Stock picks to buy, 29 cheap, high-quality companies: Bank of America – Business Insider

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  • A group of Bank of America strategists make a compelling case for value-centric stock picks in the wake of a US economic recovery.
  • The strategists bolster their picks by pointing to positioning, economic activity, historical evidence, and proprietary measures.
  • In total, the strategists provide 29 value-centered stock picks and provide additional commentary to express their reasoning.
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There’s no denying that value-centered investment approaches have seen better days.

Depending on how you carve it up, for about a decade now, investment strategies focused on stocks that are cheap relative to fundamentals have underperformed growth-oriented strategies by a considerable margin. The Vanguard Growth ETF has gained 370% over the past 10 years, besting its value equivalent by nearly 200 percentage points. 

Renowned value investors such as Seth Klarman, the billionaire manager of the hedge fund Baupost Group, and Cliff Asness, the billionaire cofounder of AQR, have vehemently expressed heartache and frustration over the strategy’s prolonged difficulties, and expect a redemption for their beloved strategy in due time. 

As of today, growth stocks continue to garner the majority of the market’s attention. 

But just because investor affinity has tilted in favor of high-flying, growth oriented issues doesn’t mean that value is dead forever. And a group of strategists at Bank of America thinks that these value investors may soon have their day in the sun.

“Following an exuberant August for Growth (the Russell 1000 Growth Index outperformed the Value index by 6ppt), Value started to see signs of life in September, reversing the trend by 4ppt MTD,” the strategists said. “Despite the recent rotation, we still see more room to run for several reasons.”

Those aforementioned reasons include:

  • The economy — “Various macro indicators point to an economic recovery.”
  • Historical evidence — “Value also outperformed coming out of 14 of the last 14 recessions for at least three months.”
  • A proprietary reading — Bank of America’s “US Regime Indicator has officially entered into a recovery phase, where Value outperformed 100% of the time by over 20ppt on average during this phase.”
  • Positioning — “On almost any measure, and among almost every investor group, Growth is over-owned and Value is neglected.”

In order to provide visual context to their argument, the strategists provided an array of charts and tables backing up their claims.

Here’s a look at value’s performance juxtaposed with that of the S&P 500 when coming out of a recession. Clearly, value outperforms the broader market in this type of scenario.

BofA US Equity & Quant Strategy, Dartmouth University data library, Bloomberg

And here’s a look at Bank of America’s proprietary US Regime Indicator. According to the strategists, the metric has officially entered a recovery phase, providing a tailwind to value-centered approaches. 

BofA US Equity & Quant Strategy, Refinitiv, ICE Data Indices, LLC, Institute for Supply Management, Bureau of Labor Statistics, Federal Reserve

What’s more, investor affinity towards growth stocks is approaching a fever pitch, potentially setting the stage for a sharp turnaround.

ofA US Equity & Quant Strategy, FactSet Ownership

Although the backdrop for a value-centered approach is currently auspicious, the strategists are quick to note that the fervor that propelled growth oriented strategies and stocks to new heights may not have run dry yet. 

“Despite our Value preference, there is still a number of compelling arguments supporting Growth’s continued leadership,” they said. “The Fed put (FANG stocks have been the ultimate beneficiaries of monetary stimulus), Tech disruption and the rise of ESG investing favor Growth over Value. A potential second wave also does not bode well for Value.”

With all of that under consideration, the strategists compiled a list of 29 high-quality value stocks that stand to benefit from a robust economic recovery. Additional commentary is included to provide background on the strategists’ recommendations.

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