Bloomberg Businessweek December 7, 2020 pp25-26|Finance|”The B Team’s Time To Shine” “Investors shift to stocks that depend on economic recovery”. THE BOTTOM LINE “With a vaccine on the horizon, investors are betting there’s a lot of pend-up demand that will start to flow to companies beyond the usual tech winners.”
Rob Arnott (Image credit ResearchAffiliates.com)
Data present in a chart
Chart shows that the Russell 1000 value index outperformed the Russell 1000 growth index rising significantly above paralleling lines recently with value up now nearly 12% since October 1 versus growth up about 6%.
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Summary of Article
With vaccinations on the horizon several factors favor stocks that might benefit from an economic rebound. First “There’s a lot of pent-up demand for leisure travel” says Michael Baron (Baron Partners Fund) co-manager of funds having Vail Resorts as a longtime holding. This thinking permeates beyond travels but another factor is the appeal of value stocks “those that typically trade at low prices relative to their earnings.” In particular the smaller value stocks are outperforming small company growth stocks up 13% recently versus 10% and the full Russell 2000, small company stock index, rose 18% in November. The third factor is that, no doubt surprising to some, the pandemic has resulted in less spending and more saving and that is “the idea that there’s a lot of money in the economy waiting to be spent on things besides video streaming and online shopping.” “U.S. personal savings rate was 7.2% at the end of 2019. By April it had surged to 33.7% and it was still 13.6% in October.”
Stocks cited as having an upside after being beaten down are Wells Fargo and Capital One according to Chris Davis (Davis Funds). “When you look at their valuations, the amount of cash they produce, the capital ratios they have, the reserves they’ve been able to put-up-they really have this characteristic of resilience and durability and yet are priced at his sort of shockingly low level.” Some, Cathie Wood (ARK Investment Management) as an example, argue that what is called a rotation away from tech to value “may benefit many value sectors in the short term” but she mentions that “traditional industries are still vulnerable to being displaced by new technology.” Rob Arnott (Research Affiliates, Pictured Above) loves stocks that are inexpensive, senses that some will see growth and tech as overpriced viewing value stocks as a better deal. He’s quoted “I do think we’re going to see somewhere between impressive and stupendous outperformance for value over the next three to five years.” Vance Howard (Howard Capital Management) counters “tech stocks are still doing well enough in comparison to value to suggest that market sentiment hasn’t switched yet…A lot of managers want to start preaching their books because they’ve got to make up a reason why they’re down.”