Is it finally time to buy back into the shares of unloved and cheap companies? On Monday, these value stocks beat expensive growth stocks by the widest margin of any single day since the 1930s, as vaccine progress improved the prospects of the beaten-up losers of lockdown such as airlines and cruise lines.
The question investors face is whether Mondays extraordinary move marks the end of a grim decade-and-a-half for value, or is just another false dawn amid the gloom.
In the short run, value could do well just because the economy improves (assuming the vaccine or others in late stage trials are approved and rolled out soon). Value stocks are defined as having a low valuation, originally just on price-to-book ratio, and now often on a mix of measures such as price to earnings, price to cash flow and dividend yield. At the moment, that means value is dominated by lockdown losers, banks that did badly due to low interest rates, and economically sensitive cyclical stocks, such as Caterpillar and oil producers.
Fix coronavirus so the economy recovers quicker than is expected, and all three groups should do better than the work-from-home winners, low-rate beneficiaries and reliable earners that dominate growth.
David Rosenberg of Rosenberg Research calculates that if the leading growth stocks Microsoft , Apple , Amazon , Facebook , Netflix , Tesla and Alphabetwent back to their pre-Covid-19 market capitalization, they would be worth 22% less. If that money was reallocated to value stocks, it would boost the laggards by 10%. Rotation between value and growth doesnt happen only because of money flows, of course, but this provides some sense of what could result purely from a bet on a return to normal.
For sustained outperformance, value stocks need to have been depressed beyond what is justified by their poor fundamentals
