By Michael Brush
“Growth companies do not make money so they can’t improve margins,” says Buckingham. “They are paying employees more, but they are not making more money.”
Here’s a chart from Buckingham showing that value stocks historically outperform when inflation is high.
3. Value stocks do well after recessions
Historically, this has been the case, as you can see in the chart, below, from Bank of America. This is most likely because inflation and interest rates tend to rise during economic rebounds. Both trends are a negative for growth stocks relative to value, for the reasons outlined above.
4. Value stocks do better when Covid cases decline
This has been the case throughout the pandemic, as you can see in the graphic below from Bank of America. This is probably because when Covid cases decline, the prospects for the economy improve, which suggests inflation and interest rates will rise — both of which make growth lag value, historically. Omicron is spreading so fast, the case count is likely to peak by the end of January. So this effect may kick in soon.
In the chart below, the light-blue line is the Covid case count. The dark-blue line is the relative outperformance of growth to value. When the dark-blue line declines, it means value stocks are doing better than growth stocks.
Which stocks to favor
Cyclical names, banks, insurance companies and energy businesses populate the value camp. So those are the groups to consider.
Buckingham suggests these 12 names, most of which are in the sectors above: Citigroup /zigman2/quotes/207741460/composite C -0.68% , CVS Health /zigman2/quotes/209664499/composite CVS +0.15% , FedEx /zigman2/quotes/203047719/composite FDX -3.14% , General Motors /zigman2/quotes/205226835/composite GM -2.15% , Kroger /zigman2/quotes/206215053/composite KR +0.45% , MetLife /zigman2/quotes/206319319/composite MET -1.19% , Omnicom Group /zigman2/quotes/209996569/composite OMC -1.12% , Pinnacle West Capital /zigman2/quotes/202967011/composite PNW -2.16% , Tyson Foods /zigman2/quotes/201117502/composite TSN +0.26% , Verizon /zigman2/quotes/204980236/composite VZ +0.66% , WestRock /zigman2/quotes/202346656/composite WRK -0.77% and Whirlpool /zigman2/quotes/200296850/composite WHR -1.37% .
Bruce Kaser of the Cabot Turnaround Letter counts Credit Suisse /zigman2/quotes/202835784/composite CS -0.60% in banking and Dril-Quip /zigman2/quotes/205108311/composite DRQ -0.91% in energy among his favorite names for 2022. He’s bullish on value stocks now that the enthusiasm for “concept stocks” has broken.
“Concept stocks get way over bid, and that is when value does the best,” he says.
While concept stocks founder, value companies continue to grind it out and post actual earnings, so money migrates to them. This is what happened for a long time, after the tech bubble burst years ago.
“After 2000, value outperformed for a decade,” he says.
No doubt, there will be countertrend reversals along the way.
“These rotations tend to wind down as both sides of the rotation get overplayed,” says Art Hogan, the chief strategist at National Securities.
Here’s a factor that might temporarily cool the rotation, near term. Investors are about to learn that first-quarter growth is taking a hit because Omicron quarantines are hurting companies. This news on economic growth may reduce the fears about inflation and rising interest rates sparking the migration to value.
But Omicron is so contagious, it will probably go as fast as it came. That’s what we see in countries struck early on, like South Africa and Britain. Then factors like stimulus, an inventory build, and strong consumer and corporate balance sheets will revive growth.
This would mean the growth-value dichotomy will continue this year — since three of the four main forces driving the trend are linked to strong growth.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned TSLA. Brush has suggested TSLA, C, FDX and GM in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.