Former growth stocks can become outstanding value plays, according to Bank of America. Its Research Investment Committee says 16 stocks in particular are cheap after a major “reset.” It says they can deliver strong returns because of their balance sheets and competitive positions. A lot of high-growth former stock market favorites have lost their shine in the last year, and Bank of America warns that there’s no sense in waiting for them to come back.
But that doesn’t mean that a former growth standout can’t be a good investment under new circumstances, according to the firm’s Research Investment Committee (RIC). The group points to the case of the “Nifty Fifty,” a group of extremely popular blue chip stocks from the 1960’s and 1970’s that fell out of favor in the ’80’s.
While the group may have become infamous as a market fad that faded, some Nifty Fifty stocks have been very strong performers since the dust settled.
“After a bear market, formerly high-flying stocks can look attractive as valuations reset and investors hope for a rebound,” the committee wrote. “But companies that had impossibly high valuations face harsh judgment as financial conditions tighten.”
That’s bad news for tech and for old internet favorites, but there’s a lot left to like outside of those names.
“Young growth stocks can become mature value stocks,” the group of strategists wrote. “Early-stage companies tend to trade earnings growth for dividends and a promise of high future returns for unreliable cash flows. Ultimately, companies can mature, and investors settle into the relative comfort of strong balance sheets.”
The RIC is positive on energy, small cap, and value stocks, noting that “there’s always a bull market somewhere.”
But the key to success in the former growth space is finding companies with world-class balance sheets and solid business models. That will give them the ability to pay steady dividends and should contribute to better earnings as the market outlook improves.
The following 16 companies are some of the RIC’s top picks for investors who want to play this theme, and all are rated “Buy” or “Neutral” by the bank. Bank of America says they’re among the least expensive S&P 500 stocks based on price-to-adjusted book value.
The adjustments to book value include intangible assets (excluding goodwill), capitalized research and development expenses, and depreciated selling, general, and administrative expenses. Bank of America screened for the 100 cheapest S&P 500 stocks by that metric, and then removed the stocks with the lowest returns on invested capital over the past five years.
The combined screen is intended to show the companies that are the least expensive based on the value of their assets, and which have been delivering the best returns on their investments in recent years. The stocks are gathered into an index that is rebalanced at the end of every quarter.
These 16 stocks are ranked from lowest to highest based on the size of their weighting in BofA’s index.