growth stocks | Value stocks | investment strategy: This is going to be a ‘kabhi kushi kabhi gam’ year; can growth and value coexist?

“Growth and value are not defined. A company cannot be either this or that, companies can change pockets. Growth is when it is growing faster than the overall market; a stock is value when it is trading below the intrinsic price or whatever is fair valuation and these kinds of move. In India, we really do not have a growth index versus a value index but in the US, since 2008, there has been almost a 14-year secular outperformance of growth stocks versus value, “says Atul SuriFounder & CEO, Marathon Trends – PMS

There was this big shakeout in the beginning of December when the market made a comeback. Then we were off to a great start in January and towards January end, we started seeing mid-air turbulence. What is going to be the nature of the market for the rest of the year? Will it remain volatile, choppy or could it be back to clear skies?
We are going to see a period of consolidation. We put out a paper on this a few months ago. What we have seen is that post crashes like in 2000 or 2008, the markets tend to spring up. We had spring action in 2003. We had a spring action in 2009 and again a similar action in 2020. This is when the big falls have happened and the markets have pulled back. That is like the first phase of the bull market.

But

post that, that market needs to consolidate and absorb the move. We cannot replicate the move we have had last year for years to come. I feel we will get into this phase of consolidation. It could last a few months where we could be in a range and hit 18,500, 19,000 on the upside and 16, 16,500 on the downside. In this, we will see sectoral changes.

I personally think that we are going to see a kind of play that will elongate for some period of time, sectoral rotation would happen and there are dark clouds at the moment – whether it is bond yields or crude prices and things like that. These narratives will keep happening. They will keep one occupied.

This is going to be a year of
kabhi kushi kabhi gam and so when we get really euphoric and feel that the breakout is going to happen, it is going to touch skies and it is going to disappoint and when we are going to say like oh! nothing is happening, it is actually happening. It is this problem that markets will surprise you on the upside. So I think this is going to be a period of consolidation as has happened in the past. It is classic. It is statistically proven and that is fine. For people who are playing the longer term trend, it may be a great period for a certain amount of rotation within the portfolio and the time to really identify the new leadership that emerges and to realign the portfolio in that space.

Where is the US 10-year yield headed?
Atul Suri: I am not talking about a week, a day but if you track a 40-year move, the US 10-year bond yields used to be at 13% or thereabouts. For the last 40 years, the bond yields have been declining in a very systematic way. There is almost a parallel channel that has played out. However, when Covid started, the US Fed really went into an overdrive and the bond yields cracked to almost 0.5%. So a channel that has been playing out for the last 40 years suddenly got violated and a big kind of crash down happened. Post that, we see a pullback. A pullback has to happen because one cannot have Covid like situations in reality where bond yields are going to be almost negative for very long. So now we are seeing a pullback and we are again getting back into the channel. I know there is a lot of chatter about bond yields and how the whole interest rate cycle has turned. But in a longer timeframe like the 40-year space, one realizes that it is nothing but the excesses that happened in 2020, a very special event, which really has pulled back and that is where we are back in the channel.

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I do not think that there is a complete reversal of the interest rate cycle of the whole 40-year trend. Excesses that happened on the downside are getting corrected and that is really what is being felt and that is really read into the kind of move that we are seeing. There is a whole move away from growth into value. Growth stocks have been through a correction but I really do not think that growth is finished, growth investing is finished. Excesses happened in the market and companies with disastrous numbers, no earnings, just good story telling, the NFTs, the meme stocks all went up. I think those excesses are getting corrected. So I still maintain that we are in a longer term downtrend as far as bond yields go. Yes the excesses are getting corrected and ultimately it is growth investing which may have had a bit of difficult months but in the long term, that is the way wealth is created.

Why do we always use this very loose reference of growth versus value? We can talk about a pharma company which is growing and still looking cheap; or an old company which could be a cement or a power company which is not growing but has value. Can growth and value coexist for the next couple of years?
In fact, they can transition. Most of us think that this– cement is old world value, it need not be the case. Growth stocks become value if some of these growth stocks really correct – and many have corrected 50-60% and we have earnings to back it. They become cheap and they become value stocks. In a lot of companies or sectors or themes which are traditionally considered as value – some of the cyclical plays – but if the earnings change and they have and they are able to persist with these earnings for a period of time, they become growth.

So growth and value are not defined. A company cannot be either this or that, companies can change pockets. Growth is when it is growing faster than the overall market; a stock is value when it is trading below the intrinsic price or whatever is fair valuation and these kinds of move. I will again put it very simplistically. In India, we really do not have a growth index versus a value index but if one looks at the US, one realizes that since 2008, there has been almost a 14-year secular outperformance of growth stocks versus value.

In fact, a very good proxy of growth is Nasdaq and a very good proxy of the value play is actually the Dow. So even if we do ratio charts, that is a very interesting way of playing out. If one plays a ratio chart between growth and value or between Nasdaq and Dow, one will find that for the last 14 years, growth or the Nasdaq has outperformed value or Dow for the last 14 years. And as interest rates have gone up in the last six months or one year or thereabouts, we will find that value stocks have pulled back a little bit. Growth has taken a cool off but again these are very loose definitions.

However, in the longer timeframe, ultimately markets value growth and ultimately it is growth that is going to get rewarded by investors. We invest for our money to grow and that is why we will get into the growth space. What could be value today can be growth tomorrow and what is growth tomorrow can be value. So a very interesting play is panning out and I for one would continue to have a very strong conviction towards growth. I still think that for a lot of stocks which are backed by very good earnings or fundamentals and which have corrected, this is a very good time for us to really go and pick those stocks. It is my understanding at the moment.

Valuations are a slave of earnings and as we are having this whole value growth conversation. What we saw in 2021 and which brought a lot of first-time investors to the market was the IPOs of the new age companies. Since listing, their losses are only widening. It happened last quarter and it has happened this quarter too from a Nykaa to a PolicyBazaar to a Zomato How to look at them?
So as far as my playbook goes, I avoid all these plays because ultimately markets are a slave of earnings; prices are a slave of earnings. Very often, if prices go up which are not backed by earnings, the end tends to be a little bit of a disaster. So the first and foremost principle which I have learned over 30 years after a lot of mistakes is that one needs to have companies that are backed by earnings and earnings that are accelerating. I think that will find reflection in stock prices.

Sometimes stock prices go up, the earnings are not there and sooner or later, markets will correct and we will find that that kind of play out happening and we are not just seeing it in these five, seven names that you mentioned. In the US, marquee names have corrected 50-60-70% and nothing much has happened in the index really. So I am very clear that it is earnings that drive prices and if the earnings are missing and prices are going up, I am very okay to sit by the side and watch it go, because sooner or later, when corrections happen if there are no earnings to back it, it ends.

Concept stocks are great things; one may get some right and you can make a big story about it but 9/10 times it is going to end very badly. I am one of those guys who does not have the appetite to have those disasters in my portfolio. I would rather miss a good so-called story but the base principle is that has to be backed by earnings.

I have seen again through history – whether it is the FAANG like Apple, the most marquee name – that in the global equity markets, it is not a newly listed stock. It has been around for ages and it has done nothing. It has been disaster of a stock. It is only when there were sustainable earnings that the stock rewarded investors. Someone like the legendary Warren Buffett could get into the stock so late and make it the most remunerative investment in his life di lui in spite of being a late stage investor simply because what came were sustainable earnings. So all the new age stocks that listed last year, some will be hits and some misses but only when they give me sustainable earnings, will I be in them. Otherwise, I am okay to sit out because my experience or history shows me that the ending is never too pretty actually.

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