over 3 years ago • 2 mins
Market data from the last week has shown investors buying up stocks that appeared cheap and selling those that were most expensive, suggesting they believed some of the stocks hardest hit by coronavirus might soon make a recovery.
Investors plumping for “value” stocks focus on what a company is worth right now – basing their analysis on the value of a company’s assets, the strength of its cash flow, and its dividend yield. Such investors then buy the stocks they calculate are worth more than their current stock market valuation. According to Goldman Sachs, the cheapest stocks – which have been unloved for the last month – were the standout performers last week.
That might be because economic data appears to be improving: April’s likely to be the trough in terms of economic growth, and in Europe, the proposed recovery package is skewed towards the most affected countries, helping them and their companies to potentially bounce back from the pandemic.
Moreover, the valuation differential between value and its counter investing style “growth” had reached historical extremes, perhaps priming underperforming value stocks for a rally.
Professional investors tend to copy one another, and following the pros is popular among retail investors too, even though they’ll often be late to the party. Nevertheless, Goldman Sachs is on hand with recommendations for its clients also hoping to bet on a coronavirus recovery amid value stocks.
The investment bank has recommended a basket of “fiscal infrastructure” companies that consist of eurozone companies generating over 30% of their revenue from the continent, and in sectors which governments have specifically targeted for investment. These include roads, rail, renewables, and digitalization.
Goldman also recommends a “recovery” focused basket of stocks for investors wanting a more aggressive economically geared strategy. It includes companies with consistently high operating leverage, high financial leverage, and below-average price-to-earnings ratios. Such companies should benefit the most by an improving economic growth outlook.
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