Fishing for Value in a Sea of Growth

Over the last couple weeks, we’ve been profiling the growth vs value rotation and the macroeconomic factors driving the current market environment. Though the worst of the recent market sell-off may have passed, it’s clear that 2022 has brought a new regime which requires investors to be creative in sourcing ideas that align with their investment mandate, while allowing for opportunities to take advantage of this macro-fueled market rotation.

Many growth-oriented investors - especially those who focus on the Tech & Consumer sectors - may consider it a daunting task to find growth-friendly names that have a value tilt and/or are receptive to the rising rate environment. However, as we’ll demonstrate in this week’s Factor Spotlight, Omega Point’s screening tools can help portfolio managers and analysts to more effectively source and prioritize research ideas that meet this criteria.

Finding Value in the Growth Universe

To proxy the investable universe for a US growth-focused portfolio manager or analyst, we’ll start with the Russell 3000, screened for names with market capitalization greater than $500 million and average daily trading volume greater than $5 million. We’ll also screen our universe to only include names that have positive exposure to the Growth factor from the Axioma US 4 Medium Horizon (“AXUS”) risk model. This initial screen yields a an investable growth universe of ~800 names.

From here, we can screen our growth universe further to limit to names that also possess a value tilt by adding a filter to securities with positive exposure to the Value factor from the risk model. This yields a universe of over 400 names, with over 50% of those names belonging to traditional growth sectors, such as Tech, Consumer, and Health Care.

One such Consumer Discretionary name, Strategic Education Inc. (STRA), outperformed the Russell 3000 on a YTD basis. Though STRA is a growth-oriented name, it also has strong value characteristics, which bolstered its performance through the thick of the recent market sell-off.

Finding Growth Names that Benefit from Rising Rates

We can extend this analysis beyond the growth vs value rotation and look to the macroeconomic variables to help source alpha ideas within our growth universe. For this exercise, we’ll again start with our investable growth universe of ~800 stocks.

To find stocks that will benefit from the current macro environment, we can overlay factors from Quant Insight. Quant Insight notes that three key factors (“FED factors“) that can effectively describe the impact from US central bank action are:

Based on the table above, we’ll limit our investable growth universe to only include names that have positive exposure to FED Rate Expectations, FED QT Expectations, and USD 10Y Real Rate. These filters will identify names that will benefit from macroeconomic conditions as we move deeper into the inflationary regime.

Screening for the Quant Insight factors yields a universe of 173 securities that meet our criteria. Again, over 50% of these names belong to traditional growth sectors.

Global Payments Inc. (GPN), a payments technology company, is identified by our screen as a company that is comfortable (and will likely thrive) with tighter FED policy, increased rate volatility, and rising real yields.

Interestingly, GPN also has desirable characteristics for a growth-focused investor looking for stocks with value tilts.

Using Factors to Source New Ideas

As demonstrated in the examples above, with the proper datasets and screening tools in place, portfolio managers and analysts are able to quickly source new ideas that can help mitigate downside coming from the new value and macro-driven market regime. No matter your investment strategy, a robust screening and research prioritization process can save you time and pain by surfacing assets that have desirable factor characteristics without compromising fundamental ideas and convictions.

Please reach out to us directly if you would like assistance to screen your coverage universe for ideas that can help you weather these volatile markets.

US & Global Market Summary

US Market: 01/31/22 - 02/04/22

• The S&P 500 and Nasdaq Composite finished up 1.5% and 2.4% respectively, for their best week of the year, while the Dow increased 1.1%. These gains mark the second weekly advances of 2022 for the three major indices.
• The Labor Department's employment report showed nonfarm payrolls increased by 467,000 jobs last month, compared with the 150,000 jobs addition forecast by economists.
• The 10-year Treasury yield jumped above 1.9%, hitting its highest level since December 2019.
• Amazon.com Inc jumped 13.5% after reporting robust earnings and expanded its market capitalization by ~$190 billion, the largest ever single-day increase in value of a U.S. company.
• Energy was the top sector for the week, up nearly 5%, followed by consumer discretionary, up just under 4%. Financials were up 3.5%, and tech finished the week at +1%.

Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)

• Market Sensitivity took the top spot as moved away from the oversold threshold and is now within reach of positive status.
• Growth shot up following last week’s slowing in its recent freefall into extremely oversold territory, and now sits at -1.42 SD below the mean.
• Medium-Term Momentum continued to come on strong and move further away from the extremely oversold threshold.
• Size and Volatility both made strong moves following several weeks of middling performance and finished the week in or close to positive terrain.
• Value finally fell after longer-term upward pressure took it deep into extremely overbought territory.
• Earnings Yield finished at the bottom of the leaderboard for the second straight week.
• U.S. Total Risk rose by 0.20% this week.

Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• After three weeks of little movement, Volatility made a move upward to finish the week atop the global leaderboard.
• Size popped following its recent sluggish performance to finish the week at -1.46 SD below the mean.
• Exchange Rate Sensitivity continued its rocketlike trajectory and barely missed securing the top spot for a third straight week.
• Market Sensitivity kept up its impressive climb and moved closer to overbought terrain.
• Value finally fell back to earth moving lower to finish the week at 2.14 SD above the mean.
• Earnings Yield fell for the sixth consecutive week as it slid into negative terrain.
• Global Total Risk rose 0.04% this week.

Regards,
Alyx