A great divergence is widening the gap between the stock market’s winners and losers. The growing chasm between the two groups creates an opportunity for investors willing to bet on better times ahead for today’s most beaten-up sectors.
To be sure, this is not a bet for the faint of heart. But it may appeal to bargain hunters who see overlooked potential in humdrum areas of the economy, and worry about how expensive stocks have become in the market’s sexier areas, notably technology.
Tech-oriented growth stocks were already pricey at the end of last year. They have shot even higher in recent months.
A good marker of their success is the NYSE FANG+ Index, made up of 10 red-hot tech stocks, from Apple Inc. to Twitter Inc. It has surged 23 per cent since New Year’s Day as investors flock to the supposed safety of the tech sector’s already expensive big names.
While these winning stocks have kept on winning this year, losing stocks have been equally dependable – just in the opposite direction. The S&P 500 Pure Value Index, a collection of already bargain-priced stocks, has slumped 35 per cent since January. The one thing you can say in its favour is that it has managed to do better than many Canadian oil stocks.
To sum up: The dominant pattern of 2020 to date has been for already expensive purveyors of online information to go on getting even more expensive, while reasonably priced stocks just keep on getting cheaper.
You don’t have to be Warren Buffett to wonder how much longer this can go on. Maybe, just maybe, we will see a reversal of fortunes over the next couple of years.
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Look, for instance, at those value stocks we just mentioned. These are shares that trade at notably low prices compared with their underlying earnings, sales and book values. They are primed for a comeback, according to Cliff Asness, co-founder of AQR Capital Management LLC, a money manager in Greenwich, Conn., noted for its quantitative research.
“Value is super cheap today,” Mr. Asness argued in a recent note. By several measures, value stocks are as cheap as they have been at any point over the past half-century, he calculates.
Granted, investors have been hearing similar sentiments for several years now. Value investing produced lush profits for decades after the Great Depression, but it has been in a protracted slump since the Great Recession.
The particularly miserable performance of value stocks since 2015 has prompted concern that the strategy is permanently broken. Skeptics argue that value investors rely too much on simple accounting measures such as share-price-to-book-value ratios to spot apparent bargains. These yardsticks may miss the intangible intellectual advantages and network effects that distinguish many of today’s biggest winners, such as Alphabet Inc. and Facebook Inc.
But Mr. Asness and the folks at AQR disagree. In a research paper, they examine various explanations for value’s tough times and conclude its current woes don’t stem from any one sector or any one type of company or any one type of accounting measurement. “Investors are simply paying way more than usual for the stocks they love versus the ones they hate,” Mr. Asness writes.
If this trend reverses in years to come, some of the biggest beneficiaries would be financial services stocks and natural resources stocks. Both sectors are well represented in the S&P Pure Value Index and value portfolios in general.
Bargain hunters should pay particular attention to energy producers and miners. “After a decade of falling commodity prices and contracting valuations, the resources sector measures cheaper than we’ve ever seen relative to the broad equity market,” according to an April report from GMO LLC, a money manager in Boston. If you are searching for cheap stocks, these unloved producers of physical commodities are a good place to begin looking.
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