To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 5.8% during the quarter as the market awaits a robust cyclical recovery this year. Oil prices rebounded a robust 25.2% to $61 from $49 at the beginning of the year. The 10-year treasury bond increased 81 basis points (bps) in the quarter to 1.74%, while the spread between the 2- and 10-year substantially widened 71 bps to a rare 151 bps. Expectations for one of the best cyclical recoveries ever led value to decidedly trounce growth. The Russell 2000 Value Index increased 21.2% for the quarter, followed by the Russell 1000 Value Index, which gained 12.2% for the quarter. The Russell 2000 Growth Index increased a more modest 4.9%, while the Russell 1000 Growth Index, which beat large cap value by over 35% in 2020, was up 1.0% in the quarter.
Since last September, the Russell 2000 Value index is up 61%, 28% higher than the Russell 2000 Growth Index over the same time frame. What could possibly justify such a rapid recovery, and the strongest performance versus the growth index in more than 20 years? A cyclical recovery unlike anything we have ever experienced, at least that is what the market is expecting. As can be seen in the following chart, the top end of the value index is expected to trounce the top end of the growth index this year from a revenue and earnings perspective. After one of the worst economic declines in years, the economy is set up for a meteoric recovery in 2021. In fact, the top 25 companies in the Russell 2000 Value Index are expected to experience a 63% revenue gain and an 87% increase in earnings in 2021. This compares favorably to the top 25 companies in the Russell 2000 Growth Index’s more modest 29% increase in revenues and 80% increase in earnings.
Source: Factset. As of March 31, 2021.
Why is there such a difference between growth and value stocks? After a horrendous 2020, market leading material companies such as US Steel, Alcoa, and Cleveland Cliffs, which top the value index, are expected to experience an unusually strong recovery in 2021. In fact, analysts increased their earnings expectations of this cohort of the top 25 index holdings, including material, energy, casino, and travel companies by 55% in just the last few months. No wonder the market is selling technology favorites…their steady growth doesn’t hold a candle to the cyclical growth of traditional favorites (at least early in 2021).
At Kingsland Growth Advisors, we will continue to search for and own what we believe to be the best growth companies. Investors will love these companies some of the time and favor cyclical companies or dividend stocks at other times. We think these robust business models will produce strong stock performance for the underlying shares over many years. With a long-term horizon in mind, we believe the current pullback in growth stocks affords a rare opportunity to buy some of the best companies out there at relatively attractive price levels.
All the best to you,
Arthur K. Weise, CFA