Value stocks continue their strong run following the correction in technology stocks in March. Mick...
Value stocks continue their strong run following the correction in technology stocks in March.
Mick Brewis, head of US department at Baillie Gifford, says: "To some extent it is an inverse of the correction of the highly valued technology stocks. Value stocks are seen as a safe haven."
James McLellan, director, US equities, at Clerical Medical, agrees: "The S&P 500 has been quite flat this quarter, it has gone down 0.5% in US dollar terms but value sectors have performed well."
He points out that such traditionally defensive sectors as consumer staples, basic materials and transport have been the top three performing sectors this year and have gone up between 7-12% in dollar terms.
At the same time growth stocks have been suffering earnings warnings and disappointments, McLellan says, citing Nortel as an example. Technology company Nortel did not see its growth exceed its estimates in October and it has been particularly hit in the optics part of its business, he adds.
"People are nervous about third quarter earnings, expectations having got out of hand in the first half of the year, the market is now worried about the ability of the technology sector to match expectations," says McLellan.
"There has been a rotation out of growth stocks due to these fears and into the value arena, where expectations are more reasonable and easily attainable."
McLellan points out that basic materials have enjoyed a bit of a run this quarter, especially at the end of October. International Paper hit a low of $26.5 on 17 October then rose to close at $36.5 on 31 October.
Colgate Palmolive enjoyed a strong quarter despite having disappointed in September when it pre-announced disappointing third quarter results due to problems with raw materials and the strength of the dollar. The stock was hit but re-bounded strongly in October. "This is typical of the move we have seen back to value areas and the defensive attitude of the market," says McLellan.
Clerical Medical has some exposure to Phillip Morris. McLellan points out that it is cheaply valued and both of its tobacco and food businesses enjoy robust fundamentals. It has gone up 20% this month.
Brewis is also keen on Phillip Morris as an example of an attractive value stock, noting its shares have doubled from $18 in March to $36 in October, he says.
"It was traditionally seen as a dull, defensive stock," he says. "It is now at a very cheap valuation and has had a good run recently. There have been litigation worries but these concerns are easing slightly. Class actions, which could potentially bankrupt a company have not been successful and there has been a bounce since March."
Brewis also classifies regional banks as value stocks and says selectively there are some good opportunities. Goldenwest Financial, a regional savings and loan bank, at a low P/E rating of 9 compared to the market P/E of 25 and its shares have more than doubled from $28 in March to $54 in October, he says.
"Regional banks are a value sector because people find their prospects dull, their businesses of making loans are not that high growth," Brewis says.
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