As investors continue to rotate their exposure into value sectors, stocks in that corner of the market starting to take on characteristics of the momentum factor, an uncommon combination that bodes well for investors, said analysts at Alliance Bernstein in a research note out Wednesday.
“This is the holy grail of quant and Value investing!” the Bernstein analysts wrote.
Many investing models, they note, have been “built to overweight stocks where there is agreement between Value and Momentum – i.e. to overweight stocks which are cheap but which also have earnings momentum and/or price momentum. It was a very successful combination.”
Investors are currently in the midst of a rotation into stocks seen as offering value in terms of earnings or sales growth as the economy recovers from the coronavirus pandemic rotation and are paring exposure to stocks that rose sharply as they benefited from the work-from-home trend in the past year.
“It is being driven by the re-opening trade, and improving macro outlook, and is directly linked to continuously increasing nominal yields, a steepening yield curve and increasing inflation expectations. We are tactically long Value and think there is further to go,” the Alliance Bernstein analysts wrote.
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Sectors that are benefitting now – that is, screening as both value and momentum – include autos, banks, energy, and materials. The energy, materials and financials sectors, as well as consumer discretionary, are the sectors with the largest increases in earnings estimates over the past six months. Share price performance is being driven by these earnings upgrades.
Specific stocks which fit the criteria as screening for both value and momentum — meaning they’re in the cheapest quintile for both Price to Book and 12-month Price Momentum — include Ford Motor Co. F, -1.58%, PulteGroup PHM, -5.37%, Baker Hughes Co. BKR, -4.17%, Dupont de Nemours DD, -0.01%, and a host of financials, including KeyCorp KEY, +1.67%, Fifth Third Bancorp FITB, +1.11%, Regions Financial RF, +1.27% and Ally Financial Inc. ALLY, -3.10%
The Bernstein analysts note that the backdrop for this value rotation “is very different to any period in history. We are in a very different policy environment and possibly are at the start of a much bigger change in the inflation regime.”
Still, it’s worth drawing comparisons and distinctions between earlier value rotations, they add. The current one is the largest since 2009, which served as a rebound from the 2008 financial crisis.