By Michael Brush, MarketWatch
Here’s another possible explanation for the post-election joy ride of value stocks: Seasonality. Value stocks naturally do well in November and December for the following reason, says Brian Barish, a value investor at Cambiar Investors: Most mutual funds have an Oct. 31 deadline for tax-loss selling. They dump losers in September and October. Then, when this selling stops, value stocks rebound. That’s because the losers tend to be value stocks.
“Just because a stock is down does not mean it is value. But it is more likely,” says Barish.
List of value stocks
Here are 20 favored value stocks that may enjoy a post-election romp.
The “other Cisco /zigman2/quotes/209509471/composite CSCO +0.66% ,” Sysco /zigman2/quotes/205335941/composite SYY -0.80% distributes everything from plastic straws and chicken breasts to hot sauce, to restaurants, universities and schools. That makes this a “reopening play.” As vaccines come on line over the next six to 12 months and the economy moves back toward normal from a coronavirus-led lockdown, Sysco’s business will pick up.
“We operate under the assumption there will be a vaccine sometime between Thanksgiving and Easter,” says Barish, who manages the Cambiar Opportunity Large Cap Value Fund /zigman2/quotes/209711246/realtime CAMOX -1.44% . “People will be very quickly going back to restaurants.” As Sysco’s business normalizes, so will its valuation. That suggests a move up into the mid-$80s range from recent prices of around $66, says Barish.
I think he’s worth listening to because his fund has a great record. It outperforms its large-cap value competitors by 4.3 and 2.6 percentage points annualized, over the past three and five years, says Morningstar.
Raytheon /zigman2/quotes/203237915/composite RTX 0.00% is another reopening play because it sells airplane engines out of its Pratt & Whitney division. “By the time we get to the middle of next year, with a vaccine we will see air travel recover,” predicts Barish. That will revive airplane purchases and increase demand for airplane engines, especially fuel-efficient models sold by Raytheon. As Raytheon recaptures its historical forward price-to-earnings multiple, the stock could go up around 50%, meaning it will likely outperform the S&P 500, the Dow Jones Industrial Average and Nasdaq.
For years, “Moore’s law” defined the rapid growth in chip-processing power (doubling of transistors per chip every two years). But now it’s all about “Moore’s law stress” — meaning chip makers have to work a lot harder to get there. They’re turning more and more sophisticated chip-equipment makers such as Applied Materials /zigman2/quotes/209393259/composite AMAT +0.12% to keep up. As faster economic growth increases demand for products using chips — and gives chip makers the confidence to spring for more equipment, Applied Materials will get a lift, possibly pushing its stock up 50% from current levels, as it all plays out.
Energy and materials
McDonald, at Bear Traps Report, favors energy and materials — classic value sectors — for a post-election boost and beyond. One reason: Commodity and energy prices tend to rise when growth and inflation kick in. That will help Mosiac /zigman2/quotes/203825795/composite MOS -1.70% , which sells phosphate and potash crop fertilizers, and Teck Resources /zigman2/quotes/208435438/composite TECK -0.96% in steelmaking coal, copper and zinc. It will also benefit out-of-favor energy names including BP /zigman2/quotes/207305210/composite BP -1.32% , Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A +2.27% , Exxon Mobil /zigman2/quotes/204455864/composite XOM -2.60% , Chevron /zigman2/quotes/205871374/composite CVX -1.78% and Schlumberger /zigman2/quotes/201012972/composite SLB -5.02% .
“Our capitulation model is giving a screaming ‘buy’ signal for energy,” says McDonald. “Energy is going to crush in a reflation trade.”
Here’s another driver for those companies, says McDonald. They are capital-intensive. They have to buy a lot of equipment. So they have a lot of debt. Many have taken advantage of the low-rate environment to raise cash, refinance debt at lower rates and push out debt maturities. That makes investors more comfortable owning them because it lowers bankruptcy risk.
“It increases the optionality of the equity,” says McDonald.
‘Quality’ value stocks
Citing value stocks’ typical outperformance coming out of the past 14 recessions, and a likely reversion-to-the-mean bounce for value out of its extreme discount to momentum, Bank of America Global Research recently suggested 29 “quality” value names to clients.
The list included: Alaska Air Group /zigman2/quotes/200972303/composite ALK -2.87% , AT&T /zigman2/quotes/203165245/composite T -1.22% , Citigroup /zigman2/quotes/207741460/composite C -0.48% , Comcast /zigman2/quotes/209472081/composite CMCSA -2.46% , Cracker Barrel /zigman2/quotes/205921983/composite CBRL -0.43% , Goldman Sachs /zigman2/quotes/209237603/composite GS -1.59% , Kimco Realty /zigman2/quotes/202836571/composite KIM -2.58% , Medtronic /zigman2/quotes/206816578/composite MDT -1.25% , Molson Coors /zigman2/quotes/205165133/composite TAP +0.16% and Restaurant Brands /zigman2/quotes/202094900/composite QSR -1.87% .
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested AMAT, MOS, BP, RDS.A, XOM, CVX, SLB, T, C, GS, and MDT in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.