During the initial stages of the pandemic in March and April, it became quite clear to me that companies with a strong online brand and presence were set to outperform the broad S&P 500 index. The accumulation/distribution line (AD line) pointed us towards those companies that were being accumulated by institutions and showing relative strength. Growth companies that were able to grow their earnings rapidly during the pandemic were bid much, much higher, in large part due to the historically-low interest rate environment. Strong earnings growth in a low interest rate environment will command premium PE ratios and we've certainly seen that as companies like Zoom Video Communications (ZM), Peloton Interactive (PTON), Docusign (DOCU), and Wayfair (W) have soared with the following year-to-date returns:
ZM: +493%
PTON: +255%
DOCU: +178%
W: +161%
These are all excellent companies that benefited from a basic paradigm shift as a result of the pandemic. In my opinion, they will continue to perform well fundamentally, but have they reached a short-term peak because of all the optimism? Do they need time to grow into their stratospheric market caps? After all, the stock market works in cycles. Growth stocks (IWF) are showing wear and tear vs. value stocks (IWD) and the following chart illustrates this:
The price of this ratio (IWF:IWD) is "invisible". The two lines that you see are the green 20 day EMA and the blue 50 day EMA. Momentum has favored growth stocks all year, and especially through early-September. Since then, however, it's become more of a struggle and now we're actually seeing both the 20 day and 50 day EMAs roll over and turn lower. The 20 day EMA is below the 50 day EMA for the first time in a year. We have begun to feel that impact at EarningsBeats.com with our portfolios underperforming significantly last week. That's confirming this market shift. I've said plenty of times that I follow what the market says, not what CNBC says. Stick with the charts ALWAYS. The next chart shows our Model Portfolio's relative performance to the S&P 500. In nearly every previous rally off market lows, our Model Portfolio's growth leaders have crushed the S&P 500. But last week's rally was different and that is telling us it may very well be time to shift gears and prepare for outperformance elsewhere. Take a look at this chart:
Those two red circles are difficult for me to ignore. The S&P 500 rallied last week without us. What changed? Well, the vaccine news on Monday morning, for one. While COVID-19 cases surge across the U.S. and Europe, Wall Street is looking out 6-9 months and is beginning to accumulate the companies that will begin to accelerate their earnings and earnings growth in 2021. The ZMs and the PTONs of the world will continue to do quite well, but if the institutions are looking elsewhere to invest, then we want to be where they're investing.
That brings me to tomorrow, Monday, November 16th. Like we did in April, which turned out to be the most important webinar in our company's history, we're hosting a special webinar for our EB.com members to discuss the rotation that's currently taking place. Barring a MAJOR change this week, the current rotation will have a DRAMATIC effect on our new portfolios, which will be announced on Thursday, November 19th. I cannot overemphasize the importance of spotting the relative sector and industry group winners early in the transition. Look at our Model Portfolio's outperformance from March through September. That occurred because we positioned ourselves correctly before the fundamentals began to change and the masses began chasing. I expect the stock market is going much higher, but outperforming the benchmark S&P 500 requires spotting these reversing trends early. That's the purpose of Monday's webinar.
I'd love for you to join me at 4:30pm ET on Monday, November 16th for this very important and educational webinar. In fact, we have 3 webinars this week that you won't want to miss (they're all recorded and made available to members if you're unable to attend live). For more information on how to register for these timely events, CLICK HERE.
Tom
