Wall Street Outlook: Wall Street Week Ahead: Growth? Value? Some investors go for a bit of both
Value stocks, which trade at relatively cheap multiples of their fundamentals, surged in early 2021 as hopes of an economic rebound boosted stocks of banks, energy companies and other economically sensitive names. after years of underperformance.
Their performance against growth stocks has fluctuated since then, with signs of an economic rebound in the United States tending to benefit growth stocks, which are less tied to fluctuations in the economy and have dominated the market during the most of 2020. The Russell 1000 Value Index is up 16.2%. year-to-date, just behind the 18.6% recorded by the Russell 1000 Growth Index on Friday at noon. The benchmark S&P 500 is up about 18% this year.
As a COVID-19 resurgence and an imminent unwinding of the Federal Reserve’s easy-money policies cloud the economic outlook, “you don’t see a great backdrop for deep value or mega-growth names, so we think you can find some great companies in the industry, ”said David Marcus, portfolio manager of the Evermore Global Value fund.
Marcus is venturing into companies like French media conglomerate Vivendi SA, whose growth prospects he believes will improve after an expected split from a stake in Universal Music Group later this month. On the value side, Vivendi has a portfolio of economically sensitive media and pays a dividend of 1.8%.
Investors will be keeping a close eye on next week’s Federal Reserve meeting, which ends on Wednesday, for details of the central bank’s plans to withdraw emergency support to the economy. The European Central Bank and the Bank of Japan will conclude their meetings on the same day.
Some fund managers were also concerned about the comparatively high valuations of growth stocks, which helped push the S&P price-to-earnings ratio near its highest level since the 2001 dot-com bubble.
These concerns have led Matthew McLennan, co-head of the Global Value team at First Eagle Investment Management, to own shares in companies such as logistics company CH Robinson Worldwide Inc.
A large recovery that increases the number of global shipments could benefit the company’s operations, he said. At the same time, McLennan is betting that the company’s growing market share and relatively low valuation of 16.8 times future earnings will make it attractive if worries about global growth prompt a flight to quality stocks.
“You don’t have to chase the ‘glamorous stocks’ which are quite expensive,” he said.
The search for companies with both growth and value attributes comes at a time when Wall Street analysts are lowering their expectations for stocks.
Banks such as BofA, Morgan Stanley, Citi and Credit Suisse cut their recommended exposure to equities last week, while Goldman Sachs lowered its forecast for US economic growth in the third quarter on August 19 to 5.5% against 9% due to the impact of the Delta variant.
A disproportionate rally in value stocks in battered industries like cinemas and cruise ships, like the one seen in the first three months of this year, is unlikely to repeat itself even if the Delta variant turns out to be less. disruptive to the economy that many fear, said David Park, portfolio manager of the Nuveen Santa Barbara Dividend Growth Fund.
Yet at the same time, he doubts growth stocks will pick up on last year’s scorching rally due to their strained valuations.
Instead, Park is looking for companies like discount retailer TJX Companies Inc, which he says has taken market share from shopping mall clothing stores. The company reinstated its share buyback program in late May and resumed its dividend in December after cutting both in response to the pandemic, giving it a value slant, he said.
Its shares are up 3.2% for the year.
“We’re usually stuck in purgatory because we can’t invest in the highest growth non-dividend payers, nor are we interested in lower quality stocks,” Park said. “We are waiting … for more opportunities like this.”