Resilient Recovery Stocks Transcend the Growth-Value Divide

Investors are reassessing which types of companies will thrive in the next stage of the recovery amid the recent rebound of value stocks. But we think the distinguishing performance factor will be a company’s ability to generate sustainable earnings, regardless of its style classification.

Value stocks have rebounded recently, driven by hopes that an exit from the pandemic will buoy the global economy. The gap between value and growth was especially pronounced in US markets. Sectors such as financials and energy, which are more cyclically sensitive, tend to do well in economic recoveries and are more heavily represented in value benchmarks. Growth stocks, meanwhile, may face pressure from rising interest rates, which tend to affect their multiples more than those of their value peers.

The growth-value debate will rage on. But we think there’s a more important question that transcends traditional style definitions, considering how different post-COVID-19 normalization may look from past recoveries. In fact, we believe investors should widen the lens beyond a growth-versus-value assessment to determine a company’s true potential.

Three Signs of Strong Recovery Potential 

In our view, the key question is whether the quality a company offers comes at a reasonable cost. And in the aftermath of an unprecedented economic crisis, determining quality will now come down to how fast a company can recover its earnings as conditions improve. To identify such companies, we believe investors should look for three key growth drivers that are very specific to today’s conditions: 

With the global economy on the mend, investors will continue to reassess the relative advantages of value and growth stocks alike. But their assessments are happening amid high price/earnings multiples not seen since the late 1990s, which is raising the market’s overall risk profile. That’s why high-quality companies with reasonable price/earnings and transparent earnings streams should have the advantage. Simplistically focusing on either value or growth likely misses the bigger picture: companies with resilient business models amid changing market and macroeconomic conditions should be able to deliver solid returns in a post-pandemic world, no matter what style benchmark their stock belongs to.