks we believe bring improving fundamentals at a reasonable price. Notably, while our Large Cap strategy is doing well, we should note that valuation and small stocks have not truly ramped yet. For this reason, we believe markets have still had a cautious bias, because Value and Small Stocks have historically outperformed during recoveries.
Some data points:
- The Buy/Sell decisions we made in March during the market fallout have been favorable so far. The stocks we bought in March have generated more than double the returns of those we sold in that month, as of 5/28 (the last time we ran that analysis).
- In this early rebound, the market has begun to favor higher quality cyclical stocks (i.e., energy companies, capital goods manufacturers, banks, selected retailers, producers of raw materials) and stocks across the capitalization spectrum (i.e., not the Biggest Ones). Our portfolios are tilted toward these areas and are equally weighted (for risk management), which has helped us beat the S&P 500 during this period.
- Valuation mattered in April, but was less effective in May, where spreads were actually negative (meaning the most expensive were beating the least expensive). Valuation is still mixed and has not yet made a convincing recovery.
By our analysis, the profile of winners so far is: 1) business models tied to recovery, not defense; and 2) companies with a solid growth outlook, at a reasonable (but not deep value) price.
- Across most sectors, we have been able to pick “best in class” (by our definition) among peers, which means our outperformance is broad not narrow.
- This is why we own stocks like Facebook, Google, Go Daddy, eBay, Booking.com, and Fortinet.
- Energy stocks have done the absolute best in the early recover, after being decimated during the oil price war. We note that our energy stocks, where we were up 87% since March 23, vs. the S&P 500’s energy sector return of only 66%, illustrate our efforts to select what we believe are the best opportunities among a stock’s peer group. We own Diamondback Energy, Chevron, and ConocoPhillips, among others.
- Of the FAANG stocks, only Facebook and Apple have outperformed during this period. Amazon and Netflix have lagged materially. Not because they are bad companies. They just carry high hopes and high expectations, which historically is NOT the source of long-term returns.
To reiterate, our purpose here is not to declare victory. We expect the road to recovery to be long, unpredictable and volatile. Opportunities and risks will ebb and flow, and we must remain vigilant, nimble and responsive in our work to position client portfolios to support near-term and long-term client objectives.
That said, we believe the key to long-term returns is not chasing yesterday’s winners, compelling as those stocks may be. Instead, we believe investors are better served by building a diverse portfolio of stocks that show attractive fundamentals at reasonable prices.
Past performance is no guarantee of future results, and CornerCap’s strategies, like most investment strategies, involve the risk of loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. All investors are advised to fully understand the risks associated with any kind of investing they engage in.
Please see the attached disclosures, which are an integral part of this discussion.