Which stocks fared better during the current sell off?

23 October 2018

The severity of the October sell-off in markets has led us to do a post-mortem before the victim has been declared dead. We do not know if the sell-off is done yet but we are interested in looking at how different buckets of stocks have been holding up. We are always told that value (i.e. cheap stocks) tend to do better in times of strife. We will try to assess the value of this proverb after a 9% decline in the MSCI World.

We take a very simple approach to test this: We look at the price performance of the 200 largest stocks in the MSCI world between the 3rd and 26th of October. We also look at the stocks’ forward price to earnings multiples - the PE is a guide to judge how ‘cheap’ or ‘expensive’ these stocks are. We create four buckets of stocks according to the PE ratios relative to the market i.e. 1) Cheap 2) Fair 3) High 4) Expensive. The point of this is to judge whether stocks in bucket 1 & 2 performed better than the market did.
 
113 out of 200 companies actually did better than the market (MSCI World) so that tells us small/mid cap companies were disproportionately sold off. The rest of our results are summarised in the table:

 

% outperform

% underperform

cheap

73%

27%

fair

60%

40%

high

56%

44%

expensive

30%

70%


We can see that cheap stocks did do the best out of the buckets we created thus highlighting the importance of valuation. The next three buckets once again highlight the importance of valuation as relatively cheaper stocks do better in the downturns which inevitably do arrive in markets. We take short term comfort in these results as we are positioned in the ‘fair’ and ‘high’ buckets. Our stocks were able to participate in the long bull market we have experienced but they were also did better than the market during the latest shake-out thus preserving capital. If we create equally weighted portfolios of all the stocks in their respective buckets, the ‘high’ PE portfolio actually outperformed all the others:

cheap portfolio

-8.5%

fair

-7.8%

high

-7.4%

expensive

-12.5%

MSCI World

-9.18%

 
We believe quality businesses do better in up and down markets as long as valuations are reasonable. These companies are the Holy Grail for our approach.

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