"The prices fluctuate more than values - so there is opportunity."
If the quotation from Wall Street legend Joel Greenblatt is right, the possibilities are huge in the current market climate. You just need to know where to look.
This is where a newsletter from Alliance Bernstein's James MacGregor, written by Cem Inal and Shri Singhvi, comes in.
"Securities have always been challenging consensus – but never more than today" MacGregor wrote. "After several hard years, we see signs of value-saving brewing. But new approaches are needed to capture the potential of today's complex markets."
Of course, the concept seems as sensible as ever: Sniff out the undervalued and misunderstood stocks wait until their value is realized, and voila, profits. Sounds easy, but if the last decade is any indication, it's definitely not.
The under-priority of securities since the financial crisis has understandably got skewed investors to lose faith in the time-tested approach that counts such heavyweight as Warren Buffett
Benjamin Graham and Seth Klarman as loyal supporters.
MacGregor points out that the numbers are actually scary. Russell 1000 Value Index
has trailed the Russell 1000 Growth Index
with 3.5% annually over the last 10 years.
"Securities are generally perceived as more risky and suffered from growing anxiety about trade friction, interest rate security, volatile oil prices and threats to economic growth," MacGregor explains in the note. "Under the surface, however, we see promising signals."
He used this chart to illustrate how deeply discounted securities are for growth. As you can see, the current level is not something we see very often.
"Skeptics can claim that the rebate is justified," wrote MacGregor. "Maybe value is so much cheaper than growth stocks today because investors in a harsher macroeconomic environment believe that the growth stocks give some immunity to a slowdown and securities are vulnerable."
That's not how he sees it. He believes that macroeconomic risks are already priced, and in addition, many of these attractively valued stocks have strengthened their balance sheets to better cope with a potential recession.
"Investors don't have to pay for low-quality, heavily indebted or terminally falling companies to access attractive securities," he said.
So where does an investor seek this value player?
MacGregor says airlines and communications are mature for picking at this time. Specifically, he highlighted the Alaska Air Group
CMCSA, + 1.50%
as two stocks worth considering.
Whatever the case, it won't be easy.
"Although a value adjustment resumes, the path to recovery will not be smooth. Volatility is likely to continue," he wrote. "Therefore, investors need to be selective. Passive securities based on simple valuation measurements do not investigate individual companies. To identify undervalued companies that can withstand external pressures, investors need to carefully look at balances, cost structures, management teams, and most importantly, cash flows." 19659003] MacGregor says investors who are patient and avoid following the hearing could reap "very attractive returns" when the market changes.
"Reports of death value of investment are very exaggerated," he said. "By paying attention to the current market risks and using more lenses to measure valuations, we believe investors can be trusted to redistribute to disciplined portfolios based on traditional contrarian stockpicking."
There is a winter chill on the market Thursday, with Dow
S & P
all moving lower.