Wall St Week Ahead-US value stocks draw bargain hunters while AI fever rages

Vulcan Materials Co

01/03/2024 19:33

By David Randall
       NEW YORK, March 1 (Reuters) - As fervor for artificial
intelligence sweeps Wall Street, some investors are seeking
bargains in more conventional areas of the stock market.
    Value stocks, typically defined as companies trading at a
discount on metrics such as book value or price-to-earnings,
have largely been left behind as AI put a charge into their
growth-focused peers. 
    However, gains in some value-heavy sectors such as
industrials and materials have accelerated lately. Proponents
believe that's a sign that the rally in the benchmark S&P 500
index  .SPX  is broadening beyond a handful of tech and growth
names.
    “There’s clearly an investment case for value stocks over
the long term,” said Que Nguyen, chief investment officer of
equities at Research Affiliates. “These companies are still
very, very cheap and many of them have already gone through the
difficult process of restructuring their businesses and balance
sheets.”
    The S&P 500 is up 7.6% in 2024 and stands at a record high.
The S&P 500 Value Index  .IVX  is up 3.1% year-to-date, lagging
the 11.5% gain in the S&P 500 Growth Index  .IGX . Yet some
value-heavy sector have shown signs of life in recent weeks. 
    The S&P 500 industrial sector  .SPLRCI  rose 7.1% last
month, driven by rallies in General Electric  GE.N  and Howmet
Aerospace  HWM.N . The broader index gained 5.8% in that period.
    The materials sector  .SPLRCM  gained 6.7% in February, led
by Vulcan Materials  VMC.N  and Ecolab  ECL.N  . Consumer
discretionary  .SPLRCD , home of recent gainers such as Chiptole
Mexican Grill  CMG.N   and Ralph Lauren  RL.N , rose nearly 9%. 
    One major draw: value stocks are relatively cheap compared
to the rest of the market. The health care sector trades at 18.9
times forward earnings with energy trading at a 12.2 multiple,
much less than the 20.8 forward earnings for the S&P 500 after a
rally lifted the benchmark 42% from its October 2022 lows. 
    Michael Hunstad, Northern Trust Asset Management’s deputy
chief investment officer and head of global equities, believes
multiples have grown too steep for the S&P 500 and the so-called
Magnificent Seven group of growth and technology stocks that
have led its rally. Tesla's  TSLA.O  drop of nearly 20% this
year illustrates how quickly such stocks can reverse, he said.
    "We expect to see more risk to the downside for multiples,
particularly among the Mag 7," said Hunstad, who has been
increasing his positions in value-focused sectors such as
healthcare and energy.
    Hunstad also believes value stocks could better weather a
prolonged period of elevated interest rates than growth names,
as their cash flows are shorter-term and less sensitive to
borrowing costs. 
    While investors still expect the Fed to cut rates this year,
they have reduced expectations for how quickly and deeply the
central bank will cut rates, as a stronger-than-expected economy
could reignite inflation if monetary policy eases too soon. 
        Next week’s congressional testimony from Fed Chairman
Jerome Powell could shed light on policymakers’ views. Investors
are also awaiting U.S. employment data next Friday.
    Betting against growth stocks has been dangerous over the
last decade, when searing rallies in shares of companies such as
Apple  AAPL.O , Google-parent Alphabet  GOOGL.O  and Meta
Platforms  META.O  led markets higher. The S&P 500 Value index
is up about 110% over the last 10 years, compared with a nearly
235% gain in the S&P 500 Growth index.  
        Broader sentiment toward value has waned, by some
measures. A net 13% of fund managers polled by BofA Global
Research expect growth stocks to outperform value names over the
next year, the highest conviction level since May 2020. 
  
        Still, some strategists argue the productivity gains
promised by AI could lift all boats long-term, benefiting value
stocks as well as growth shares.
    Robert Robotti, chief investment officer of Robotti &
Company, believes value stocks are likely to see the largest
efficiency gains from adopting AI, bolstering their margins and
pushing up valuations. He has increased his stake in industrial
and healthcare stocks as a result.
    "The application of AI is going to be across the entire
company and that’s not limited to the guy selling the chip,"
Robotti said. "It’s the guy buying the chip and increasing his
efficiency who is going to benefit.”

 (Reporting by David Randall; Editing by Ira Iosebashvili and
David Gregorio)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
 
((Wall St Week Ahead runs every Friday.
For the daily stock market report, please click  .N ))