Covid-19 Could Change Your Concept of Growth and Value Stocks The Covid-19 pandemic has the potential to alter the dynamics of value and growth investing because of the sweeping changes it brings about.
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Some expert opinions doing the rounds deal with the idea that if there’s anything the pandemic has done, it is turning the value investing and growth investing factors topsy-turvy. Marketwatch reports Kathleen Houssels and Stephen Dean introducing this idea in an article, on the basis of computational models. Houssels believes conventional investing factors have become redundant. That could be the case till markets get back to normalcy. Until then, following conventional factors could be walking down a blind alley, she says.
Berkshire Hathaway’s Example Houssels cites the example of Berkshire Hathaway ($BRK.A, $BRK.B) to prove how the pandemic has managed to create distortions. The first quarter saw Berkshire Hathaway report an operating profit of $4 billion. However, in the downdraft period from February to March the company reported loss of almost $50 billion. The major factors behind this were unrealized losses its stock holdings incurred in this period. But these figures don’t really give the true picture regarding howBerkshire Hathaway is performing, according to Buffett himself. Houssels believes this, and stresses that this is an indication of how important it is to get deeper into the standard valuation ratios to get the true picture behind the raw data. From Value to Growth and Vice Versa Houssels further puts forward the examples of Disney ($DIS) and Netflix ($NFLX). Many consider Disney to be a value stock since it has a valuation that is relatively low and it is a major stock. That makes it a value stock. Before the Covid-19 pandemic, the company’s forward P/E ratio was somewhere around 16. That was even lower than the S&P 500. But in 12 months, Houssels believes Disney’s picture could totally change Disney’s forward-looking P/E could well be an astronomic 110!
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Houssels demonstrates this through a chart:
(Source: https://www.marketwatch.com/story/everything-you-know-about-growth-and-valuestocks-is-about-to-flip-2020-05-07?mod=home-page)
As the chart shows, Netflix ($NFLX) could travel the other way around too. Its forward P/E ratio was 91 before the pandemic, making it a growth stock. But 12 months from now, the company’s P/E ratio could put it a great deal lower than Disney. That could transform it from a growth stock to a value stock. Moreover, it could also have predictable earnings. Though this is just a prediction raised by a few experts, you can keep this aspect in mind while trading stocks online.
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