Value investors are quick to point out that value stocks have historically outperformed others in the long term, but more recently, value has been underperforming the markets. However, John Buckingham of Kovitz and The Prudent Speculator newsletter says it’s an excellent time to be a value investor.
During an investment webinar given in partnership with ValueWalk, Buckingham pointed out that over time, value stocks have an annualized return of 13%, compared to 9.9% for growth stocks. He also highlighted several misconceptions investors have about what sort of environment is terrible for value stocks.
Economic recovery is good for value stocks
Buckingham explained that value stocks have historically done well coming out of recessions. This is good news for value investors right now because the economy is coming out of the worst downturn since the Great Depression. The fourth-quarter earnings reporting season has been good so far, compared to pessimistic analyst projections, which supports the idea that the downturn is ending.
Many investors were also concerned about the election, but Buckingham said the outcome was good for stocks.
“The perception is that Democrats are bad for business, which must be bad for the economy, which must be bad for the stock market,” Buckingham said. “History shows that a Democratic presidential party and a Democratic Congress is actually the best combination for equity prices in general, the best for value investors in general. So again, the data shows that value is the place to be, and Washington is certainly not a reason to be frightened to remain in value stocks.”
Concerns About Inflation
Buckingham also said many investors are concerned about inflation, as the Federal Open Market Committee said it’s fine with inflation running higher than 2%. However, he added that even though the Federal Reserve is doing all it can to boost inflation, there hasn’t been much in the way of inflation.
Looking at market history and what happens when inflation rises, value stocks do well. The numbers do not bear out the idea that inflation is bad for equities. Buckingham said the data “does not support some of the wild claims that are out there.”
Some investors have worried that rising interest rates will kill the rally, pointing out that stocks have sold off in the past. However, Buckingham pointed out that only growth stocks sold off. Value stocks actually rose because interest rates were rising.
Last year, signs that value is returning were already starting to appear. Buckingham pointed out that several value stocks, including Tapestry Inc (NYSE: TPR), ViacomCBS (NYSE: VIAC), Mosaic co (NYSE: MOS) and General Motors (NYSE: GM), were among the top performers in the S&P 500 for the seven months between July 2020 and this month.
Where To Invest In 2021
Buckingham also highlighted several investing themes for 2021, emphasizing that the key is to buy things that are on sale and not chase after hot stocks like GameStop. The longer you hold a stock, the less of a chance there will be of losing money on it. Like others, Buckingham highlighted the economy reopening play.
“The [COVID] vaccines have been tremendous in terms of their effect on the economy and on stocks that are economically sensitive,” he said. “Obviously, the rise in interest rates has been very beneficial for financial stocks.”
He highlighted JPMorgan Chase & Co (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C). Buckingham also pointed out that pent-up demand in certain areas will give names like Royal Caribbean Cruises Ltd (NYSE: RCL), World Fuel Services Corp (NYSE: INT) and Delta Air Lines (NYSE: DAL) a boost. Other beneficiaries of pent-up demand include Kohl’s Corporation (NYSE: KSS), Tapestry and Foot Locker (NYSE: FL).
Buckingham believes the work-from-home and shop-from-home trends are here to stay. Tech stocks like Microsoft Corporation (NYSE: MSFT), Cisco Systems Inc (NASDAQ: CSCO), Intel Corporation (NASDAQ: INTC) and NetApp Inc. (NASDAQ: NTAP) should benefit from the work-from-home theme. Target Corporation (NYSE: TGT) benefited from the shop-from-home trend as its online sales have exploded. FedEx Corporation (NYSE: FDX) and International Paper Co (NYSE: IP), which makes shipping boxes, are also winning thanks to online shopping.
Home improvements are another key theme of the stay-home trend. Lowe’s Companies Inc (NYSE: LOW), home builder MDC Holdings, Inc. (NYSE: MDC) and home furnishing component maker Leggett & Platt, Inc. (NYSE: LEG) are key beneficiaries.
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