Cheap stocks have been underperforming for the last 18 months, while expensive stocks are overperforming. In fact, current value performance parallels the Tech Bubble and Global Financial Crisis. This may come as a surprise to man, but we’ve been living through an extraordinary return environment that has, largely, fallen under the radar.
QMA’s latest paper, “Value vs. Growth: The New Bubble” examines the poor performance of value from multiple angles. We establish a baseline for normal value behavior, and demonstrate through return decomposition, among other measures, why we believe that value is poised to pay off: Dislocations are meaningfully above average, as are the expected returns to value. We also find support from corporate insiders (company management and boards of directors) that there are meaningful opportunities in value.
Recent dynamics reflect investor overreaction and price action. With valuation spreads (the difference between valuation of cheap and expensive stocks) at extreme levels, dislocations are meaningfully above average, as are the expected returns to value. We expect the resulting bounce-back to represent some of the largest investment opportunities of the last decade—if not the last 25 years.