Value stocks have gained popularity this month as investors look for vaccines to end the coronavirus pandemic. This article will consider key things to know:
Value stocks are equities that may appear inexpensive by various metrics. Investors may want to own them based on the idea their prices will return to “correct” values. They may not care whether their businesses are growing, or the long-term prospects of the industry.
Growth stocks, in contrast, are companies whose markets are increasing. They’re usually in newer fields where products and services haven’t yet reached all potential customers. (Like technology.) Growth stocks usually trade at higher prices, so they wouldn’t be considered undervalued.
Recent examples of value stocks include energy, industrial and financial stocks. Growth stocks include software companies, e-commerce and biotechnology.
Value stocks have gained recently because investors think the economy may recover from the coronavirus pandemic. They see the potential for fiscal stimulus to boost hiring and business spending. Hopes of at least one effective vaccine have people thinking travel restrictions and social-distancing measures could end soon.
Most value stocks fell sharply when coronavirus pushed the economy into recession. Investors shifted to companies that would benefit from social-distancing and remote work. Those included e-commerce, streaming video and software companies. They’ve mostly paused in the last month as sentiment shifted toward reopening.
Investors can find value stocks by scanning for companies based on certain ratios and metrics. They include:
Investors should always consider their time horizons, risk thresholds and expectations when making portfolio decisions. Recent gains in value stocks are based on the economy recovering and the coronavirus pandemic lifting. They also result from money managers rebuilding positions after liquidating these assets earlier in the year.
While the snapback could be sharp, its duration may be limited. Many impacted industries, like hotels, airlines and fossil fuels, may never return to their previous size. They could also be susceptible to political risk if Congress fails to pass further stimulus early next year.
Value stocks have at least two other potential drawbacks. First, their end markets are often mature or shrinking. Second, they don’t stand to benefit from disruptive technological innovation. This could make them less suitable for investors with multiyear time horizons.
This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 24/11/2020.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.
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