6 CHEAP STOCKS IN AN EXPENSIVE MARKET
WE USE THREE METHODS TO SPOT RARE POCKETS OF VALUE
Stock markets across the globe are marking new highs as investors continue to focus more on how fast earnings are growing rather than how these earnings are being valued.
‘Growth’ and ‘value’ investing are typically seen as being in opposition to each other and growth is on a winning streak. The US Russell 1000 Value Index has returned 9.7% in 2017 against 24% for the US Russell 1000 Growth Index. That trend is being replicated on this side of the Atlantic too.
Hedge fund manager David Einhorn – a noted value investor – has even questioned if there is a ‘new paradigm for valuing equities’. In a letter to clients of his Greenlight Capital fund, reported by
Bloomberg, he wrote: ‘The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy.’
AJ Bell’s investment director Russ Mould says one fund manager recently moaned to him that there is no value in momentum stocks at present – and no momentum in value stocks.
We’re in a difficult time for markets despite the headline indices racing ahead. Nevertheless keep reading as we do have some good news.
EXPENSIVE MARKETS ARE MAKING IT TRICKY TO FIND VALUE
HOW TO FIND VALUE
Value investing may be out of fashion but Shares still believes in considering valuation when it comes to judging an investment.
Just look at the fate of leisure group Merlin
Entertainments (MERL) which fell nearly 20% in the wake of a recent profit warning (17 Oct). The news undermined its growth credentials and shined an unfavourable light on its high price-toearnings (PE) ratio in excess of 20-times.
Investing in undervalued companies provides what is often described as a ‘margin of safety’ which can help you avoid those kinds of sharp losses.
Expensive markets are making it tricky to find value – but it is not impossible.
Data from Capital Economics suggests the FTSE All-Share is trading at around a 50% premium to its long-run average PE ratio; and the US S&P 500 trades on an earnings multiple of 17.9 against a 10year average of 14.1.
Buried within the market is a pocket of value stocks. To find them, we’ve decided to look beyond the standard PE figure and use a range of alternative metrics. We’ve accessed three filters offered by Stockopedia’s screening service partly inspired by the processes deployed by legendary investors.
Recognising a stock can be cheap for a reason; we have also applied the knowledge of the Shares team to filter out the bad stuff and arrived at a list of six stocks which we believe offer winning value.