Credit Suisse: Sell dividends buy cyclicals
The hunt for yield has been the number one trade for investment advisers and asset managers since the financial crisis. However, this trade is now being openly criticised by an ever growing number of analysts who believe yield investments currently trade at some of their most expensive valuations in history, and these valuations are becoming increasingly difficult to justify.
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Credit Suisse’s US Equity Strategy research team is the latest group of analysts to turn against defensive and high-yield stocks. In a research note sent out to clients at the beginning of this week, the team, led by Lori Calvasina Chief US Equity Strategist writes that both the defensive stocks and high yield trades have wobbled recently as the trades have become “stretched”.
Sell dividends buy cyclicals
One of the team’s key worries is valuation. Valuations across these two strategies have now become so rich that they might actually work to undermine the defensiveness of the equities in question. Specifically, they write:
“Stocks with the highest dividend yields and those within defensive sectors are a major source of the overvaluation problem seen in the US equity market today. If equity markets correct, we suspect that these areas may not act as defensively as expected, given that valuations are one of the key worries that investors have about the US stock market at the moment. If markets climb higher, we think cyclicals provide the best remaining valuation opportunity.”
Dividend stocks are trading at their highest valuation ever according to Credit Suisse’s data which goes back to 1985:
“Similarly, the median NTM P/E multiple for the highest dividend yielding names hit a new all time high within large cap over the summer, and has also been trading well above its long-term averages (and starting to approach past highs) within small cap. By contrast, the median NTM P/E’s for non-dividend payers look far more reasonable, as they are close to their long-term averages in both small cap and large cap.”
On the other hand, cyclical stocks look extremely cheap relative to history and may provide a great alternative to overpriced offensives:
“Cyclicals look extremely cheap vs. defensives, with relative NTM P/E’s well below historical averages and hitting post Tech bubble lows in both large cap and small cap. Additionally, high dividend yielding names look extremely overvalued relative to non dividend payers, with relative NTM P/E’s well above historical averages and approaching past highs in both large cap and small cap.”