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MARKET
INSIGHT
Insight and analysis from Redmayne Bentley
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ISSUE 6 - DECEMBER 2020
Growth vs Value - The Big Debate
READ THE ARTICLE
ALSO IN THIS ISSUE
Jet2 Ready for A comeback for
Lift Off cyclical sectors?
READ THE ARTICLE
READ THE ARTICLEMARKET INSIGHT
BARGAIN HUNTING?
JAMES ROWBURY | INVESTMENT RESEARCH COORDINATOR
IN THIS ISSUE
STOCK FOCUS At last, we can see the light equipment used to make toys and
Jet2 Ready for Lift Off at the end of the tunnel. Last the furniture in its office, while
month’s vaccine news offered additional value would allow for
READ THE ARTICLE
fresh hope to businesses key financial measurables: revenue,
struggling to battle rising costs profit margins and growth
and a non-existent customer prospects.
INSIGHT base. It has also seen a change
Growth vs Value: The in investor sentiment. Yet, in today’s world it is more
Great Debate nuanced to measure the intangible
On the day Pfizer announced assets that are becoming so
READ THE ARTICLE a successful outcome in its important to a company’s success.
Coronavirus vaccine trial, stock How do you value Facebook’s
markets surged in places that data, Disney’s brand power, or
TOPIC OF THE MONTH had previously been unloved. Amazon’s logistics technology?
A Comeback for Cyclical So-called value stocks – those You certainly can’t crunch these
Sectors? with a low share price relative to numbers in the annual report.
their annual earnings or value of Critics of these asset-light growth
READ THE ARTICLE assets – saw their shares rise, in a stocks would, not unreasonably,
bet that the traditional economy argue that investors are placing too
(energy, consumer goods, leisure) much value on that which we can’t
will bounce back to its previous see, leading to share prices being
stature (See: Jet2 Ready for Lift at eye-watering multiples to their
Off). That said, the growth stories present earnings.
OPENING HOURS
(technology and healthcare) that
Monday–Friday, 08:00–17:00
have been the winners of the In previous issues of this
GIVE FEEDBACK pandemic saw just a meagre rise publication, we have pondered the
publications@redmayne.co.uk on the day, lending very little of idea of a market bubble forming.
their performance to the prevailing The Amazons of the world surely
HEAD OFFICE
economic backdrop. look expensive on paper, but
0113 243 6941
investors have remained convinced
FOR MORE DETAILS This ‘rotation’ of capital has been they will continue this level of
redmayne.co.uk long awaited by those who take growth for the next decade and
comfort in the traditional valuation beyond. With attention turning to
models. These financial rules are the return of the ‘old economy’, we
entrenched by decades of stock ask: does the sentiment change in
market investment analysis, but we markets have legs, or is this just a
RISK WARNING think investors need to recognise blip in the unstoppable juggernaut
Investments and income arising from the changes going on in the that is growth stocks? Do market
them can fall as well as rise in value. markets (See: Growth vs Value; cycles still exist? (See A comeback
Past performance and forecasts are not The Great Debate). Despite for cyclical sectors?).
reliable indicators of future results and being a logical method, valuation
performance. There is an extra risk of is no longer just a measure of the
losing money when shares are bought sum of the parts, AKA tangible
in some smaller companies. Redmayne assets. Traditional companies,
Bentley has taken steps to ensure the for example a toy manufacturer,
accuracy of the information provided. would be valued on the land
value of its factories, the factory
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CELEBRATING 145 YEARS | ESTABLISHED1875MARKET INSIGHT
STOCK FOCUS
JET2 READY FOR LIFT OFF
The Travel and Leisure sector is very much a race to recovery. On 11th November, the company announced its
the bottom: who can charge the least per seat? Who can tenth operating location to be Bristol Airport – operational
build hotels most quickly in the newest, most in-demand from 1st April 2021, this will enhance its customer base in
locations? Who provides the best value for money? the South West of England. The company is displaying a
Overall, it is a fiercely competitive industry with high reasonable liquidity position; from the first half of 2020 to
fixed costs which has caused the sector to struggle during November 15th, the company’s cash was declining by around
the Coronavirus pandemic. £50m per month. Therefore, assuming earnings do not add
to the cash position, this provides an estimated cash liquidity
Limitations on international travel and consumers being less period of 12 months. Jet2 is staying ahead of the competition
willing to take the risk of travelling both hurt the ailing sector. by not following the crowd. Both Ryanair and easyJet have
While the airline industry has taken its fair share of punches introduced extra costs for travellers wishing to take a second
from the pandemic, it is important to keep in mind its struggles item of luggage on-board, a decision that will likely anger
before the pandemic even began - Coronavirus is only hurting passengers, if not surprise them. Jet2, on the other hand, will
them further. keep this free of charge. Some will argue that from a business
point of view this does not make sense, especially given the
The introduction of vaccines, the lifting of national lockdowns lack of revenue during the pandemic. However, given that low-
and more lenient tiered systems are expected to cause a cost airlines are known for their cheeky additional costs, this is
reversal in this trend as pent-up demand causes a surge in likely to be welcomed by many, helping Jet2 secure as much of
bookings. Of the companies that may benefit from this is Jet2, the post-pandemic rush as possible.
the British airline company known for its cheap fares. Shares
in Jet2 are up 366% since their March low of £305.80 per With people locked into their homes for months on end, and
share, an astonishing feat, outperforming even a significant travel restrictions reducing the reasons for people to take
portion of technology stocks over the same period. Recently, holidays away from work, the pent-up demand is expected
the company reported an operating loss of £111.2m in the first to be immensely high. The savings from a reduction in
half of 2020 which is indicative of the fall in demand for flights commuting costs may leave some with a nice pot of money,
and holidays. The firm, however, is still displaying a strong with which international travel may be the first port of call.
financial position with cash of c£632m, which puts it in a good People may wish to travel to multiple destinations while
position to capitalise on the inevitable resurgence in air travel. maxing out their annual leave from work and will look towards
budget airlines such as Jet2 to maximise their value for
On 2nd December, it was announced that the UK was the first money.
country globally to approve the Pfizer and BioNTech vaccine
for widespread rollout. Subsequently, the UK purchased 40 Please note that this communication is for information only and
million doses of the vaccine, which displays a 95% efficacy does not constitute a recommendation to buy or sell the shares of the
following two doses. Jet2 is adopting growth strategies which investments mentioned.
will position it strongly for the expected post-Coronavirus
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INSIGHT
GROWTH VS VALUE
– THE GREAT DEBATE
The gap in performance between and agile, often in the ‘growth’ winning individual races, it is about
growth and value over the past category, continuing to flourish winning the overall event; endurance,
ten years has been stark. Growth despite the severe headwinds. therefore, is key.
stocks have far outperformed their
value counterparts, and, in recent This is not to say that value investors While growth investing has long been
years, the gap has only widened. have always lost out - there have been a strategy for many investors, it started
The Coronavirus pandemic has certain timeframes within the past ten to gain significant traction after the
caused a significant rift between years where the style has had its day, 2008/09 financial crisis, when new age
the two strategies, with stocks in but a view that perhaps best sums up technology companies started to show
sectors most prone to being labelled the debate, at least in the long term, explosive growth and, unlike during the
‘value’ (travel & leisure and airlines) comes from legendary UK-based quality dot-com bubble, crucial profitability.
remaining slumped back, far away growth investor Terry Smith. Smith has, This rise in the popularity of growth
from their all-time highs, while those on many occasions, likened investing investing, coinciding with the growth
companies who remain innovative to the Tour de France - it is not about of tech companies, meant that the
S&P 500 VALUE VS GROWTH
400
S&P 500 Growth Index S&P 500 Value Index
350
300
250
200
150
100
50
0
31/12/10 31/12/11 31/12/12 31/12/13 31/12/14 31/12/15 31/12/16 31/12/17 31/12/18 31/12/19 30/09/20
Source: Redmayne Bentley
Figure 1 – S&P 500 Growth index vs S&P 500 Value Index over a 10yr period
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CELEBRATING 145 YEARS | ESTABLISHED1875MARKET INSIGHT
aspects that investors will want to keep
in mind. Firstly, while the vaccine news
is positive, both from a general health,
economic and business point of view,
mass vaccinations will likely take some
time. While preliminary comments from
many governments worldwide seem
to suggest that a vaccine will be rolled
out by the end of this year, this is only
likely to include those at particular risk
of death from the virus, which generally
encompasses those in the over 75 age
category. While this will be an important
step, those over the age of 75 are unlikely
to kick start the economic recovery
given their reduced level of consumer
spending when compared to those in
the 20-65 age category. This will mean
that many businesses will likely have to
wait until late 2021 until demand fully
returns, however, with many stocks at
information technology sector started RECENT TRENDS all-time highs, the gap between business
to become increasingly important to Despite the gap in performance performance and investor expectation
the stock market as a whole. The sector continuing to widen from the March continues to widen and prove costly in
started to increase its weighting within market lows, recent trends would seem the short-term.
important global indexes such as the to suggest that value is starting to
S&P 500 and the MSCI World, with make something of a comeback. The “...many businesses will likely
IT now by far the largest sector in both last two weeks have seen a (at present)
have to wait until late 2021
indexes, standing at 27.6% and 21.63%, short-term rotation into cyclical sectors
respectively. and by association, value, helping the until demand fully returns,
industrials-heavy Dow Jones Index however, with many stocks at
For many new entrants into the investor reach an all-time high of 30,000. This all-time highs, the gap between
community, however, value investing is of course due to the recent vaccine business performance and
seems the logical choice. The eternal breakthroughs from three separate investor expectation continues
phrase ‘buy low, sell high’ makes sense firms, which have spurred hopes of a
to widen and prove costly in
on paper – purchase an asset below its full economic recovery, sending those
intrinsic value and sell when it reaches stocks that have been most affected by the short-term...”
or exceeds that value. This is ‘Value the COVID-19 pandemic higher and
Investing 101’ but it fails to address the those companies that have benefited Secondly, many of the sectors in which
issue of why the price of the asset is so most from the outbreak, such as Zoom, you tend to find value stocks are facing
low. In many cases, assets are priced lower, as changing circumstances force significant structural headwinds going
below their intrinsic value for a reason; investors to re-evaluate which sectors forward. The energy sector, an area that
in essence, it’s not cheap by chance, offer the best short/medium term upside has suffered greatly due to the significant
it’s cheap because it deserves to be potential. reduction in oil prices, is facing a
and investors believe that the value of fundamental shift away from traditional
the assets may fall in the future. The THE GREAT VALUE ROTATION? sources such as oil and gas and towards
strategy, despite maintaining a cult-like This then poses the question of whether renewable sources such as solar and
following to this day, has slowly begun to value will continue to underperform wind. The financial services sector, while
fall out of favour over the past ten years, its growth counterparts or whether the not facing quite the same structural
with investors attracted to the far higher recent uplift is indicative of a longer- change as the energy sector, is also
returns of growth stocks. This has, in term style rotation? With the recent battling with an increased regulatory
part, come down to a more favourable vaccine news proving a much-needed framework, especially in Europe, which
macroeconomic environment for the short-term uplift to value stocks, it is effectively helps to limit their upside
typical growth sectors, with low interest likely that we may continue to see a short potential. Such headwinds will likely,
rates providing cheap debt to further and perhaps even medium-term boost in effect, push investors towards assets
their expansion opportunities and fewer to those cyclical sectors as economies better positioned for the future and those
regulatory hurdles providing a more start to open up thanks to immunised facing structural tailwinds with regards
favourable business environment than populations. to the products they sell and or markets
traditional value sectors, reducing costs they tap into, in effect, growth stocks.
and decreasing barriers to entry. However, it is worth mentioning two key
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CELEBRATING 145 YEARS | ESTABLISHED1875MARKET INSIGHT
TOPIC OF THE
MONTH
A COMEBACK FOR CYCLICAL SECTORS?
REAL ESTATE CONSUMER
CYCLICALS
CYCLICAL
STOCKS
CONSTRUCTION FINANCIAL
SERVICES
BASIC
MATERIALS
Cyclical stocks have been such as technology and healthcare, recovery in 2021 continues to grow,
predominantly depressed this year have performed significantly better. energy, real estate and industrials are
amid the Coronavirus crisis, with starting to look more attractive based
profits taking a large hit as travel and However, following promising on earnings expectations. According to
face-to-face meetings came to a near Coronavirus vaccine news, those sectors Credit Suisse, the group is now expected
halt. Travel and leisure, real estate, more sensitive to economic cycles, have to deliver a rise in profit growth next
energy, and industrials traded lower jumped as investors begin to shift their year, with projections that cyclical
in 2020, while sectors that are less money away from high-flying tech sectors could report more than 65%
dependent on economic conditions, stocks. As optimism over an economic earnings growth in 2021.
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The performance of markets in both sustainable and resilient in the industry, pushing it into hibernation.
recent days has focused on the so- long-term. Worldwide lockdowns Since March, the focus for the sector
called ‘value rotation’, with cyclical dramatically reduced the demand for has been to survive rather than to thrive,
sectors outperforming defensive ones. oil and gas but provided a significant forcing many companies to reassess
Insurance, energy, and banks have boost for renewables. Following a sharp and reshape their business models in
recently been the best performers drop in fuel prices, renewable energy order to cope and recover during such
globally, up 21.1%, 16% and 16.7% companies became more competitive challenging times. Analysts, however,
respectively. Firms in the pandemic-hit with ever-falling renewables prices and are becoming increasingly bullish on
leisure sector such as British Airways fossil fuel companies now beginning the sector, pinning hopes on a vaccine-
owner International Consolidates to turn towards wind and solar energy fuelled recovery that will benefit the
Airlines Group and Cineworld have sources. Furthermore, traditional forms industry later in 2021 and into 2022.
seen their valuation surge by 50% or of energy are likely to encounter further Although travel is unlikely to return to
more over the last couple of weeks with scrutiny following the election of Joe normal levels until the vaccine is widely
companies such as Whitbread, TUI and Biden, who placed climate change at available, air travel and, subsequently,
Carnival also producing strong gains, up the forefront of his campaign and has the overall leisure sector, will pick up
more than 30%. now encouraged five of the UK’s biggest significantly, with travel potentially
energy companies to lobby Boris Johnson seeing a 50% recovery by the second
Energy is usually one of the industries to match his clean energy goals. Given quarter of 2021. As progress towards
which benefits from a shift in sentiment, that oil and gas companies are facing Coronavirus vaccines is helping investors
however, since the Coronavirus tougher headwinds from regulations, and look past the current frightening
pandemic, the energy industry has from a shift in political capital invested resurgence of infections, cyclical value is
started to undergo a structural change to push forward green energy, a cyclical very much likely to return to the beaten-
as many countries across the world value into the sector, may be hard to down travel and leisure sector.
use the pandemic as an opportunity envisage.
to enact more green policies and shift Please note that investments and income
towards renewables. Initially, when On the other hand, the Coronavirus arising from them can fall as well as
the pandemic broke, there were fears crisis is the most significant challenge rise in value. This communication is for
that the inevitable economic recession that the travel and leisure sector information only and does not constitute a
would hinder efforts to move towards a has faced in recent years, with recommendation to buy or sell the shares of
carbon neutral future, however, the crisis markets essentially unable to operate. the investments mentioned.
has only underlined the importance Government restrictions across the
of ensuring that the economy remains globe have had a seismic effect on the
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