September 16, 2019 BARRON’S 11
Don’t Hate, Rotate
DARLING STOCKS FELL THIS PAST WEEK, AND DOGS ROSE.
SomeWallStreetbankscalledtheshift“violent.”One
usedtheterm“haterotation.”Ifanyoneelseislooking
forover-the-toptermstodescribethisbriefreturnto
howstocksusedtowork,I’mprettysure“hatchetcan-
non” and “clown punch” are still available.
It used to be that stocks that got too expensive
would eventually sell off, and that stocks that sold off too far would
rebound. But over the past decade, pricey momentum
stocks have gotten pricier, and value stocks have stained
the carpet. Then, during the first three days of this past
week, momentum stocks sold off by 10% and value stocks
rallied 7%, according to J.P. Morgan. That was one of the
sharpest such three-day shifts in 30 years.
There’salwaysabitofdisagreementoverhowexactly
todefinevaluestocks,becausecheapnesscanbesubjec-
tive. But let’s just say it was a bad few days to be long
electronic trading platforms and short underpants and
motorcycles.MarketAxessHoldings(ticker:MKTX),whichBarron’s
singledoutlastweekasanexampleofwhystraightmomentuminvest-
inglooksexpensive,fell19%,theworstperformanceinthe S&P500in-
dex.CME Group(CME) was second-worst, down 9%. Meanwhile,
Hanesbrands(HBI) gained 13%, andHarley-Davidson(HOG), 10%.
I’mnotsureHanesandHarleyarethefirstplacestolookforgood
dealsnowoncompanieswithfavorabletrends.SameforGeneralElec-
tric(GE), up 7%, and Victoria Secret ownerL Brands(LB), up 12%.
Butthen,valueinvestinghasn’tworkedforsolongthatit’sunderstand-
ableifbargainhuntersarerusty.Totheircredit,theyalsosweetened
onBorgWarner(BWA), up 10%, andAT&T(T), up 7%.
Funnythingabo`tAmericanAirlinesGroup(AAL):JamieBaker,
who covers air carriers for JPM, has a simple, turbulent trading rule
hecalls“down30in30.”Hisrecordsshowremarkablereturnsforin-
vestorswhoboughtsharesofUnitedAirlinesHoldings(UAL)andits
predecessorContinentaleachtimetheyfell30%ormorein30days,and
whoheldfor180days.Justbeforethispastweek,Bakerissuedanote
saying American had triggered his trading rule. He’s up a quick 8%.
The big question for investors, of course, is whether this shift will
continue. A trio of Wall Street firms has the answers: absolutely, prob-
ably, and not really. JPM points out that recent trading has unwound
only about the past five months of outperformance for momentum
stocks. “The extreme divergence...is bound to further rebalance,” its
strategists wrote on Thursday. According to Bank of America Merrill
Lynch, investors are underestimating the ability of central banks to
fuel stock gains with a “liquidity supernova,” and as stocks broadly
rise, value will likely continue to shine.
UBSexplainsthatgrowthstockshavehadsuchstrongpricemomen-
tumbecauseinvestorshavepouredmoneyintogrowthmutualfundsat
atimewhenfast-growingcompaniesarebecomingscarce.Ifhistoryis
aguide,arecentslowdowninmanufacturingsignalsthatgrowthstocks
willnowbegintounderperformdefensiveones,thebanksays.Itfavors
staples, health care, utilities, and real estate investment trusts.
Meanwhile, assets in stock index funds, which tend to have a mo-
mentum tilt,just eclipsedthose in actively managed funds, according
to Morningstar. If the recent bounce in value stocks is a hate rotation,
savers are still boarding the love train.
There are no free lunches, at least sinceBlue Apron
Holdings(APRN) last offered its three-meal introduc-
tory giveaway. But free stock-trading is a growth indus-
try.Square(SQ) is reportedly testing such a service for
its Cash App payments platform. It will go up against
privately held Robinhood, which is valued at $7.6 billion,
up from $5.6 billion last year, if a summer funding round
is any indication.
RobinhoodispartofwhatCanaccordGenuityCapitalMarketsanalyst
JosephVafi,ina209-pagereportthispastweekonthefinancialtechnol-
ogyorfintechindustry,callsfreemium2.0.Freemium1.0involvedoffer-
ingastripped-downserviceforfree,whilechargingtoupgradetoapre-
miumone.Inthe2.0version,companiesgiveawayapremiumservicein
hopesofcharginglaterforatotallydifferentservice.Theideaistowin
overplentyofso-calledHENRYs—highearners,notrichyet.Onerisk
isthatyouendupinsteadwithJEFS,whojustenjoyfreestuff.Another
riskisthatabiggercompanydecidestoprice-matchatfree.Vafi’sfavor-
itesinfintechincludeFidelityNationalInformationServices(FIS)and
PayPal Holdings(PYPL).
Onpage19ofthisissue,Viacom(VIAB)chiefBobBakishdiscusses
PlutoTV,afreeNetflix-likeservice.Ituseslibrarycontentandmakes
moneywithadvertisements.ButApple(AAPL)isdoingsomethingalto-
getherdifferent.It’sreportedlyspending$6billiononcontentforanew
streaming service launching Nov. 1. On Tuesday, it priced the service
at$4.99amonth,lowerthanexpected.Anditsaidthatitwouldgiveit
away for a year to anyone who buys a phone, computer, or Apple TV.
Goldman Sachs trimmed its earnings per share forecast for Apple
by $1.72, to $10.76, for its fiscal year ending September 2020, in part
because the iPhone maker’s likely accounting for the giveaway will re-
duce average selling prices on its gear. In a Thursday note, Goldman,
which rates Apple stock Neutral, predicted 26% downside. I feel some-
what less neutral about the prospect of losing one-quarter of an invest-
ment, but to each his own. The larger point is that for companies, all
this free stuff is starting to look expensive.
email: [email protected]
Valueinvestinghasn’t
workedforsolong
it’sunderstandable
ifbargainhunters
arerusty.
Streetwise
By Jack Hough