It is not uncommon for different value metrics to produce different investment outcomes, so value indices and ETFs generally blend value metrics. The selected metrics and their weightings produce a particular impression of value investing performance. This selection feature differs from cap-weighted indices, where only one metric, cap weight, is considered. What has been happening in the consumer staples sector of the S&P500 has been extreme, highlighting what a value blend masks.
The larger panel on the left of the chart shows the return to two value strategies, Earnings/Price and Sales/Price. A long-short, monthly rebalanced portfolio of stocks in the consumer staples sector of the S&P00 is used to measure the performance of each strategy. Before April 2024, the cumulative return to these two strategies would occasionally diverge, but mean-reversion eventually did its job and brought their returns in line. However, for the past half-year, the divergence between the success of Earnings/Price and the losses for Sales/Price has ballooned.
The two smaller panels on the right of the chart reveal what is going on. For Earnings/Price, shown in the upper panel, expensive stocks have been losing since the end of March. Shorting them in the long-short portfolio worked very well (orange line). At the same time, the return to cheap stocks based on Earnings/Price has been rising, so buying them has been profitable (blue line).
For Sales/Price (lower panel), the return to cheap stocks has collapsed since the beginning of April, so buying them has produced a loss (blue line). At the same time, the expensive stocks based on Sales/Price have also lost a bit – yielding more losses when shorting them (orange line).
If mean reversion operates as it has in the past, then the extreme strategy divergence that has developed over the past six months in consumer staples could present an opportunity. Avoiding a value blend, which amounts to an active rather than a passive approach, reveals this opportunity.
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