Momentum Stocks Hit The Skids As Risk, Value Stocks Take Over

Momentum stocks like FANG (Facebook, Amazon, Netflix Google) have been underperforming this year as investors have begun to see valuation as more important than most other factors at a time when the U.S. equity markets are going through a time of turmoil and upheaval. This year so far is turning out to be the opposite of last year when valuation mattered little and euphoria ruled on Wall Street.

Volatility was the name of the game in February

Bank of America Merrill Lynch Equity and Quant Strategist Savita Subramanian and her team note that a number of “relatively benign factor returns” last month hid the huge swings that occurred during the month. While the majority of factor groups plunged early in the month, most recovered to end February in the neutral to positive.

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The BAML team notes that Risk and Value stocks have gained the most since hitting that February trough, with Cash Deployment factors in the lead, followed by Share Repurchase and High Dividend Yield stocks. The big laggard for the month was High Dividend Growth. Year to date, they said Quality is ahead, while Risk is the biggest laggard, although they have reversed dramatically this month so far as Risk leads the way month to date.

Momentum stocks break down

They added that Momentum stocks hit the skids last month as exposure to high-growth names that skyrocketed last year dragged the factor down. The FANG stocks took a huge hit last month as well, signaling a shift from Momentum stocks toward Value. Facebook, Amazon, Netflix and Google have underperformed the broader market for most of this year so far, no matter what the market is doing.

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Investors are starting to care more about valuation, as Value stocks came roaring back last month following “multiple years of lackluster returns,” the BAML team said. Thus far, Value stocks are a bit ahead of the market, although they added that leverage is important because enterprise value-based valuation signals like high FCF/ EV and low EV/ EBITDA brought better performance compared to Value stocks with more “equity-based signals” like P/E or price to book, Subramanian and team said.

Betting against funds

The BAML team noted that “small” companies climbed 3% in February, putting Small Size stocks ahead of others, but they don’t think this trend will continue. Also names with foreign exposure rallied last month, which they say was probably due to the U.S. dollar’s reversal. Investors who bet against institutions also did well last month, and they said active investors are still de-risking.

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They also found a similar strategy in their work on fund holdings as investors went against institutions by purchasing the ten stocks actively managed funds are most underweight on and selling the ten stocks they’re most overweight on. Subramanian and team found that this strategy resulted in about a 2% gain last month and so far has gained 7% this year.

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