Series 7-D—The Fed tapers--will mid cap value hold up better then mid cap growth in Q2? (Part 3 of 6)
Strong Momentum in HOT
The below graph reflects the strong performance of Starwood Hotels and resorts, HOT, which was particularly strong until the 2008 crisis, and is once gain handsomely outperforming the Morningstar mid cap growth total return index. While just a bit below the S&P 400 index over the years, Starwood Hotels has been an excellent growth stock. This article considers Starwood Hotels’ prospects on a forward looking basis in relation to mid cap growth shares in general.
Morningstar mid cap growth top ten
Morningstar mid cap growth index holds Starwood Hotels & Resorts as #6 in its holdings, at 1.08% of the portfolio. With a market cap of $15.09 billion, forward price earnings ratio 2015 of 24.21, price to book ratio of 4.47, a profit margin of 18.15%, and a five year average dividend yield of 1.20%, Starwood is clearly a much more richly valued growth company compared to Alcoa. With a17.37% return on equity versus Alcoa’s -14.95% return on equity for 2013, it is easy to see why Starwood has been such a strong performing stock, and why Alcoa has been a laggard. While past performance is one issue, it is possible that value laggards such as Alcoa may finally exhibit some revaluation as future expectations for improved earnings strengthen.
Rate spike near term, weak consumption longer term?
While Fed taper-related rate spikes in the longer end of the curve could take some wind out of the sails of high momentum stocks near term. It should also be remembered that consumption data in the US is becoming somewhat tepid. Not only has consumption as a percentage of GDP been down from 70% of GDP since 2012, the press if finally focusing on the effect that the baby boomer exodus from the labor market could be having on declining consumption as a percent of GDP.
To see how mid cap value versus mid cap growth shares have been performing on a year over year basis since 1998, please see the next article.
Equity Outlook: constructive macro view
Despite problems in the Ukraine and China, and despite the modest consumption data in the USA, US labor markets appear to be well into recovery—with the exception of the long term unemployed. From this perspective, it would appear that the US is probably the most attractive major investment market at the moment. While the fixed investment environment of the US is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find their way into a new wave of profitable investment opportunities, and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption and investment in the works, the continued out performance of growth stocks over value stocks could remain the prevailing trend, favoring iShares Russell 1000 Growth Index (IWF), and growth oriented companies such as Google, GOOG, or Apple, AAPL.
Equity Outlook: cautious macro view
Given the China and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index, IWM, State Street Global Advisors S&P 500 SPDR and Dow Jones SPDRs—SPY & DIA, and iShares S&P 500, IVV. Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index, IWD, such as Wallmart, WMT.
Browse this series on Market Realist:
- Part 1 - Part 1: Mid Cap Value, the quiet outperformer…Alcoa versus Starwood Hotels
- Part 2 - Part 2–Will rising rates support mid cap value Alcoa over mid cap growth Starwood Hotels?
- Part 4 - Part 4: Mid Caps—why value rallies and growth weakens post Fed taper announcement
- Starwood Hotels