WHAT STOCKS ARE DRIVING THIS RALLY?
After a brief retreat, stocks have powered ahead in 2021. The S&P 500 is up 1.61% YTD, but more impressively, it is up 2.79% in the past 3 days. The real winners, however, are small-cap stocks. The Russell 2000 Index is up 7.76% in the past 3 days (table below). In this report, TPA examines the nature of this first-week rally of 2021 and tries to identify the nature of what is really rising.
One factor driving stocks is rising rates.
The U.S. 10-year Yield is 1.087% up from 0.919% at the end of 2020. That is an 18% rally in just 4 days. In the recent 1/4/21 and earlier 8/4/20 World Snapshots, TPA explained what to buy in rising rate environments. The big winner in the past 8 rising rate environments since 1995 has been small-cap stocks, and they are not disappointing so far this year (table at the bottom of this report).
Drilling down, TPA raises a red flag in all this euphoria.
The table below shows data for the Russell 3000 stocks. TPA ranked all Russell 3000 stocks by their 3-day performance and then broke them down into 5 percentiles; top 20% to bottom 20% by 3-day performance. The top 20% of stock's average 3-day performance was +16.95%; more than twice the average for all stocks.
The next column confirms TPA’s analysis that small-cap stocks have been the outperformers as rates have moved higher. The top 20% of the performance ranked stocks had an average market cap of $4.06 billion, while the bottom 20% had an average market cap of $34.4 billion.
Free Cashflow Per Share
Since many of the stocks have no earnings, PE’s are tough to compare. Instead, TPA measured Free Cashflow per share. Note that the best performing 20% of stocks in the past 3 days have almost ½ the Free Cashflow Per Share as the average stock in the Russell 3000.
Return on Equity
ROE is also telling. The top 20% of stocks by 3-day performance have a ROE of -18.32. This is not only alarming, it is also more than 3 times lower than the average stock in the Russell 3000.