BANK OF AMERICA: An 'extreme' shift in the market is coming, and investors should buy these 23 cheap stocks before they get snapped up

  • Low-cost value stocks have long been left in the dust by more expensive growth stocks. But Bank of America’s Jill Carey Hall says that’s about to change.
  • She says there are two reasons: First, when returns for value stocks get this bad, they soon rebound. Second, the economy is in a “recovery” phase that also helps value beat growth.
  • Hall names a slew of “buy”-rated small-cap stocks that are very strong in terms of value metrics. Those could be especially well-positioned to capitalize on the shift she’s predicting.
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It’s clear what kinds of trades have worked in the stock market lately, but it’s harder to know when they’ll stop working.

Jill Carey Hall, a US equity strategist at Bank of America, says expensive growth stocks are crushing cheaper value stocks by a huge margin that can’t last much longer. She says economic conditions are one hint that a shift is coming.

“Our US Regime Indicator has now moved into the ‘recovery’ phase after its second month of improvement in January,” Hall wrote in a note to clients. “‘Recovery’ periods are typically most positive for value stocks and small caps — two of our key tactical calls for 2020 — and within small caps, Value and Cash Deployment both tend to outperform.”

Hall says another reason a change is due is that investors are shifting an “extreme” amount of money out of value stocks are into growth stocks. Returns for value small-caps are haven’t been this bad in 16 years, she writes, and the last time they got this bad, the stocks came back to outperform growth stocks on a three-, six- and 12-month basis.

To find the companies that have the best shot at outperforming when that shift arrives, Carey Hall looked at Russell 2000-listed stocks that Bank of America rates “Buy,” and found the companies that rank highly based on traditional value measurements such as book to price ratio, forward price to earnings, and price to sales ratio.

The 23 stocks are listed below and grouped by industry.