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In Saturday morning’s blog, I said that the 15 basis point rise in the 10 year treasury yield was the most important story from last week. While it didn’t really impact stocks last week, it did in a big way Monday.
This can be seen in the vastly different performance yesterday of value vs growth stocks. The iShares S&P 500 Value ETF (IVE) was +0.66% while the corresponding iShares S&P 500 Growth ETF (IVW) was -1.94%. These are big , liquid ETFs with assets of about $20 billion and $32 billion, respectively. You can see their holdings by clicking on the links and then clicking “Holdings”. The value ETF has stocks like Berkshire Hathaway Class B (BRKB), JP Morgan (JPM), Intel (INTC), AT&T (T) and Cisco (CSCO) in its Top 10 holdings while the growth ETF has stocks similar to the QQQ including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google (GOOG GOOGL), Facebook (FB), Tesla (TSLA), Nvidia (NVDA).
The reason they performed so differently yesterday is that growth stocks value comes primarily from future earnings. They’re reinvesting profits and growing now to earn more in the future. However, that makes these stocks more interest rate sensitive because those future earnings have to be discounted by a rate, frequently the “risk-free” rate of the 10 Year Treasury. Value stocks, on the other hand, are more mature companies with more of their earnings in the present and near future. Therefore, a rise in rates doesn’t hurt their present value to nearly the same extent as growth stocks.
This is also why the S&P was -0.77% while the NASDAQ was -2.46% and even more heavily future oriented growth stocks and ETFs performed even worse with the Semiconductor ETF (SMH) -3.66%, Cathie Wood’s Ark Innovation ETF (AARK) -5.79% and TSLA -8.55%. In fact, real technical damage was done to the NASDAQ and AARK which closed below their 21 DMAs and TSLA which closed below the 50 DEMA that Scott Redler likes to use in the chart below as well as its 50 DSMA. The iShares S&P 500 Value ETF (IVE), on the other hand, closed at an All Time High.
The second biggest story of the day was the rip in precious metals and their mining stocks while Bitcoin sold off. While Bitcoin continues to selloff and is currently around $50k, the Gold Miners ETF (GDX) was +4.49% Monday, the Junior Gold Miners ETF (GDXJ) +5.83%, the Silver Miners ETF (SIL) +6.49% and the Junior Silver Miners ETF (SILJ) +8.22%. Since Top Gun is long these precious metals ETFs in a big way along with a decent portfolio of value stocks suffice it to say we had a good day.
Lastly, I want to discuss Palo Alto Networks (PANW, Market Cap $38 billion) earnings reported yesterday afternoon. PANW reported Revenue +25%, Adjusted Diluted EPS +30% and guided FY21 Adjusted Diluted EPS to $5.80-$5.90. It was a solid quarter but the stock closed yesterday at $384.35 for a current year P/E multiple of 66x. The stock closed the after hours down a little less than 2%. Keep your eye on it Tuesday as it’s exactly the kind of stock that got punished Monday.