Value stocks for the next 12 months

At the beginning of this year, the dominant discussion in the markets was around growth versus value. For context, value investors believe that a stock is undervalued relative to metrics like earnings, revenue, or book value, whereas growth investors pursue stocks that have metrics which display rapidly expanding revenue, earnings, and cash flow.

Let’s be honest, the events in last 18 months have been beyond extraordinary. The US economy has been juiced up with different fiscal and monetary stimuli, which helped power the market along. Literally if you’d bought an old shoe, it has probably gone up (side note: there’s probably an old shoe non-fungible token out there, but let’s leave that discussion for another day!).

Looking back to September last year, value stocks started to hit their stride. Their valuations at that point were among the lowest seen in about two decades, which was a great set-up for a strong rebound. Roll on a few months and strong performance continued with great news on the COVID vaccine front that boosted optimism for economic reopening. From September 2020 through to the end of March 2021, the iShares Russell 1000 Value ETF (NYSE: IWD) had gained 24.6%, more than four times the 5.9% return of its growth counterpart (the iShares Russell 1000 Growth ETF (NYSE: IWF)).

In the wake of vaccine rollouts, healthy economic data and even more stimulus from Joe Biden’s administration earlier this year, value’s outperformance has remained relatively intact (the IWD is up a further 4.6% from beginning April to mid-July). The question is - can it be sustained beyond the near to medium term? Have the unique mix of factors that powered the market to this point run their course? It seems, at least at the face of it, strong GDP growth and a rising interest rate environment point to the potential for further outperformance of value stocks, certainly in the near term.

We could easily get caught up in the subjectivity of growth versus value and you could land on either side of the fence depending on your market view, time horizon, etc. Do you prefer deferred earnings through capital gains, or more instant earnings through a regular dividend stream? Personally, I’d rather not get locked up in a discussion about whether I’m in the value camp or the growth camp; instead, I’d rather stick to the names I feel will give the best possible outcomes for my portfolio. And if that means loading up on value names, great.

With that said, here’s a few of my picks of potential names to look out for in the next 12 months (and beyond).

1. Novavax (NASDAQ: NVAX)

• It’s hard not to like any vaccine stocks at the moment. NVAX’s COVID-19 vaccine has produced nearly 90% vaccine efficacy in a UK study and a 90.4% efficacy in a US study, according to the company.

• Their vaccine candidate might have a chance to displace Johnson & Johnson's (NYSE: JNJ) single-dose vaccine, which was given the green light via an emergency use authorisation by the U.S. Food and Drug Administration.

• NVAX filed for emergency use authorisation in June and will only have full capacity production in about Q4 this year. Their single-dose vaccine is likely to be a game-changer for developing countries and is also slated as a good candidate for booster shots.

2. IBM (NYSE: IBM)

• You’ll likely think of IBM as the tech laggard that missed the innovation surge by staying hooked on hardware. But the company has been in transformation, and its hybrid-cloud platform - solutions that combine private and public cloud services, and allow data/applications to be shared between those services - represents the future for the old, stable tech giant.

• The firm has positioned itself as the leading big-data solutions provider and their hybrid-cloud solution is hugely beneficial to remote workforces.

• Cloud still enjoys healthy margins and Cloud accounts for roughly a third of IBM’s total revenue. With IBM’s focus on Cloud and their ability to squeeze costs out of its legacy business means it is certainly one to watch in the long term. Their 4.4% dividend yield is also not completely off-putting.

3. Financials

• Banks and other asset gatherers always benefit from a rising interest rate environment. Several analysts have predicted that the 10-year Treasury yield will be over 2% by year end, on the back of inflation fears.

• Names like Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), JP Morgan Chase (NYSE: JPM) and other big lenders do well in this environment.

• It is also worth noting that these 3 banks have increased their quarterly dividends - JPM up 11% (for an annual yield of 2.6%), BAC up 17% (for an annual yield of 2%) and GS up a colossal 60% (for an annual yield of 2.1%).

• Final thought on the Financials - if you do not like the idea of picking individual names, you can always look at the Financial Select Sector SPDR Fund (NYSE: XLF).

Since this is a discussion around value, one of the potential problems investors face, particularly with the US markets, is affordability. Instinctively, you may think about that as the brokerage costs associated with trading. Very fair. But in this case I'm referencing the total value of the trade itself. Names like Google, Amazon and Booking.com trade at prices in excess of US$1,000 per share. Fractional trading (as offered on the Gotrade platform) breaks down that barrier and allows investors to get exposure to high priced stocks and create the exposure you want. Oh, and Gotrade is commission free, so there’s that too…..

I’ll leave you with this final thought - since 1926, value investing has returned over 1,344,600%, according to Bank of America. During that same time, growth investing returned just 626,600%. Although, as any investment professional will tell you, past performance is not an indication of future outcomes!

Happy trading!

Disclaimer

The views expressed above are those of the authors and are intended to be general in nature. They do not necessarily represent Gotrade’s views. Please consider your situation carefully before investing and, if in doubt, please seek independent professional advice. Nothing in this post is intended to be a recommendation or an offer to buy, sell or hold any securities.