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For a short time, momentum stocks seemed to fall out of favor as investors rushed to value names, as measured by the iShares EDGE MSCI USA Value (NYSE 🙂 and the iShares EDGE MSCI USA Momentum ETF (NYSE :).
But suddenly the value trade seems to be blurring, with the ETF value showing signs of a steeper 7% decline based on the technical charts.
There is probably a good reason why this trade depletes: the companies that represent value have little to offer investors in terms of future growth, when using consensus analyst estimates.
Companies such as AT&T (NYSE :), Intel (NASDAQ :), IBM (NYSE :), Pfizer (19459005 ] NYSE 🙂 and General Motors (NYSE 🙂 all represent some of the largest weightings in the ETF value. When considering their growth rates, these stocks seem overvalued based on profit multiples.
Value Rising
Since mid-August, the ETF value has risen by more than 7.6% compared to the fall in momentum ETF by 1.6%. However, the ETF value peaked on September 11, when it had risen almost 11.5%, while the ETF momentum traded almost sideways.
The Break Down Nears
The technical graph shows that the ETF value has been rising and falling since May in a well-defined trade channel. Now the ETF rests on a level of support around $ 81.70. A fall below that price could cause the ETF to fall back to the bottom of the trading range at a price of $ 76.50 – a decrease of around 6.75% from the current price of around $ 82.03 on September 26 .
Shares with overvalued value
One reason for the sharp rise in the group may be due to a major jump in AT&T, which represents a weighting of nearly 10% in the ETF. AT&T has seen the stock rise considerably in recent weeks since Elliott Management Corp. has announced that it has built up an interest in the company. Because AT&T has such a large weight in the ETF, the sudden rise in the share price may have helped raise the entire group.
When digging in AT&T, one has to wonder what value the company represents. Shares are traded for approximately 10.3 times 2020 consensus earnings estimates of $ 3.61 per share. These current earnings estimates represent a growth of only 1.95% versus estimates for 2019 of $ 3.54 per share. But even worse, analysts predict that earnings in 2021 will fall to $ 3.57 per share.
Intel is another company that has seen its shares rise sharply, along with the rest of the semiconductor space in September. However, like AT&T, analysts estimate that earnings will increase by only 1.3% in 2020, followed by a flat 2021. Meanwhile, the stock is trading with a PE ratio of one year ahead at 11.4
IBM, Pfizer and General Motors all fit into a similar camp. The three companies together represent a weighting of almost 9% in the ETF. IBM is expected to have a profit growth of only 5% in 2020, Pfizer is expected to lower its profit by 3.6% and General Motors' profit is expected to fall by 2.5% based on the latest consensus estimates.
It is true that all of these companies trade in profit multiples that are lower than the 2020 PE ratio of the S&P 500 of 16.5. However, it is also predicted that revenues will grow by almost 10% in 2020. So you have to ask yourself how much value these companies offer compared to the growth of the S&P 500.
Perhaps in this low-interest environment, with treasury rates below 2%, the valuation can be supported by some very attractive dividend yields from these companies. However, the value transaction is unlikely to last unless these companies start presenting better underlying fundamentals to investors.
Otherwise, all investors would be left behind with overvalued companies disguised as value stocks. For that reason, every rally in this group is likely to fade quickly.
