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Oct. 17, 2020, 4:24 p.m. EDT

Value stocks are poised to crush growth stocks after the presidential election

Michael Brush on 20 value stocks to research, including Sysco, Raytheon and Applied Materials

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By Michael Brush, MarketWatch


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The Harvest Grape Crushing Celebration in Bologna, Italy.

Value investing, which has been maligned for years, is about to come back in style.

Why would there be a return to favor after underperforming for so long? Because elections have a long track record of doing wonders for value stocks, whose prices are deemed low compared with business prospects. (I highlight, below, 20 value companies that may benefit as a result.)

Value stocks outperformed growth for half a year after every presidential election since 1980, according to research by Larry McDonald and his team at the Bear Traps Report .

Why is that? Refreshingly, in this overly politicized world, it has nothing to do politics. Value tends to outperform growth after elections, regardless of which party wins.

Instead, it’s all about the law-making momentum enjoyed by the fresh faces in Washington, D.C., when they first get to town.

Here’s what this means.

Historically, the party that wins the White House also takes the Senate. Since the Senate is the typical blocking vehicle in the legislative process, this gives victorious presidents with a mandate to legislate the ability to get laws passed. That’s true at least in the first two years before the Senate can change hands.

What do they do with this power? Politicians being politicians, they spend money! New administrations often pass a lot of spending bills that rev up the economy. Value stocks typically outperform when growth picks up. One reason is that when there’s more growth around, investors no longer pay up for what was once a narrower swath of growth plays.

Inflation and value stocks

But growth also produces inflation. And value stocks are the darlings of inflation, for three reasons.

1. The first reason comes straight out of business school. Investors’ perceived value of stocks derives from the present value of future cash flows, which ramp up faster at growth companies than at value companies. When inflation rises, those future cash flows get discounted back to the present at a higher discount rate. This dings the perceived value of growth stocks more than value stocks, points out McDonald.

2. Inflation drives investors out of bonds and into perceived inflation trades, such as value stocks and commodities. McDonald thinks 10-year Treasury yields will rise to 1.5% by the end of next summer. That would be quite a move. This is an out-of-consensus call, so if he is right, a lot of money will move into inflation trades. He estimates about $10 trillion in wealth will make the trip.

“Bonds will be destroyed, and money will be forced into alternatives,” he says.

3. Inflation naturally singles out sectors that are the big constituents of value: financials, energy, materials and industrials, says Todd Lowenstein, an equity strategist at The Private Bank at Union Bank. Banks do better when the yield curve steepens, a consequence inflation and economic growth. Inflation typically benefits energy, materials and industrial companies because their pricing power — and the price of what they sell — goes up.

“If you are a copper or steel maker in a reflationary environment, your ability to raise prices is really good,” says Lowenstein. And a lot better than at a tech company. Big picture, all of these groups are cyclicals, which means they do better during economic growth.

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