Valuation dispersion heralds a new era for stock-pickers and active managers. If there are greater difference in valuation across firms, there will be a greater opportunity for stock-pickers to find cheap and rich equities.
Clearly, some of these opportunities have already presented themselves during the transition from tight to wider dispersion. Tight stock dispersion suggests that there is a single factor that may be driving all stocks. Notice the tight dispersion during the GFC, when the focus was on the recession and financial crisis. Dispersion has increased during the pandemic because COVID has not had a single effect on the market but has had a differential impact across industries.
Differentiation between sectors will reduce correlation across stocks and will allow those who can effectively identify stock differences to generate excess return in a way that cannot be found with passive indexing. Dispersion does not guarantee excess returns, but the set of opportunity will improve.
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