Around the world there is a universal cry from value fund managers of ‘I told you so’, as they finally see the value rally that’s been predicted for what seems like a decade. Previously unloved stocks are moving fast, and retail investors are now having to look at a part of the market that they could previously afford to ignore (and for a long time).

Fortunately, it’s not too late to go hunting as plenty of so-called value stocks have yet to join in the party. Screening for them is relatively easy, the harder part is working out why they are laggards – is it because of negative factors hanging over these businesses or has the market simply not awoken to certain opportunities?

Value stocks are moving higher on the basis that a Covid-19 vaccine will soon be approved and distributed to millions of people. That should help to reopen society and pave the way for companies to earn more money as economies recover.

It’s a rare chance to buy stocks with improved growth prospects on lower earnings multiples relative to the faster growth stocks which have been in demand for the past decade.

Liberum says we are now in phase five of the current crisis, ‘where increasing visibility is driving more focus on the medium/longer-term new normal and away from short-term uncertainty’.

It says historically, in such phases, value and small cap stocks have significantly outperformed over six to nine months, with a return to growth thereafter remaining a theme for the next five years.

Anyone with access to a basic stock screening system can find companies that fit the value bill. Look for stocks trading on a price to earnings multiple of less than 20 and which have positive earnings growth forecast for 2021 and 2022. A good screener should also let you see the share price change between certain dates.

A look at the FTSE All-Share chart would suggest the value rally began in earnest at the start of November, so you could run a screen looking at share price change since 30 October (the last trading day of the month) and now, as well as share price change between 1 January and 30 October to see the performance before the value rally took flight.

The worst performing stocks so far in November aren’t all value ones – they include many fast growth and/or quality stocks that were previously sought-after, now shunned by investors in favour of value ones.

Another way to look for laggards is to examine stocks furthest below their 52-week high. ‘Many of these stocks have bounced hard since the end of October, with the energy and travel and leisure sectors particularly well represented,’ says broker Peel Hunt. ‘Even if they doubled again from here, they would remain below their 52-week high.’

This week’s issue of Shares discusses three UK value stocks that are laggards yet where there are reasons to be more optimistic. We also look at ways to play the value theme in the US market via funds. If that’s not enough to whet your appetite, it’s worth looking at our recent article on Aurora Investment Trust (ARR) which is also relevant to the value theme.

‹ Previous2020-12-03Next ›