Is it finally time for the value investing revival? Growth was the only game in town but the vaccine rally hints at a switch, says SIMON LAMBERT
When news of Pfizer’s successful vaccine broke on Monday, some Britons went panic buying again.
Except this time round in lockdown, it wasn’t toilet roll or pasta getting grabbed but beaten-up shares.
The FTSE 100 surged 5 per cent on the vaccine news, but it was the rocketing share prices of a disparate group of stock market members that was the real story.
Rolls-Royce, BA-owner IAG and EasyJet share an obvious airline industry link, but joining them at the party were oil giant BP, caterer Compass, Premier Inn-owner Whitbread, builder Taylor Wimpey and Cineworld.
They racked up single-day gains of up to 44 per cent – scored by leader of the pack Rolls-Royce – and the main attribute this ragtag bunch shared was that they have taken a real kicking from the Covid crisis.
The question now for investors is whether this marks the passing of the baton from growth to value investing?
Is value investing finally on the up as investors decide there’s no need to pay high prices for growth if a vaccine can bring a Covid recovery?
The former involves paying the high price that companies boasting the promise of many years of high growth command, while the latter involves looking for shares that have been undervalued by the market.
There’s a lot of middle ground, of course, but when you look at what is characteristically seen as one or other camp’s strategy, growth has been lording it for some time.
It’s what lies behind the stratospheric share price rises of the US tech giants, from old hand Amazon to upstart Zoom.
And growth investing is why some believe that you can justify Tesla being worth considerably more than the world’s established car companies (which are entirely capable of making electric cars).
Growth has been the main game in town for some time, but when Covid-19 and its lockdowns steamrollered stock markets many thought that the game was finally up.
This sentiment proved wrong: it turned out the businesses, earnings and share prices of the world’s growth giants – particularly the US stars – were much more resilient that people had thought.
Those stocks led the way with astonishing gains as the brutal and fast market sell-off in late February and March turned into the FOMO rally of spring and early summer.
It was dubbed that due to the rush to pile into companies with major upward share price momentum, for Fear Of Missing Out.
On Monday, the cool kids were left behind though as the unpopular bunch took over.
Companies that investors have really disliked due to their severe hits from lockdown measures and crumbling economies took centre stage.
Cineworld shares have fallen off a cliff this year due to lockdown, but on Monday and Tuesday they had doubled at one point in two days as investors rushed to beaten-up stocks
So, is this the point when investors decide that if a vaccine can deliver a return to some form of normality and recovery, then there is no point paying the high price growth shares command when you can pay a lower one for companies that are going to benefit anyway.
Markets have short memories and the promise of a bounce back, flattered by a recent profits crash, is easily able to drive share prices upwards as traders and investors chase gains.
And that can come long before the actual issue at hand is fixed
After the financial crisis this phenomenon led to the so-called dash for trash, as investors raced to buy struggling companies whose share prices had been hammered, despite some coming with piles of awkward debt and long-term structural problems.
The problem with that kind of strategy is that ignoring the fundamentals and buying not very good companies can easily blow up in your face.
A better long-term value investing route is to sort the wheat from the chaff and look for the good businesses that got caught up in a crisis and dumped with everything else; the ones with temporary problems you think they can fix; or those whose issues won’t go away but where people are overly pessimistic about their future prospects.
And there is a good argument for value investing being due a stretch in the sun.
There is lots of evidence that shows buying into cheaper stuff pays off in the long run if you are patient.
If you are picking individual shares, this requires some proper research and due diligence – and a portfolio of enough different companies doing different things that you have spread your risk.
If you use a fund manager or tracker, then do some decent digging into track records, strategies and what’s really in the fund, investment trust or ETF.
A middle ground is to look for something that can do both growth and value, often called growth at a reasonable price. This was made famous by investor Jim Slater, who used a price-to-earnings growth or PEG ratio, but is also expressed by fund and trust managers in a variety of ways.
You can also use specific share data specialists to look for shares that combine aspects of value, growth, momentum and quality. One I’ve used for some time and that This is Money has worked with on research and articles is Stockopedia.
Whatever you do, don’t just chuck money at the market.
That worked on Monday, but a sugar rush soon wears off.