B of A Securities quantitative strategist Savita Subramanian published a compelling, seven point argument this week advising clients to allocate at least a small portion of their equity portfolios to value stocks.
The strategist began by noting the success of valuation-conscious investing over the extreme long term. One dollar invested in U.S. value stocks in 1926 would be worth US$13,447 now, more than double the $6,267 that growth stocks would have generated.
The performance of value stocks during economic and profit recoveries is a key reason for optimism. Historically, value stocks have outperformed the overall market immediately after bottoms in economic growth and earnings growth. B of A believes the economic trough is just behind us, and that second quarter profit results will mark the bottom in U.S earnings.
Value stocks are also neglected in the current market. Ms. Subramanian observed huge asset inflows into growth stocks while portfolio managers are broadly underweight companies with lower price to earnings and price to book value valuations. This lack of faith in attractively valued stocks implies outperformance in the coming years.
Value stocks are also extremely cheap relative to the rest of the S&P 500. “Value stocks trade at record levels of cheapness to momentum stocks,” the strategist writes, while “growth [stocks] by almost any measure trade at record [high] premiums to the market.”
Ms. Subramanian goes on to highlight the dominance of large cap growth stocks in the index, and suggests that we’re nearing the point where government anti-trust regulation will force break-ups or otherwise limit their influence. This is almost certainly a reference to technology companies like Amazon.com, Alphabet Inc. and Facebook Inc.
The average investor prefers to buy assets that are already outperforming – the investments that have the highest returns over the past 12 months tend to attract the most new assets. They will be resistant to value-oriented stocks or ETFs then because they have badly lagged the major equity benchmarks since 2007.
But Richard Bernstein, founder of asset management firm RB Advisors and a former mentor of Ms. Subramanian’s when he was chief quantitative strategist at Merrill Lynch, cites “returns are best where capital is scarce’ as one of his primary rules of investing. Value stocks are currently neglected and starved for capital, and this provides yet another reason for investors to consider a value stock component in their portfolio.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Billionaires look to dump equities after turning quick profit
Billionaires looked after by Swiss bank UBS are looking to move their cash out of equities after profiting from an unprecedented sell-off and rapid rebound from March to May, the world’s largest wealth manager said this week. During the rout in stock markets across the globe in March, UBS’s richest customers took out loans to place billions into crashing stock markets. They are now looking to pull that money from equities and put the profits in illiquid and private assets, said Josef Stadler, UBS’s head of global family offices. (for everyone)
Rebalancing a portfolio has gotten trickier in this pandemic-warped market
The global pandemic has made all sorts of mundane tasks painfully complicated, from buying groceries to rebalancing a portfolio. With the course of the crisis and the fate of the global economy shrouded in uncertainty, simply tweaking one’s investments to realign with long-term goals and to strike a balance between risk and return is now full of hazards. Tim Shufelt tells us more. (for subscribers)
How to put together a gold ‘mini-portfolio’
Gold has always been seen as a haven investment in times of market turmoil. It’s no different this time around. The price of the yellow metal broke through US$1,800 last week. With bullion rising and equities uncertain, what holdings are best for building a mini-portfolio focused on gold? Gordon Pape shares his thoughts. (for subscribers)
The market rally is grounded. Just look at banks
Are investors blithely ignoring the economic damage caused by COVID-19? Bank stocks suggest that the mood remains far from upbeat, notes David Berman. (for subscribers)
Fund managers prepare for worst small-caps earnings season as COVID-19 second wave looms
Investors are searching for bargains in the world of U.S. small-caps, as the beaten-down asset class prepares for what may be the worst earnings season in its history amid a resurgent coronavirus pandemic. David Randall of Reuters has more. (for subscribers)
Cresting ‘first wave’ of stimulus may be next hurdle for world markets
A growth spurt in the balance sheets of the world’s biggest central banks has crested in recent weeks, drawing warnings from investors that any signs of backpedaling on stimulus will jolt financial markets and strangle economic recovery. Ritvik Carvalho of Reuters has this analysis. (for subscribers)
Also see: BlackRock CEO Larry Fink says economic recovery further away than markets think
Others (for subscribers)
The week’s most oversold and overbought stocks on the TSX
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Number Cruncher: Ten materials sector stocks enjoying a golden moment
Number Cruncher: Seven sustainable ETFs have outperformed their peers this year
Others (for everyone)
Rising gold to offset second-quarter COVID-19 pandemic hits on precious metals miners: analysts
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Answer: Ask the administrator of your RRSP. The company should have access to at least one and probably more high-interest accounts that can be used. Ask for the one with the best rate. Unfortunately, you’ll probably find its less than the comparable rate on a non-registered account. And be warned – “high interest” doesn’t mean a lot these days.
--Gordon Pape
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David Berman looks at some of the TSX stocks that have lagged badly during the rebound from the March lows - and shares his thoughts on each of them.
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Compiled by Globe Investor Staff