The article notes that while counting on a value rebound amid the coronavirus pandemic “hasn’t been a winning strategy,” a shift may be imminent: “Value stocks are looking very, very cheap relative to everything else,” and could benefit from the extensive support coming from the U.S. government.
The article notes that the recent underperformance of value stocks has some investors questioning the strategy’s sustainability. But advocates like AQR’s Cliff Asness argue that the stocks are cheap for good reason (i.e. lower profitability and higher debt than their peers) but are not in “particularly bad shape today compared with the past five decades.” In a recent investor note, Asness highlighted how the valuation spread between the market’s cheapest and most expensive stocks has grown to historic levels: “It has certainly been excruciating getting here, but here we are, and it’s never looked cheaper looking forward. This is where long term investors make their bones.”
The article also cites comments from Wells Fargo analyst Chris Harvey, who said that value stocks are more reliant on debt to fund themselves, so the Fed could serve as a bolster for value businesses. Harvey pointed out that once the Fed began supporting the markets, “the bottom for value was in.” He added that the thawing of credit markets should make highly leveraged value stocks less dangerous. “Investors inclined to play a potential value bounce, the article concludes, have “plenty of options to choose from.”