Switching From Growth To Value

All good things must come to an end.

For most of 2017, growth stocks far and away have been the outstanding performers in the US stock market.

Almost daily, I was delighted in sending you Trade Alerts to buy winners, like NVIDIA, Palo Alto Networks, Apple, Facebook, and Alphabet.

And so they delivered, in spades.

The reasons for their impressive gains were crystal clear.

Hyper accelerating technology, which I have been pounding the table for years, kicked into overdrive in 2017.

The believers were rewarded, as was evidenced by the blockbuster earnings announced by the tech leaders.

However, good things don’t last forever, and trees don’t grow to the sky.

There is in fact a good chance that market leaders will change in 2018.

A sea of change may be coming. Which group is about to take charge?

That would be value stocks.

How do you deal with an expensive market that has been running for nearly a decade?

Only buy cheap stuff.

Value stocks are easy to find.

Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them.

This is what the big boys do.

There is another reason to refocus on value stocks, but it is more psychological than analytical.

We are now entering our ninth year in this bull market, one of the strongest in history.

Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000 and in housing debt in 2008.

At least if they buy cheap share at market highs they have done an adequate job preserving explanations for their actions.

There is also some inherent built in safety in increasing weightings in companies that haven’t appreciated very much.

I probably don’t know you personally (although I call about 1,000 of you a year), but I bet you don’t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.

So let me do the heavy lifting for you. I’ll distill down the value play to a handful of high quality, high probability sectors.

1) Industrials – Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years?

With US GDP now growing at a more robust 3%, suddenly this is a sector you want to own.

Protection from tailwinds and deregulation provide additional tailwinds.

What’s my favorite industrial?

The former hedge fund that made light bulbs, General Electric (GE).

They make really cool jet engines and diesel electric locomotives too.

And the shares have just been completely slaughtered, making them the worst performing Dow stock of 2017 by a large margin.

It has been punished enough.

My second pick in this sector would be US Steel (X).

Dogs of the Dow arise!

2) Consumer Discretionary – Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall.

A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades.

Low rates will keep the 30-year mortgage under 4% for longer. You already know my best name here, Home Depot (HD).

3) Financials – Look at the head and shoulders top now in place in the US Treasury market, and the first thing you want to do is rush out and buy bank stocks.

This steepening yield curve is where it really matters for banks, as it allows them to hugely expand their profit margins.

On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value.

Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).

New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into 2018.

It could take us right to my final Dow target of 28,000 in 2019.

After months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure.

As a result, the balance of this year has “chase” written all over it.

Keep your fingers crossed, but stranger things have happened.


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