The Veteran - Identifying Value Stocks

Last week we talked about the concept of value as an investment style or factor and some of its attributes.

We saw how value had dramatically underperformed growth, over not only in 2020 but for many years before that.

And we touched on the idea that the reopening and reflation of the global economy should favour Value and that this could be fast-tracked by the discovery of viable Covid vaccines.

We have had a glimpse of what that rotation from growth into value might look like, just as we did back in early May, but as the initial, the vaccine euphoria faded away traders took a more pragmatic and some might say realistic approach to the timetables and widespread availability of a vaccine.

Though news a second vaccine with a high rate of success has subsequently helped to boost confidence once more.

These episodes served to highlight the potential contained within value stocks that could be realised if the rotation sentiment can gather what we might call critical mass.

With that in mind, how can traders identify value stocks and more importantly how they identify value stocks that the market is likely to re-rate when and if that rotation begins in earnest.

We can adopt two methods one would be to build our own value screen(s) and sift through the equity markets looking for stocks that fit those criteria.

Our second possible method is something of a hack but its no worse for being that.

The hack would be to look at the stocks that major value tracking ETFs hold and drill down into those. We identified IUSV as a proxy for the value style in our last piece so that seems a good place to start.

If we look at the top 25 holdings in the fund we find a selection of well known US businesses and brands and the table is topped by another fund run by the most successful value investor of the last 5 decades namely Warren Buffet and Berkshire Hathaway, whilst number 6 in the list of the top 25 holdings is the stocks that might kick start the US economy and that is Pfizer.

The table below shows the top 25 value stocks tracked by IUSV ranked by their 1-month change but we also the performance over a variety of other timescales many of these stocks are still down over the year to date.

IUSV top 25 holdings

Name

5D %Chg

1M %Chg

3M %Chg

6M %Chg

YTD %Chg

52W %Chg

CVS Corp

+8.00%

22.39%

+11.06%

+15.41%

-1.83%

-1.83%

Chevron Corp

+10.03%

19.85%

-3.31%

-2.02%

-27.51%

-27.59%

Citigroup Inc

+5.73%

16.62%

-4.84%

+20.16%

-36.95%

-32.30%

JP Morgan Chase & Company

-0.01%

15.15%

+14.14%

+36.08%

-16.15%

-9.76%

Bank of America Corp

-0.68%

13.74%

+4.16%

+28.59%

-21.72%

-16.28%

Walt Disney Company

+0.97%

13.53%

+10.30%

+32.02%

-0.46%

-0.48%

Exxon Mobil Corp

+1.90%

10.35%

-12.89%

-10.40%

-46.07%

-45.61%

Berkshire Hathaway Cl B

+4.12%

8.83%

+9.32%

+36.26%

+1.82%

+4.95%

Comcast Corp A

+5.03%

8.77%

+13.22%

+37.96%

+10.20%

+11.21%

Wells Fargo & Company

+2.44%

8.53%

-1.94%

+6.21%

-53.88%

-53.88%

Unitedhealth Group Inc

+1.85%

8.06%

+10.13%

+22.52%

+21.26%

+32.33%

Coca-Cola Company

+2.47%

7.68%

+11.19%

+24.53%

-2.67%

+2.28%

AT&T Inc

+2.53%

6.17%

-3.32%

+2.49%

-25.75%

-26.54%

Verizon Communications Inc

+1.97%

5.12%

+3.79%

+11.53%

-0.62%

+2.54%

Wal-Mart Stores

+5.73%

4.87%

+14.45%

+20.50%

+27.70%

+27.67%

Cisco Systems Inc

+9.86%

4.50%

-1.25%

-5.20%

-12.49%

-6.92%

Pepsico Inc

+4.81%

2.38%

+5.49%

+6.74%

+6.18%

+8.44%

Fidelity National Information Services

+3.61%

2.03%

+2.03%

+11.03%

+5.54%

+8.08%

Johnson & Johnson

+3.31%

1.90%

+1.81%

+0.32%

+3.46%

+11.84%

Medtronic Inc

-1.11%

1.66%

+11.17%

+19.25%

-1.31%

-0.09%

Merck & Company

+0.35%

1.20%

-3.23%

+1.26%

-11.18%

-4.85%

3M Company

+5.27%

0.63%

+3.58%

+24.05%

-2.48%

+0.10%

Procter & Gamble Company

+3.99%

-0.62%

+6.22%

+25.21%

+14.89%

+19.05%

Pfizer Inc

-5.37%

-2.26%

-2.54%

-1.77%

-5.33%

-0.50%

International Business Machines

+2.53%

-5.94%

-5.44%

+1.26%

-11.63%

-11.87%

McDonald's Corp

+0.38%

-6.68%

+3.39%

+23.15%

+8.31%

+10.35%

Many of these stocks are in sectors or industries that have been hard hit by COVID 19 and changing patterns of consumer behaviour and there are others which have done very well during the pandemic so what becomes clear from this list is that there is difference between value plays and Covid rebound stocks though there will be some crossover.

It seems to me therefore that a barbell approach might be warranted at one end of the barbell we can use a broad-based value approach such as IUSV or other large-cap value ETF to get broad brush exposure to the value factor and the crossover of a post-Covid rebound whilst at the other end of the bar we can use a more granular approach to identify purer value plays.

And we will look at how we can do that next time.