Clearly, value is dead. The year-to-date numbers alone are quite staggering. Within large cap stocks, as measured by the Russell 1000 Growth and Value Indexes, large growth is up about 17% year to date, a whopping 1250 basis points better than value's paltry 4.5% return.
Things get a bit better for value as you head lower down the market cap spectrum; with small caps as measured by the Russell 2000 Growth and Value Indexes, the gap is about 700 basis points with growth up about 12.3% and value up 5.3%.
Within Microcaps, my favorite hunting ground, the difference narrows to about 310 basis points, with growth up about 10.4% and value up 7.3%.
Large growth is simply killing it in this market environment, beneficiaries of an economy which appears to be on fire, as well as last year's tax cuts, although I believe the latter is already priced in.
Further complicating the situation is the fact (or my opinion) that value is simply hard to come by in these markets; truly inexpensive names that still have some meat on the bone. In addition, rising interest rates generally render dividend paying names less compelling. Money market funds that were literally yielding nothing before the Federal Reserve began lifting rates now yield in the 2.2% range, and moving higher.
This is not 2000 or 2001, when names with no revenue, let alone earnings, were driven into the stratosphere by investors jumping on the momentum train. There was plenty of value in those days; fundamentally cheap companies, but few wanted to own them, and many lingered until after the bubble burst.
This time it's different. The high flying growth names are generating revenue, and in many cases, a bottom line. It may be a small bottom line, but these are not the tech bubble companies we saw 18 years ago. Yes, I think Tesla's (TSLA) valuation is a bit ridiculous; a $51 billion market cap, and no earnings, but it is reportedly on the verge of profitability, which is a lot more than you can say for some of the tech bubble companies.
The question I get these days is "what is the value investor supposed to do in this environment?" For starters, keep some dry powder (cash) on hand. Second, if you are deep value oriented, and can handle getting your hands dirty in distressed names, look for situations where it appears that the market has overreacted. Those have been the bulk of my new positions over the past year+. Some have worked out much better than expected , but have not been long-term holdings. That takes some getting used to. Others have not worked all that well, but this comes with the territory. When you dumpster dive for stocks, you are going to get dirty and bruised at times. Sometimes you'll come up with treasure. The bottom line is that you need to keep looking. If you don't find anything compelling enough, and go a year without buying any new names, that's okay too.
I lied in the opening of this piece; value is not dead, it is just taking a hiatus, and will return.