Value is in the process of reasserting itself.
Value will continue to outperform growth.
Longer term we want to be exposed to value.
Those are three comments the talking heads on CNBC made in April and May on the value vs. growth debate. To be fair, on the surface it looked like value stocks had been on a tear since mid-February. From February 12 to May 12, the iShares S&P 500 Value ETF (IVE), which tracks S&P 500 value stocks, surged 9.7%. During the same time period, the iShares S&P 500 Growth ETF (IVW), which tracks S&P 500 growth stocks, was down 1.8%.
However, if you dive a little deeper into the numbers, you’ll see that it wasn’t a value rally but rather a “mean reversion rally,” which is when a rising tide lifts all boats. Here are a few interesting stats that I shared in last Friday’s Power Options Weekly Update from a recent Bespoke report based on their decile analysis since February 12:
- The top 30% of stocks in the S&P 500 with the lowest price-to-earnings ratio have risen 16.42%, 16.48% and 17.15%, respectively.
- The top 30% of stocks in the S&P 500 with the lowest price-to-sales have risen 19.37%, 16.98% and 15.00%, respectively.
- The top 50% of stocks in the S&P 500 with the highest dividend yield have risen 12.75%, 15.09%, 16.05%, 15.11% and 13.19%, respectively.
- The bottom 20% of stocks in the S&P 500 with the lowest share price are up 11.59% and 12.15%, respectively.
- The bottom 10% of stocks in the S&P 500 with the lowest market capitalization are up 10.63%.
Although this mean reversion can be interpreted as a value shift, the value stocks without strong forecasted sales and earnings are expected to stall out in the upcoming weeks. Now, with that said, a rising tide isn’t necessarily a bad thing, as it builds a base for the NASDAQ and growth stocks to relaunch.
And boy did they relaunch.
The growth stock comeback officially got underway in mid-May, and growth stocks have been gathering momentum ever since. Case in point: About two-thirds of the underlying stocks on my Power Options Portfolio have rallied since May 14. 16 have climbed in the double digits.
The reality is that my Power Options Portfolio is chock-full of fundamentally superior stocks, and while they were hurt during the NASDAQ selling, it was only a matter of time before their fundamentals dropkicked and drove them higher.
Let me give you three examples…
I recommended call options on DocuSign, Inc. (DOCU) on March 3, right as tech was falling off a cliff. The options were hit hard, plunging as low as 61%. However, they did an about-face after the company smashed analysts’ earnings and revenue estimates for its first quarter in fiscal year 2022, reported on June 3. Total revenue jumped 58% year-over-year to $469.1 million, and subscription revenue increased 61% year-over-year to $451.9 million. Estimates called for total revenue of $437.81 million.
First-quarter earnings surged 266.7% year-over-year to $0.44 per share, compared to $0.12 per share in the first quarter of fiscal year 2021. The consensus estimate called for earnings of $0.28 per share, so DocuSign topped estimates by 57.1%.
The stock soared more than 15% Friday morning, and more than 24% in three trading days, flipping my call trade from a 61% loss to about a 14% gain.
Veeva Systems, Inc.
I also recommended call options on Veeva Systems, Inc. (VEEV) on March 3. As with DOCU, the stock and my call trade quickly came under pressure. The options fell 20%, but the stock rebounded nicely on the heels of its earnings report on May 27, thanks to the company’s strong first-quarter results. Revenue rose 29% year-over-year to $433.6 million, with subscription services revenue accounting for $341.1 million.
First-quarter earnings jumped 39.6% year-over-year to $146.9 million, while earnings per share increased 37.9% year-over-year to $0.91. The consensus estimate called for earnings of $0.78 per share on $410.03 million in revenue, so Veeva Systems posted a 16.7% earnings surprise and a 5.7% revenue surprise.
The stock is up 11% since reporting its earning beat, and the VEEV call options are now up about 27% on the Power Options Portfolio.
My call trade for NVIDIA Corporation (NVDA) came on April 22. The stock fell as much as 9.4% over the next three weeks. As a result, the call options dropped nearly 40%. However, they rebounded with a vengeance following NVDA’s blowout first-quarter earnings results for fiscal year 2022, released on May 26.
Its fiscal first-quarter revenue surged 83.8% to $5.66 billion, compared to $3.08 billion in the same quarter a year ago. During the same period, the company’s operating earnings surged 103.3% to $2.31 billion, or $3.66 per share, compared to $1.12 billion, or $1.80 per share. Gaming revenue accounted for $2.76 billion, or a 106% year-over-year increase, and data center revenue accounted for $2.05 billion, or a 79% year-over-year rise.
The analyst community was expecting revenue of $5.41 billion and operating earnings of $3.28 per share, so the company posted a 4.6% revenue surprise and 11.6% earnings surprise.
The stock has since rallied about 12% on the news, reversing the NVDA calls from a nearly 40% loss to a more than 45% gain in seven trading days.
The bottom line: Good stocks bounce like “fresh tennis balls.” And when those good stocks bounce, so do my Power Options trades.
Now, to be clear, these trades weren’t made on a whim. The companies all have a strong history of growing their sales and earnings, as well as posting earnings surprises. The truth of the matter is I’m not interested in betting on randomness, on the unpredictability of very short-term market movements. That can get you into trouble with “meme stocks” like AMC Entertainment Holdings, Inc. (AMC) or GameStop Corp. (GME). Sure, the stocks can make massive moves to the upside, but they can also turn just as quickly. So, odds are high that you’ll be left holding the bag after the smart money flees the stock.
As you can see, sometimes it does take a little time for my trades to play out, which is why I focus solely on Long-term Equity Anticipation Securities (LEAPS). This way we have more time to ride out the short-term blips. The reward is worth the wait.
P.S. If you’re not an options expert, that’s perfectly okay! I am especially proud that my Power Options service is easy for brand-new options trades and pros alike, as all of my recommendations are very straightforward and easy to follow. I also offer a LEAPS Trading Primer and educational videos to help get you started.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
DocuSign, Inc. (DOCU), Veeva Systems, Inc. (VEEV), NVIDIA Corporation (NVDA)