“Stocks have to go down faster than earnings to get me interested again,” said Frank. “There are definitely more things on my screen than there were three months ago. But you can run into a value trap: it might look cheap, but it’s lower quality stuff.”
Investors like Titzer hope the market has reached an inflection point where momentum
and its close cousin growth go out of style, though it’s been a difficult argument to make with the strategies moving nearly in lockstep. Growth stocks in the S&P 500 have fallen 6.8 percent in 2016, compared with a 5.5 percent loss for value stocks.
That’s an improvement over 2015, when investors flocked to stocks with a track record of improving earnings. Momentum shares returned 32 percent last year, according to an analysis by Evercore ISI and Bloomberg. Even as the S&P 500 barely budged, two companies with high price-to-earnings ratios, Amazon and Google owner Alphabet Inc., lifted the index by 31 points. Value strategies fell 21 percent.
The situation is about to change, according to JPMorgan Chase & Co. A bubble has formed in momentum assets, which will result in a “mean reversion” where they converge with value, said Marko Kolanovic, the New York-based head of global quantitative and derivatives strategy. That could mean broad losses across equities and heightened volatility, but the selloff that kicked off 2016 may be the first signs of a momentum breakdown, he said.
“Over the past years this trend has picked winning assets, sectors, and stocks often with less regard to fundamental valuation and more regard to momentum and extrapolated growth,” Kolanovic wrote in a Feb. 5 note. “We think the outperformance of value assets over momentum assets is likely to continue.”
That’s welcome news for Greg Estes, a vice president and fund manager who helps oversee $700 million at Jacksonville Beach, Florida-based Intrepid Capital Management. Much like Frank, Estes has had a hard time finding stocks that look attractive and cheap enough to him. About 70 percent of Intrepid’s small-cap value fund is cash. That’s the most dry powder they’ve ever sat on, said Estes.
“We’re sitting here with quite a bit of cash and finding it hard to find good prices in stocks,” said Estes. “That’s starting to turn, but it’s not turning enough yet. We’ve welcomed seeing more volatility and seeing the market starting to sell off. Our clients are starting to to get more excited.”