MoneyShow Virtual Expo Preview: Sam Stovall

09/10/2020 5:00 am EST

Focus: STRATEGIES

Sam Stovall

Chief Investment Strategist, CFRA Research

On September 3 & 4, investors were reminded that growth stocks in general and tech stocks in particular can fall just as easily as rise, observes Sam Stovall, chief investment strategist of CFRA Research's The Outlook — and a participant in The Interactive MoneyShow Virtual Expo on Sept. 15-16.

In those two days alone, all sizes, styles and sectors within the S&P Composite 1500 declined in price, led by 4.8%+ selloffs in the cyclical communication services, consumer discretionary, and information technology sectors, while the value-oriented energy, financials, real estate, and utilities groups suffered the least.

In addition, only 14% of the 147 sub-industries rose in price, while seven of the eight sub-industries off by 7% or  more were tech components.

After seeing the S&P 500 Growth Index rocket higher by 68.5% from March 23 through August 31, eclipsed by the tech sector’s 74.5% surge, and significantly outpacing the S&P 500 Value Index’s 40.8% rise, investors must have begun to wonder just how much longer this outsized advance would last.

Indeed, the percentage point difference between the rolling 12-month return for Growth minus Value recently hit an all-time high since these indices were created in the mid-1970s, rising to nearly 60% above its two-standard deviation threshold and surpassing the highs set during the tech bubble of the late 1990s.

The S&P 500’s 200-day moving average typically serves as a bull-market support level, which now lies at 3092.73. A drop to this level would imply a sub-14% correction for the broader market, which falls within the range of declines typically experienced after post-bear new all-time highs.

Of course, a deeper decline for each of these growth groups should be expected. Unless there is a trend shift in interest rates, however, this decline should represent an opportunity to buy rather than a reason to bail.

In the meantime, CFRA is maintaining its overweight in communications services and information technology (along with its overweight hedges to consumer staples and health care).

CFRA equity analysts look upon the sell-off in growth stocks as leading to a potential buying opportunity, since the fundamentals still look strong for the large tech names in a highly concentrated sector.

Specifically, CFRA’s Angelo Zino expects a big Q3 EPS beat for Apple (AAPL) in October, since tech names typically rally into big product announcements, like the one we should see next month (e.g. 5G). Also, he thinks it is hard to bet against Apple, as it shifts its business model towards recurring revenue streams that will warrant its multiple.

Should investors want to begin gravitating toward value names, while remaining exposed to the growth sectors as they undergo this tactical digestion of recent gains, the screening tool on CFRA’s MarketScope Advisor platform identifies 15 stocks within the S&P 500 Communication Services, Consumer Discretionary, and Information Technology sectors that are labeled “value” and carry 4- (Buy) and 5-STARS (Strong Buy) recommendations.

favored stocks

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