Using a Barbell to Strengthen Your Equity Portfolio
Among our top calls for the new year is the potential for beaten-down value stocks to surge back in 2021. Yet we wouldn’t count out some of 2020’s big winners those growth companies with dominant and emerging business models that can continue to meet or exceed lofty shareholder expectations. We believe an approach that barbells the two can strengthen equity portfolios.
The case for a value resurgence
Investors weren’t necessarily seeking low valuations in 2020. Growth stocks supercharged by low interest rates, digitization, work from home and other pandemic-related trends were continuously bid up and led the market higher. It wasn’t until November, with positive vaccine news and election relief, that value took the mantle – and we think it can hang onto it.
We don’t count growth stocks out, yet we see a near-term opportunity for value investors for a few key reasons:
- Room for a bigger bounce. Some growth businesses may be permanently accelerated by COVID, but for others, the 2020 bump was a temporary pull-forward of demand. Meanwhile, cyclical value stocks, those with ties to economic growth and low valuations, have been most depressed and should enjoy a larger bounce with market and economic recoveries. A look back also shows that value historically has outperformed in the early stages of a recovery.
- The return of buybacks. Company buybacks of shares slowed dramatically in 2020. We believe activity should resume in 2021. Having that incremental buyer in the market pushes stock prices up and is good for the market overall. But buybacks are more accretive for value stocks, as buying shares at lower valuations (removing them from the market) has a greater proportionate impact on the value of the remaining shares.
- Easier year-over-year comparisons. Corporate earnings comparisons could matter more in 2021. Many value cyclicals will have an easier time beating dismal 2020 figures versus growth companies with a much higher bar to pass to impress investors.