Credit Suisse’s jump securities tied to S&P 500 value over growth offer relative value play

By Emma Trincal

New York, Oct. 29 – For investors who believe that value strategies are going to stage a comeback and finally outperform rather than trail growth, Credit Suisse AG, London offers a note tailored to this particular view.

The issuer plans to price 0% jump securities due Nov. 11, 2019 linked to the relative performance of the S&P 500 Value index over the S&P 500 Growth index, according to a 424B2 filed with the Securities and Exchange Commission.

If the return of the value index finishes at or above the return of the growth index, the payout at maturity will be par plus at least 12%.

If the opposite happens, investors will lose the percentage amount of underperformance of the S&P 500 Value index relative to the S&P 500 Growth index, with a potential and maximum loss of their entire principal.

Payout

The value benchmark does not need to be positive or to outperform by a lot its growth counterpart, sources noted.

Even in a bear market, investors could achieve a positive return of 12% for the year as long as the value index outperforms the growth index.

For instance, a 25% negative performance for the value index versus a 30% decline in the growth index would lead to much more than the simple gap between the two strategies as investors would get a 12% positive return simply because the value index did better.

On the other hand, the payout is capped at 12% for those who successfully predicted that value would outperform growth. If they’re wrong, the entire principal of the noteholders is at risk.

Laggard

After years of lagging the S&P 500 Growth index, the S&P 500 Value index may provide investors with a turnaround opportunity, noted Carl Kunhardt, wealth adviser at Quest Capital Management.

“It’s very possible that the Value index would outperform by a minimum amount, in which case you get that 12% gain,” he said.

“If you believe to a reversal to the mean whether the value index beats the other one by one percentage point or 20%...it looks like a decent win.

“But it’s a bet and I wouldn’t do it.”

Since 2008, the S&P 500 Value index has outperformed the S&P Growth index only three times – in 2010, 2012 and 2016, according to S&P Dow Jones Indices website. The seven other years saw the growth index outpacing value, which is 70% of the time.

Time is value

Kunhardt considers that the odds of making money with value stocks are greater than with growth. But time is a big part of the equation.

“I wouldn’t do this note because it’s a one-year,” he said.

“I’m not willing to bet that value will beat growth in a one-year timeframe.

“If you go back 100 years, we know that over the long-term value does outperform. But you need a long-term horizon. Why do you think Warren Buffet spends a lot of time selecting value stocks and then holds them forever?”

“Over the short-term it’s purely emotional. Growth is what gets people excited.

Growth and technology

Kunhardt said that he also was bullish on growth strategies in general.

“It is very strange that value investing has been lagging growth all those years,” he said.

“It should have outperformed growth by now.

“If you read professional journals every month there is an article about that. If valuations matter – and they do – how come we haven’t seen value outpacing growth?

“I’m inclined to have greater faith in growth stocks. Psychology and emotions have a lot to do with that,” he said, pointing to the top components of the S&P 500 Growth index.

Those are Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook, Inc. and Alphabet Inc.

“The world in the past two decades has been driven by technology. Our tech-heavy society is going to reward innovation and growth. It’s the future. I don’t see valuations trumping the same excitement,” he said.

Possible reversal

Simon Lack, founder of SL Advisors, LLC, is a value portfolio manager whose firm invests in energy.

“I believe value is better than growth. It’s the basic foundation for the price of a security,” he said.

He considers energy as a value investment at the present. Exxon Mobil Corp. and Chevron Group are the third and fifth largest components of the S&P 500 Value index, respectively.

As the market becomes choppier and risk-aversion increases amid this month’s sell-off, will value regain its luster?

Sell-off helps value

Lack believes it already is.

“Value tends to outperform growth over the long haul. But it’s not true all the time. It hasn’t been true in recent years,” he said.

“We’ve reached a trend in October though where growth has started to get hit more than value. Is it going to change? It looks like it is,” he said.

A volatile October so far has led the S&P 500 index to touch correction territory intraday on Friday from its Sept. 20 high. For the month through Friday, the S&P 500 index has fallen 9.7%, the S&P 500 Growth index has declined by 10% and the S&P 500 Value index outperformed both benchmarks with a 7.95% drop.

For Lack, the structure was designed for a particular view, with the issuer’s role remaining neutral.

“Credit Suisse is not taking the other side of the bet. They’re hedging it out. So the notes are not mispriced. It’s just something that reflects an investor’s view,” he said.

Lack said that he shared that view. He simply may not express it with the notes.

“I think it’s a good bet. We see energy as a value play, that’s why we’re investing in it.

“If I wanted to take that value bet though, I would probably buy the underlying. I would buy the S&P 500 value index directly,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on Tuesday and settle on Friday.

The Cusip number is 22549R623.

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