It’s been well documented how “junk”-type stocks have outperformed higher-quality issues during the huge run-up since the March lows. But in his New York Times column, Mark Hulbert provides some interesting statistics that show just how wide and anomalous the gap has been — and what that means for investors.
Citing data from Ford Equity Research, Hulbert says that stocks in the bottom fifth of the 4,000 the group tracks in terms of “quality” (based on size, debt level, earnings history and industry stability) returned an average of 152% from the beginning of March to the end of November. Stocks in the highest quintile averaged a 66% gain. The disparity is the greatest over the first nine months of any bull market since 1970, the first year for which Ford has such ratings, Hulbert says.
What does this mean? Hulbert says that according to Jeremy Grantham, the gap is in large part a by-product of the government stimulus efforts, which have helped bolster weak companies and encourage risk-taking in the market. Grantham tells Hulbert that that has made high-quality stocks about as cheap as ever compared to stocks of lower-quality firms.
Hulbert says that if you go back before 1970, the best proxy to use for “quality” may be market cap. “Historically, as a group, the difference between the large- and small-cap sectors has proved to be roughly correlated with the disparity between high- and low-quality stocks,” he says.
Since the March lows, Ford Equity says the lowest quintile in the market based on market cap have beaten the largest quintile by 72 percentage points. “By contrast, in the first nine months of all bull markets since 1926, the average outperformance of the small-cap sector was just 21 percentage points, or less than one-third as much as the disparity over the last nine months, according to calculations by The Hulbert Financial Digest,” Hulbert writes. There’s only been one time that the gap has been greater than in the recent rally: the bull run that began in February 1933, when small caps outperformed large caps by 196 percentage points.
To Grantham, who has been on target about most of the crash and ensuing recovery, the bottom line is this: “It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term,” he said.