Sabrient - Monthly Analysis of the Market Based on Sabrient Filters

Value Rings in New Year as 2006 Winner

The year 2006 ended pretty much as it began: on a positive note with heavy emphasis toward value stocks

For the month of December, all indexes were up except for Nasdaq, which was off 0.7%. Somewhat surprisingly, the leader for the month was Dow Jones, up nearly 2%. Most other major indexes gained approximately 1%.

In a year-end review, the value style emerged as the big winner. Not only did it lead growth in all cap ranges by a wide margin for the month of December, it also led in all cap ranges for the entire year. It is interesting to note that among the large-cap Russell 1000 indexes, value outperformed growth for the entire year by an astounding 11.4%. And lest you think this is just a large-cap phenomenon, value also led growth in the mid-caps by approximately 8% and in the small-caps by nearly 9%.

When considering market capitalization alone, success was spread fairly evenly. Small-caps led, with a 17% gain for the year, but large-caps, mid-caps and even micro-caps were right up there, with 13 - 15% increases.

The bottom line was, cap didn't matter too much in 2006. Style did. Although growth had its moments, when each quarter came to a close it was almost always value on top.

With regard to the special attributes that the market is rewarding, again 2006 ended much as it began. Price-to-just-about-anything mattered quite a lot: price-to-earnings, price-to-sales, price-to-book, price-to-revenue, price-to-cash flow. Within the growth style, a close runner-up was price-to-various-growth-rates, the most important of which were price-to-absolute earnings growth rate, and -- somewhat surprising -- price-to-dividend growth rate and price-to-cash flow growth rate. It is hard to find any other metrics that stand out.

As we head into 2007, value is firmly the style of choice and so it would be foolish to ignore valuations. Why is value so important? Keep in mind that the three bugaboos of 2006 continue to overhang the market -- oil prices, interest rates fears, and world turbulence.

Notwithstanding the above, the market seems to be poised for a decent year. As the year progresses, we will of course keep you posted on any changes in what the market wants.

David Brown

Next update: Second week in February.