Heartland Advisors

Too Much of a Good Thing?

On more occasions than I care to admit, I’ve suggested there is no size KitKat I could not eat in one sitting. It’s light, wafery crisp, and thin chocolate coating is custom made for indulgence. It could be the size of a dining room table; I’m crushing the whole thing. 
Of course, this is nonsense. A coffee table, perhaps? 

Importantly, the price I’m paying for said KitKat would play a role in my cravings but would not be as much of an appetite suppressant as my bursting belt buckle.
Today, many investors seem to hold this same view on large cap stocks. Massive, unrelenting inflows and all-consuming headlines have turned large caps, especially large-cap tech, into the delicious KitKats of the stock market. 
Is there such a thing as too much? How much Nvidia is too much?  The chip maker holds the keys to the AI future. How can you consume too much Microsoft? “It’s such an amazing business,” many investors declare.
Given the level of deliciousness, how can you ever have too much? Let’s put into perspective how much investors have already consumed. 
If you were to tally up the total market value of every stock in the Russell 1000® Growth Index as well as the Russell 2000® Value Index, you’d discover that the large growth segment of the market is bigger, on a relative basis, than it’s ever been. In fact, the total market value of all small value stocks is now less than 6% of the collective capitalization of large growth. A decade ago, that figure stood at approximately 10%. Nearly 20 years ago, it was roughly 12%.
Why is this important? History suggests there are limits to investors’ appetites for large-cap growth, and they have historically had enough of the asset class around this 6% threshold. 

Source: FactSet Research Systems, Inc., Yearly data 3/31/1985 to 3/31/2024. This chart represents the Russell 2000® Value Index as a Percentage of Russell 1000® Growth Index. All indices are unmanaged. It is not possible to invest in an index. Past Performance does not guarantee future results.

In fact, there have only been two times in history where the total capitalization for small value fell below 6% of large growth. The first was in March 2000, at the start of the end of the dotcom bubble, and the other was in March 2020, at the start of the recession triggered by the COVID-19 economic shutdowns. One year after March 2000, large growth stocks lost nearly 43% while small value shares surged more than 19%. Similarly, in the 12 months that followed March 2020, small value beat large growth, posting gains of 97%, versus nearly 63% for large growth. The remedy for the "indigestion" caused by engorging on large growth seemed to be a small dose of small value.  
If investors were to rebalance a mere 5%, or a "teaspoon full" of their large growth allocation, into small value, that could potentially increase the market capitalization of small value by more than 90%. This is just market cap value, not price action. Buying pressure from this rebalance could send price action parabolic. And 5% seems to be a reasonable target considering large growth stocks, based on the Russell 1000® Growth Index, have surged 114% over the past five years through April 30, while the Russell 2000® Value Index has gained less than 34%.
Investors can find plenty of data showing price may become a catalyst for change given the relative valuations between large growth and small value, but the belt buckle could be an even more telling sign.

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Heartland Advisors Value Investing Relationship Manager Michael Kops

Michael Kops

Vice President and Partner


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