It’s because no matter who wins the election, more government spending is likely. This favors value over growth because it creates more growth and inflation. This favors value stocks for four reasons.
1) Inflation drives investors out of bonds and into perceived inflation trades — like value stocks and commodities. Larry McDonald at the Bear Traps Report thinks 10-year treasury yields will back up to 1.5% by the end of next summer. I agree that given all the stimulus, the odds favor a melt up and inflation scenario by the start of summer 2021. I like out of consensus calls, and this clearly fits the bill. “Bonds will be destroyed, and money will be forced into alternatives,” says McDonald.
2) Inflation naturally singles out sectors that are the big constituents of value. Banks and financials because they benefit from a steepening yield curve. (I am currently bullish on banks in my stock letter.) Energy, materials and industrials because they gain pricing power. (I’m also bullish on cyclical areas like these.)
3) In business school we learn that company valuations derive from the present value of future cash flows – which ramp up faster at growth companies than value. 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.
4) Finally, as growth spreads through an economy more companies experience growth, which means investors no longer have to bunch up in a narrow group of traditional growth areas like tech. This also sends money into out of favor value names, as their growth picks up.
Here are 20 favored value names that may post strength relative to growth names, for several quarters after the election: Sysco (SYY), Raytheon Technologies (RTX), Applied Materials (AMAT), Mosaic (MOS), Teck Resources (TECK) BP (BP), Royal Dutch Shell (RDS.A), Exxon Mobil (XOM), Chevron (CVX), Schlumberger (SLB), Alaska Air Group (ALK), AT&T (T), Citigroup (C), Comcast (CMCSA), Cracker Barrel (CBRL), Goldman Sachs (GS), Kimco Realty (KIM), Medtronic (MDT), Molson Coors (TAP) and Restaurant Brands (QSR).
Thanks for checking out my website. For more on this theme, see my MarketWatch column here.
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