Unpopular stocks are having their moment, with November gains smashing major benchmarks and leaving Big Tech stocks behind. How long can this rally last?
Some of the highlights of the past month looked like dead money as recently as October, but are now snapping back to life.
Laurentian Bank of Canada shares were languishing at 15-year lows last month. Since the start of November, though, the shares have soared 28 per cent, outperforming the Big Six banks, on average, by 11 percentage points.
And behold the comeback by Cineplex Inc. The Canadian theatre chain has been weighed down by delayed movie releases, physical-distancing rules and a terminated takeover deal with British-based Cineworld PLC in June, but its share price has nearly doubled this month.
Even commercial real estate investment trusts are stirring, despite a second wave of COVID-19 infections, empty malls and struggling retail tenants. RioCan REIT has rallied 26 per cent.
Clearly, the resolved U.S. presidential election and impressive test results from vaccine candidates developed by Pfizer Inc., Moderna Inc. and AstraZeneca PLC have eased market worries. Investor attention has shifted from near-term concerns to the promise of better days ahead.
“If you look at any valuations, they don’t make sense based on 2020 numbers or even 2021 numbers,” Laura Lau, chief investment officer at Brompton Funds, said in an interview.
But, Ms. Lau added, the market is betting that valuations may make sense based on profits rebounding by 2022. This outlook is lifting the relative attractiveness of cheap, beaten-up stocks over pricier stocks that performed well earlier in the pandemic.
The S&P 500 Pure Value index, a benchmark that tracks stocks in the S&P 500 that are intrinsically cheap (Berkshire Hathaway Inc., General Motors Co. and Metlife Inc. are among the top names in the index), has risen 24.5 per cent over the past month, based on Tuesday’s close.
This performance has beaten the S&P 500 Pure Growth index, which includes fast-growing technology companies such as Facebook Inc. and Nvidia Corp., by a remarkable 15 percentage points.
Why remarkable? Because U.S. growth stocks have outperformed U.S. value stocks by 35 percentage points over the past 12 months, making the recent shift look, perhaps, like a sharp break in a well-established trend.
Consider, too, that Pfizer, arguably the company that ignited the rally over the past two weeks with its initial upbeat vaccine test result on Nov. 9, has seen its share price decline about 2 per cent since then. Companies that indirectly benefit from a vaccine are doing far better now than the vaccine-maker itself.
“I think a lot of people have been holding onto a high cash position, waiting for those risks [related to the U.S. election and vaccine development] to be behind us. And then they say: ‘I want to put some money to work,’” Stuart Isherwood, a portfolio manager at Georgian Capital Partners, said in an interview.
“Well, Nasdaq is up over 30 per cent. The tech stocks have had a huge rally. So that prompted people to look at the value sector and some of these left-for-dead names,” Mr. Isherwood said.
He thinks there’s a lot left in the rally, especially for stocks that pay a handsome dividend. That’s because the payouts will look increasingly attractive if interest rates remain low and investors become more confident that distributions will continue or even rise.
Ms. Lau thinks some stocks have rebounded too fast. An example: Booking Holdings Inc., the hotel and flight reservation company, has risen 27 per cent in November and is back to its prepandemic levels in January.
But she says she believes that Canadian banks stand out with robust dividends and life insurers are still very cheap based on valuations such as price-to-book and price-to-earnings ratios. Even the energy sector, although up 42 per cent in November, looks like it has room to run given that the sector remains 37 per cent below where it began the year.
“Energy has been left for dead for five years, and everyone thinks that we’ll never burn anything any more. That I don’t believe,” Ms. Lau said.
Despite the recent run-up, unpopular stocks are hardly basking in approval just yet – and that’s good news if you’re counting on more gains ahead.
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David Berman