Factor Forensics Shows Five-Dollar Stocks Thrive in FANG Fallout

(Bloomberg) -- Here's something you may have missed in the din of Monday's FANG selloff. While tech megacaps and other high-flyers stumbled, companies that trade down near the penny stock threshold had a banner day.

Strange, but true. 

An investing strategy that owned stocks with the lowest share prices -- not valuations or market cap, but price tags -- and sold those with the highest returned 0.9 percent Monday. It's up 3.5 percent this month, triple the S&P 500, according to data compiled by Quantz Capital Management LLC.

The study is an example of how quantitative tools for slicing and dicing returns sometimes cast doubt on the salience of market narratives that rely on major indexes. While Monday's equity histrionics raised alarm bells among bullish investors and pundits focused on the 1.1 percent drop in the Nasdaq 100, analysis such as that done by Quantz CEO Milind Sharma shows there's usually more to the story.

“You're seeing a factor rotation beneath the surface and the moves we had Monday were symptomatic of risk-on,” he said in a phone interview. “It actually was a lot of junk rallying within the factors that did move. My take on that is that greed still trumps fear.”

Signs of cheap-stock adulation can be seen by separating shares in the Russell 3000 Index into quintiles based on price tags. The roughly 600 stocks in the top group have a minimum share price of $67 and are up an average 2.3 percent this month. That compares with 4.3 percent for those with the lowest rank -- companies trading below $13.55 and as low as 60 cents.

Year-to-date, the story gets flipped. Expensive companies are up 21 percent, trouncing the 0.7 percent loss posted by the cheapest group of shares.

The observation might be a clue to the rotations that have characterized the equity market this summer. Indeed, one explanation of the FANG block's recent weakness was that it reflected an allocation into value stocks. While cheap isn't synonymous with low-priced in the stock market, the two groups logically overlap.

“If there was fear we'd see an indiscriminate seller,” Sharma said. “People are just taking profits in one place and buying someone else. If there was fear you'd see the junk factors down substantially and quality factors up.”

To contact the reporter on this story: Oliver Renick in New York at orenick2@bloomberg.net.

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net.