by James MacGregor, AllianceBernstein
So as we stand today, the opportunity in value stocks is quite significant. The spread between value and growth stocks is as wide as itâs been at any point in the last almost 20 years.
On the one hand, this represents a fantastic opportunity, because there [are] an enormous number of attractively valued companies, based on their current metrics, to choose from. On the other hand, though, thereâs a lot of risk associated with that, because the underlying drivers of why we are where we are today, this idea of economic uncertainty, this idea of disruption impacting value stocksâ profitability, will affect a number of value stocks. And so not every stock within that broader value universe is going to turn out to be a good investment, because the reality is some will fall victim to disruption. Some will suffer from economic uncertainty because they are more cyclical. And so it is as important as ever for investors to be choosy in this environment.
We also want an investment catalyst. And thatâs something that, in our view, is going to change perception of the value of the company. That might be a new management team thatâs coming in and restructuring a business. That might be a change in behavior for an existing management teamâmaybe theyâre returning more capital to shareholders. That might be an improvement in the industry in which the company competes. But in each case, we want something that in our eyes is going to change perceptions of the company. And so a successful value investment today is one that combines that attractive valuation on those free-cash-flow metrics and that underlying investment catalyst.
Investors have reacted to the factors that I mentionedâeconomic anxiety and low rates and [their] disruptionâby seeking out companies that have either very fast-growing revenue streams or very stable earnings and cash flow. And theyâve done so with a conviction that exceeds the potential set of outcomes. Essentially, theyâve overpriced those particular areasâthe marketplace. And what theyâve left behind is a very wide subset of companies that in our viewpoint have attractive characteristics. And those companies are across virtually every sector and industry. Whatâs interesting to us as well is that the quality of these companies is exceptionalâthat youâre able to find, because thereâs this wide set of opportunities, a cohort full of companies that have quality metrics that are better than the broad market in terms of things like profitability, yet still trade at attractive discounts because theyâre not in the favorite areas of the market.
As we look at that positioning, our view is that regardless of what your expectations are about whatâs going to happen in 2020 and 2021, that these companies will have the strength to deal with an uncertain economic climate, the attractive cash flows and the catalyst to drive value creation as we go forward. And we think thatâs a pretty powerful combination.
This post was first published at the official blog of AllianceBernstein..
