Invest Like Wayne Gretzky Played Hockey: Stay One Step Ahead

It's easy to see what's already happened. It's hard to cash in, though, on what everybody already knows. Wall Street rewards traders and investors who position themselves ahead of trends. Smelling, and acting on, the early signs of change, allows you to accomplish that feat. Growth absolutely stomped value over the past 12-months. The graphic below shows that S&P 500 value stocks lagged their growth brethren by about 33%. That was one of the largest discrepancies over a year ever recorded. Those with a sense on market history, however, know that spreads which go past 2 standard deviations like that one, almost always reverse with a vengeance. In fact, since May 15 value has been nicely outpacing growth by a wide margin. Was that the final turning point in this cycle? I think so, but it's still too soon to declare victory for sure. A look at a longer-term chart of the Russell 1000 growth stock index vs. the Russell 1000 value index highlights the extraordinary shift in preferences that might have just ended. Growth hit a higher relative valuation in mid-May than it did back in the exact peak of the internet/tech bubble in late 1999 through March of 2000. That was quite a hurdle. Many internet stocks ended up in bankruptcy. The highest quality names like Oracle , Microsoft , Cisco Systems and their cohorts were so overpriced that most of them didn't revisit their old highs for 15 to 17 years from that crazy top. The chart below details price-to-book value ratios of the very cheapest value stocks from 1980 through May of this year. Even the most out of favor issues rarely get offered for just 50% of book value. In March, when Covid-19 panic was in the air, that magic number was reached for just the third time in the past four decades. The only cheaper time to buy was near the exact bottom of the 2008-2009 Crash. We all know now that early 2009 proved to be one of the greatest buying opportunities in history. The very best gains were not in the blue chip stocks, which were down the least, but in the truly hated smaller company shares that appeared riskier than the high-quality names like the Walmarts , Coca-Colas and Berkshire Hathaways , of the world. That same sentiment has been running rampant since the Covid-19 crisis took hold in February and March. Many less prominent stocks dropped by 50%, 60% and even 90% as traders dumped anything that might not survive the economic lockdown. Now, the businesses are reopening the palpable fear is receding. To weather the storm, companies raised cash via drawing on credit lines, issuing debt or new shares or both to firm up their balance sheets. Many dividends were cut or eliminated for the same reason. The government-imposed shutdown mainly killed businesses that were barely hanging on before the crisis. Recent filings by J.C. Penny , Hertz and Diamond Offshore are just a few examples of firms which had been hemorrhaging money for a long time. The virus didn't kill them -- although it did speed up their demise. Picking solidly financed firms that can be around when times improve is definitely the best course right now. How much better to have value oriented shares done since May 15? I'm glad you asked. The S&P 500's Small-Cap Value ETF was up about 16% since mid-May. Large-Cap Value S&P 500 companies gained just over 10%. The S&P 500 Large-Cap Growth ETF posted gains, too, but as of Tuesday, was up by just shy of 7%. In those two weeks, small-cap value more than doubled large-cap growth even within the S&P 500's envelope. Those who dared to buy lesser followed, and smaller names, have seen much better results than that. The value outperformance has only just begun (thank you, Karen Carpenter). History suggests it can last for a long time: read months to years, rather than weeks. My own IRA, in its entirety, has already rebounded by greater than 83% from its Mar. 23, 2020 low. I'm hoping and expecting much, much more. Be like the all-star hockey player Wayne Gretzky. He became The Great One by skating to where the puck was going to be rather than where it sat in his present field of vision. Your portfolio will thank you later and your CPA will be impressed at tax time. (MSFT is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock? Learn more now.)

Invest Like Wayne Gretzky Played Hockey: Stay One Step Ahead

Profit from 'the changing of the guard' by seeing where things are going, not where they are right now.

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