Samantha Gleave: Vaccination, Biden and what all this means for the expenditure of value


By Gleave Samantha

BioNTech/Pfizer and Moderna vaccine announcements led to big stock market gains in mid-November, but a closer look reveals that value stocks benefited most from the rally. Our review of the cash flow features of the companies indicates that despite their weak performance during the Covid 19 stock market launch earlier this year, these value stocks are still too cheap.

Investing in value is the basic concept of purchasing securities that seem cheap on the basis of historical or current fundamental company value metrics, such as earnings or asset prices. In comparison, for fundamental factors such as earnings, growth investors usually rely more heavily on future growth estimates; the businesses they invest in tend to look costly based on historical or current earnings.

In recent years, the underperformance of value investing is well known. Over the past decade, the MSCI World Value Index has underperformed the MSCI World Index of developed market equities by over 30 percent.

However, when news spread about a potential vaccine, a number of valuation stocks increased dramatically. But it’s not just news of a vaccine that has recently generated benefit by spending an extra boost: a boost is also provided by the outcome of the U.S. presidential election. The likelihood that a major infrastructure stimulus package will be announced is one of the primary implications of a new Democratic president. This could have a positive effect on industries such as manufacturing, commodities, consumer cyclicals and finance, which appear to form the center of the value cohort of the stock market.

Furthermore, we have been skeptical about the warning signs in “momentum” stocks for some time – mainly growth-oriented tech companies. The launch of the vaccine contributed to the biggest one-day momentum collapse in history. Given these stocks’ very high valuations, we believe other parts of the stock market will continue to lag behind.

If the recent increase in the popularity of value stocks marks the beginning of a sustained period of good results, it is too early to say, but we definitely see promising signs.

The latest spate of corporate announcements from the third quarter has given us reason to be hopeful. Better-than-expected volume and price results was recorded in a range of stocks in which we are involved. For instance, in several key markets, Swedish jewelry retailer Pandora posted double-digit percentage like-for-like growth and said October sales were up 8 percent. Peugeot posted better-than-expected sales in the automotive sector in the third quarter, led by increasing volumes and positive pricing. For the quarter ending September 2020, UK homebuilder Vistry issued a comprehensive trading update with solid sales patterns, commenting that earnings guidance will be at the upper end of the range of market forecasts.

Recent closures may have a negative effect on trading in the fourth quarter, but once the constraints are relaxed, we can expect these positive patterns to reemerge.

Although these qualitative results provide some anecdotal support for investing in stocks of value, our investment decisions are still focused on the thorough implementation of our cash flow analysis-based investment method. This means that we just look at the revenue that firms actually produce, rather than relying on their recorded profits. For a number of accounting purposes, the two metrics can be surprisingly different. Fortunately, this study of cash flow often points to a clear potential for stocks of value.

There is a large spread of stock valuations among value companies according to our criteria, which appear to have high cash flow returns because their stock prices have been depressed, and growth companies, where stock prices are high but returns on cash flow are poor.

As a result of high historical cash production coupled with inventory rates that were among the hardest hit by the pandemic, value stocks have excellent backward-looking cash flow returns. While many of these businesses are still facing trading challenges at the moment, as economies recover from the pandemic, we expect cash flow to return to normal levels. This should lead to a value rally,


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