What’s Driving High ROE In Value Stocks?

In their latest episode of the VALUE: After Hours Podcast, Travis, Taylor, and Carlisle discuss What’s Driving High ROE In Value Stocks?. Here’s an excerpt from the episode:

Tobias: Yeah. I don’t know the answer, either. My topic was that the Jeff Weiner whose Wisdom Tree has a great Twitter account, had a great tweet about the amount of return on equity in the value portfolios versus the return on equity for the growth portfolios and he said, “As far back as Wisdom Tree data goes, which is pre-2000, anyway.” But you’re looking at this 2000 types.

One of the things that Jake and I’ve talked about before on this podcast is, in early 2000, the return on equity of the value portfolios was better than the return on equity of the growth portfolios, which seems to suggest that the value portfolio should have been trading at a premium to the growth portfolios. But they obviously weren’t. They were trading at a discount. That was some of the conditions that created the run for value in the early 2000s.

And now, we’re looking at similar things. Just universe is the Russell 2000. He says, “Russell 2000 value now has a higher return on equity than Russell 2000 growth.” What’s the reason for that? Is it just energy and financials having a good run?

Tim: I would assume so. If you look at 2000. A lot of the stuff that was really good for value were like homebuilders, insurance companies. That’s when Berkshire had a huge run, and Fairfax had a huge run, Markel. I think that you do have a lot of smaller financials in that index that are still profitable, unlike a lot of the companies probably losing money. Then, of course, energy miners, the ones that are posting huge ROEs with the boom in commodities would be my guess.

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