Value Investing: Why it Will Overtake Growth Stocks in 2021

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“Value investing is making a comeback.” This statement has been doing the rounds of finance circles for quite some time, it started around 2019 and then grew louder in the first quarter of 2020 before COVID-19 arrived and put value stocks firmly in their ‘place’ for the rest of the year. However, the second half of 2021 might actually see solid movement in the value investing space as economies reopen, vaccination roll-outs gather pace, and the world recovers from the pandemic.

To understand how much growth investing outperformed value investing in the last decade, take a look at this 2019 report by Alger. The report said, “Over the past decade, the Russell 1000 Growth Index has returned over 40% more than the Russell 1000 Value Index.”

The number wasn’t very different in 2020. The Russell 1000 Growth Index returned 38.49% compared to 2.8% that the Russell 1000 Value Index returned, according to Morningstar.

Time for Growth to Fall?

If growth outperformed value by such a huge margin, why would people still believe in value stocks? That’s because the pandemic and the subsequent lockdowns caused several sectors to take a massive hit in stock prices. Cyclical stocks – banks, energy companies, auto stocks and auto components, airlines and others like these – had seen stock prices fall since no one was using their products in 2020.

These stocks fit the metrics for value stocks where they trade at lower multiples. However, now these stocks are making a comeback. The Russell 1000 Value is up 10.89% this year while the Russell 1000 Growth is down 0.25%.

This is a marked difference from last year where tech companies zoomed up as people were forced to live their lives online. Stocks like Zoom and Shopify rose big as did older stocks like Alphabet and Amazon. However, this report shows how some major gainers – like Amazon, Adobe and Zoom – moved below their 200-day moving average last week.

Boris Schlossberg, managing director of FX strategy at BK Asset Management, said, “Zoom, I think, has established a major beachhead. That having been said, it’s the biggest stock risk at this point. It easily could come in 100 more points to the downside, and still be relatively highly valued.”

The consensus was that most tech stocks are moving sideways as they try to consolidate and establish a new base. The next couple of months are going to be a challenge for these stocks until there’s a “deeper washout” in them that is long overdue.

Aggressively-priced stocks are going to find it tough to outperform. They are already trading at high multiples and it might be time to look elsewhere.

Why Will Value Grow?

This question might seem like an oxymoron but a value stock is not a stock that won’t grow. A value stock is simply a stock that has been undervalued by the markets for a prolonged period, and now whose time has come.

With President Joe Biden signing the $1.9 trillion COVID relief bill, markets will look at stocks that bore the brunt during the lockdown, restaurants, theatre chains and commercial real estate.

Take for example CBRE, a commercial real estate player whose stock price has grown 27% in 2021. There is a lot of talk of how work-from-home is here to stay but the fact is that at some point in this year, companies will ask employees (or at least some of them) to return to the office. This report by PwC says, “By July 2021, 75% of executives anticipate that at least half of office employees will be working in the office”.

It also says, “…just 13% of executives prepared to let go of the office for good. Meanwhile, 87% of employees say the office is important for collaborating with team members and building relationships — their top-rated needs for the office.”

For now, it seems like fears of a complete collapse in commercial real estate space are overblown.

It’s a similar story playing out in the banking and energy sector. Banking stocks like JPMorgan Chase and Bank of America have gained over 20% this year while oil heavyweights like Exxon Mobil and Chevron are up 50% and 32% respectively in 2021. Rising bond yields have forced tech stocks to decline while rising oil prices point to a faster-than-expected economic recovery. All four stocks fell in 2020.

As bond yields have gone up, bank stocks have moved up. This is because rising interest rates enable banks to charge more thus increasing their profits. Crude oil prices have risen over 35% in 2021 and are currently trading at $65.56 boosting oil stocks.

This report by FactSet says that earnings for 2021 are expected to be led by energy, materials, and banking and financials. The report said, “For Q1 2021, the estimated earnings growth rate for the S&P 500 is 22.1%. If 22.1% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth reported by the index since Q3 2018 (26.1%).”

Value stocks have been hurt last year. With the latest round of fiscal stimulus plus the economic recovery, 2021 could be the year they shine.

 

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