SCHD: Prepare For A Pivot To Value

seekingalpha05-07

PM Images Introduction Growth stocks continue rallying and it makes me think that the further this rally goes, the closer the market is to a correction in growth stocks. I think that a lot depends on ...

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I think that a lot depends on ...</p>\n\n<a href=\"https://seekingalpha.com/article/4690011-schd-prepare-for-a-pivot-to-value\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0097036916.USD","symbol_name":"贝莱德美国增长A2 USD","start_time":0,"source_url":"https://seekingalpha.com/article/4690011-schd-prepare-for-a-pivot-to-value","article_id":"2433226558","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1445810174/image_1445810174.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2433226558","pubTimestamp":1715068254,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"PM Images Introduction Growth stocks continue rallying and it makes me think that the further this rally goes, the closer the market is to a correction in growth stocks. 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I think that a lot depends on Nvidia's (NVDA) earnings, which will be released closer to the end of May. Predicting stock price movements after the earnings appears to be a fifty-fifty game, in my opinion. Therefore, for my short-term portion of the portfolio, I currently look at safe havens and the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is a high-quality and low-volatility name. SCHD is one of the largest dividend ETFs with solid diversification and apart from the big COVID-19 sell-off, its price movements were predictable, and pullbacks were shallow and short in timing. That said, SCHD appears to be a perfect choice for investors as a safe haven amid intensifying uncertainty in growth stocks. Fundamental analysis SCHD is one of the largest dividend ETFs in the U.S. stock market. There are only two larger competitors from Vanguard: Dividend Appreciation Fund Index Fund (VIG) and High Dividend Yield Index Fund (VYM). All three have the same 0.06% expense ratio and SCHD's $55 billion in assets under management ('AUM') is almost two times lower compared to VIG and around 23% lower than VYM. However, despite being smaller in terms of AUM, SCHD is notably a more popular trade with $264 million in average daily dollar volume. SA Liquidity is an important factor, but not decisive for me because I am not trading stocks worth millions of dollars. What I am looking for in the dividend ETF is a strong dividend yield with robust growth track record. From this perspective, SCHD offers a perfect combination of higher yield and strong growth history. Both rivals do not offer such an attractive blend of both criteria. SA There are two more reasons why I do not consider adding VIG and VYM to my portfolio. VIG has a high concentration of Technology in its holdings with 22.3% and high exposure to this sector is not something what I am looking for as a safe haven. For example, SCHD offers much less exposure to Technology and its allocation is more diversified across defensive sectors. And I do not consider VYM because it offers lower than SCHD dividend yield and dividend growth despite being called \"High Dividend Yield Index Fund\". Once I have described why SCHD is a top dividend ETF choice for me, I now want to explain my bullish case for value stocks. SA The sentiment around growth stocks appears to be cooling down, based on the market's reaction to Q1 earnings. For example, one of the top performing mega caps in 2023, Meta Platforms (META) slipped by 16% after Q1 earnings release despite delivering positive revenue and EPS surprise. Another example is Advanced Micro Devices (AMD), the company considered to be one of the biggest beneficiaries of the AI revolution. Despite delivering strong Q1 earnings and robust guidance, the stock also dropped notably after releasing the report. And these are not just two cases. According to FactSet, during this earnings season the market is rewarding positive surprises less than average. According to the same source, the percentage of companies beating revenue estimates and revenue surprise percentage are below 5-year averages. Guidance is crucial for all stocks, but it is an extremely sensitive topic for growth stocks because investors are giving up current dividends for future cash flows. And FactSet's research suggests that Technology was the second worst sector among all eleven in terms of guidance updates. According to the below bar chart, 63% of S&P 500 Technology companies which already reported Q1 earnings, provided negative earnings. On the other end of this chart are defensive sectors and most of them have more positive guidance than negative.   FactSet Discounted cash flow ('DCF') models, which are used to assess valuation of growth stocks, are dependent on just a few variables. Revenue and earnings are the most crucial and I have just discussed how these metrics are cooling down. Now I want to explain why I think that interest rates, another crucial variable in any DCF model, are likely to remain unfavorable for growth stocks. Higher interest rates mean that future free cash flows of growth companies are multiplied by lower discount factors, which deteriorate the net present value of future cash flows. Since discount rates for stocks largely depend on risk-free rates, or the Federal Funds rates, it is extremely important to analyze potential movements in monetary policy. To increase the quality of forecast about Federal Funds rates, we have to understand the logic behind the Fed's interest rates decisions. federalreserve.gov Fed is a very transparent organization and it clearly outlines goals of its activities. There are just two important goals of the Fed's 'Dual Mandate': maximum employment and low inflation, that's it. Therefore, when trying to predict the Fed's next steps regarding interest rates, we have to understand the current condition in inflation and unemployment. And both these crucial factors suggest that interest rates are stay higher for longer. The inflation has accelerated in March and there is a solid reason why it might stay above the Fed's inflation target of 2% for longer. Hydrocarbon prices affect inflation massively because the economy will not move without fuel. Crude oil prices have a domino effect on pricing in almost all other industries because all goods (and almost all services) have to be transported somehow to the end customer. Since oil prices are still running hot and the geopolitical uncertainty in the Middle East and Russia-Ukraine war does not add any optimism, I expect the crude oil factor to continue posing upward pressure to the U.S. inflation. Maximum employment is the second leg of the Fed's 'Dual Mandate'. From this perspective the Fed also has no reasons to rush into cutting rates. The unemployment rate is currently at 3.9%, which is far below the multidecade average line of 5.7%. Looking at the below chart, unemployment rarely was lower than today over the last 70 years. That said, with inflation still experiencing upward pressure and unemployment rates close to all-time lows, it is difficult to expect the Fed to pivot soon. Data by YCharts To summarize, having weakening sentiment around growth stocks caused by weaker than average revenue surprises and more negative guidance issuances than positive from Tech companies, together with the Fed likely to keep rates higher in 2024 appears to be quite a bearish blend of catalysts for growth stocks. In this situation I expect investors to reallocate their portfolios to increase weight of value names and SCHD is apparently one of the highest-quality dividend ETFs providing a strong mix of decent yield and strong dividend growth. Mitigating factors It is highly likely that the rally continuation in growth stocks significantly depends on Nvidia's Q1 FY 2025 earnings report, scheduled for May 22. In case the company delivers a new guidance boost, this might fuel a new rally chapter not only for this stock but for the whole part of the stock market exposed to the AI revolution. This case might postpone rotation from growth to value to further quarters. However, Nvidia's rapid leaps in revenue and EPS certainly will not last forever and the deceleration of its financial metrics growth is a matter of few quarters because comparative revenue and EPS figures are substantial starting from Q3. SA I also have to emphasize that preferring SCHD over VIG to hold for several years might not be a good idea. Because Technology is the number one holding in VIG's portfolio, this ETF performs better over the long term, and it outperforms SCHD on 5- and 10-year timeframes. Readers should understand that my key idea is that SCHD is much better in the current reality when the market has extremely hot expectations around growth stocks in general and Technology sector in particular. SA Conclusion  The rotation from growth to value is likely approaching as the sentiment around the Technology sector is cooling down, which we see from after-earnings share price movements of prominent Tech players. The fact that Technology companies were among the worst in terms of negative guidance also should be a red flag for growth investors. Furthermore, the more macroeconomic data rolls out, the less confidence I have that the Fed will start cutting rates in 2024. In these circumstances, I prefer to look at high-quality dividend ETFs because they offer strong diversification and SCHD is my top choice due to several reasons. To conclude, I think that SCHD is a 'Strong Buy' in current reality.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2433226558"}