Extremes

The statistics are well aired. Year-to-date the S&P has been dragged up by a handful of stocks. Markets are now, as any taxi driver will tell you, crowded. Stay-at-home day-traders have also got a taste for the go-go momentum and piled in. In size. At the other end of the market, many stocks have been routed. Some Covid related, others more structural. In the case of Energy, it has been a double hit to the gut. These dynamics have stretched the rubber on valuation dispersions across the market. Those in the hay have been re-rated through all known previous ranges, whilst those in the gutter have seen valuations smoked. For some investors, this is of interest, for stocks trading at extremes can quickly become rough, disorderly places when uncertainty runs high. Given the soup of politics, a pandemic, elevated unemployment and a sense that wider society is starting to pop apart at the seams, uncertainty is ubiquitous – it’s right up there. Portfolios then, perhaps ought to avoid the extremes. Avoid both the structurally flawed low multiple stocks and the rich ratings of the honeyed-growth cohort. Rotation beckons. But any rotation needs to be nuanced, cloaked in stock selection and perhaps targeted at the rich seam of lower-growth companies that sport valuations that are still loose in the collar. Growth is a lazy generic term, and hides the sharp dispersion across the whole growth spectrum. In a world of zero rates, it is understandable that high growth has been glazed in butter, but lower down the ‘growth offer’ many share prices still languish. Companies that are quietly ironing the linen, getting on with the day-to-day and see mid-single digit revenue growth as achievable. And achievable largely, irrespective, of the economic weather. This nuanced evaluation will find rich pickings across insurance broking, elective health, online advertising and financial exchanges – to name but a few. Companies which are likely to print double-digit earnings growth over the coming years, but sit on delicious butter-ready valuations. In the context of all that’s going on, and the gas and air that might be needed at the extreme end of the market, that’s a rotation perhaps worth making.