Stockopedia: 10 beaten up large-caps showing signs of recovery

Many shares have not recovered from Covid-19 lows – but some are now showing signs of improvement.

Last week came news that a $10 billion (£7.64 billion) investment firm in the US was shutting up shop.

For many investors - especially here in the UK - that wouldn’t usually raise eyebrows. Yet, for a number of reasons it sent a vicious shudder through sympathetic onlookers everywhere.

AJO Partners has been in business for 36 years. And for three decades its specialty of ‘value’ investing worked well (as a long history of market research tells you it should). But over the past five years - and that’s really being generous - it was a strategy that rarely worked at all.

In an interview with the research site MarketWatch, co-founder Ted Aronson, said: “Our return sucks over the past few years… Our sh*t is so bad it’s unbelievable compared to our peers.”

Aronson is not alone. Value investors around the world have been suffering since the financial crisis more than a decade ago. In that time, growth investing - irrational as value investors might see it - has simply reigned supreme. 

With firms like AJO throwing in the towel, there’s more than an echo of the high-profile firings of value managers back at the height of the dotcom boom. Back in 2000, even Warren Buffett was getting flack for not buying speculative tech stocks. But for those value managers who stayed the course, the subsequent years after the crash were blisteringly profitable. The market cycle is unstoppable.

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Back in the present, even swirling economic turmoil, US elections and Brexit trade deals have not snuffed out the enthusiasm for small-cap growth and expensively priced mid- and large-cap high quality shares. The question for investors is: when will these trends change and the cycle move on?

There’s no way of knowing, of course. But what is notable when you dig into stock-level performance over the past six months is that many shares haven’t got anywhere near recovering from March’s sucker-punch of a pull-back. But there are some that are starting to show signs of improvement. 

Traditional value managers tend to look at momentum with scepticism. Yet a combination of relatively cheap valuations in shares that are starting to be noticed by the market can be a powerful approach to finding turnarounds. Academic studies have long shown that when one style is working the other tends to lag. Used together, they can offer a smoother, less volatile performance than you get from either factor on its own.

Screening for value and momentum

To find large-caps with signs of a strong combination of value and momentum, we’ve used some ranking tools that are designed to find the cheapest shares with the best positive trends. In some cases their prices have risen very sharply, while in others the trends are more subtle.

With solid price strength over the past six months, these large-cap shares are somewhat proof that you don’t need to rely on more speculative smaller-caps for outsized returns. 

Insurance, in the form of Aviva (LSE:AV.), Phoenix (LSE:PHNX) and RSA (LSE:RSA), isn’t usually a fast moving sector, but these shares are rubbing shoulders with names like the retail group Kingfisher (LSE:KGF), security specialist G4S (LSE:GFS) and tech supplier Computacenter (LSE:CCC).

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Smoother returns

While many investment managers wait and hope for ‘value’ strategies to become profitable again, individual investors have more flexibility to take opportunities. This year’s volatility saw a hard sell-off in parts of the market. And while growth and quality are clearly still in demand, a recovery in cheaper, less exciting stocks does seem to be happening. 

A combination of appealing valuation and positive price strength are hallmarks of some of the world’s most successful investors. Together, these two factors can point to stocks with classic turnaround profiles - where the shares are bouncing back from a period in the wilderness. Careful research is needed, but cheap stocks on the move may offer a smoother way of capitalising on two of the strongest return drivers in the stock market.

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.