Summary

  • The week ended August 28, 2020 saw the S&P rise 2.23%, and the index is now up 8.92% YTD. European and Chinese stock markets are within a few percent of their 52-week highs as well.
  • Domestic breadth continues to expand to include not only growth and momentum stocks. The best-performing factor last week was Leverage i.e., the most debt-laden companies, up 4.99% on the week, despite a marginal widening of credit spreads.
  • Even the Buyback Kings rallied. Down -33.65% YTD this group-the 50 S&P 500 companies most levered to share repurchases-rallied 1.40% on the week, led by the tech (WDC, DXC, NTAP, HPQ and MU) industrials (namely, airlines-ALK, DAL and UAL) and consumer discretionary Buyback Kings (PVH, KSS, NCLH and VFC). This is primarily because…
  • …The FlowPoint Reopening Index “broke out” from its recent trading range, rising 6.05% on the week. This index includes shares of 77 companies levered to a “reopening” of the economy, such as airlines, restaurants and retailers, many with large buybacks. 8 of these stocks rose 10% or more.
  • Our FlowPoint Work From Home Index of stocks levered to trends within the “closing” of the economy rose 2.44%. The dichotomy of Reopening vs. Stay at Home is a meaningful development; we increased our exposure to ISRG, DIS, SHAK and GM.

Leverage was the top-ranked factor in the U.S. (Russell 3000) last week, though has added nearly zero value YTD. YTD Factor leaders are Growth, Volatility, Sell Side Expected Return and Revenue Estimate Dispersion. Essentially, fast-growing, volatile stocks where the sellside is confused about the outlook.

Like Momentum, Leverage is a long-term losing factor – looking back a year, 7 years and 15 years, it’s been a detractor to equity performance.

While the Reopening Index is lagging the broader market YTD, the group is perking up. 19 members are now ranked “1” on our Trend1 model and we believe represent potential contrarian opportunities. Please refer to this earlier piece the next time Cassandra tells you “America will never recover from this”, “It’s never been this bad”, “We can’t make enough PPE or ventilators”, or “This time is different”.

Buyback Kings

The Buyback Kings – the 50 companies in the S&P 500 with the largest share repurchases – rose 1.40% on average last week and are now down -33.65% YTD on average. These stocks remain on the Avoid/Potential Short list not because they have large buybacks, but because the buybacks are symptoms of everything we don’t want exposure to – low organic growth, high debt and low returns. However, many are included in our Reopening Index such as the airlines, which as discussed are gaining momentum.

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