Over the last week, analysts have almost unanimously pointed to “value stocks” – stocks with favorable P/E (price/earnings) ratios – as the next group to outperform the market in 2020.
In fact, they’re already beating the major indexes. The iShares S&P 500 Value ETF (NYSE: IVE) is up over 15% since September 2019. The S&P 500, by comparison, has only risen 13%.
Four months ago, J.P. Morgan quant analyst Marko Kolanovic predicted the “value revival” in an interview with CNBC.
“Given that the S&P 500 is heavy in bond proxies and secular growth, we would expect higher upside potential in small caps, cyclicals, value, and Emerging Market stocks than the broad S&P 500,” he said.
These days, J.P. Morgan’s chief U.S. equity strategist, Dubravko Lakos, sees that trend continuing as cash increasingly rotates out of growth stocks and into value picks.
“Currently, we estimate that 42% of potential rotation has been realized,” he said.
“As data prints improve, the reacceleration of the business cycle will be more evident and should lead to greater risk appetite. Global cyclical upturn has legs and is not fragile as feared by many. The change in trajectory of global monetary policy and central bank balance sheet growth will be a powerful driver of a new intra-cycle recovery.”
Whether that “recovery” arrives remains to be seen, but in the meantime, it might be prudent to examine value stocks that have yet to truly “pop.” Market bellwether Caterpillar Inc. (NYSE: CAT), for example, is trading near its 2019 high after dropping for most of January. Over the last few sessions, however, the stock has started rising once again, distinguishing itself as a potential “market breaker” if it keeps moving higher.
In the daily candlestick chart above, you can see that CAT broke out above its minor bearish trend (represented by a yellow trendline) after setting a higher low. It’s actually the second higher low in a row, suggesting that share prices still have plenty of positive momentum. With the stochastics indicator below 80, CAT doesn’t look overbought, either.
And even though the stock has been “chopping sideways” since peaking on January 2nd, it’s still viable for a long position. The January high almost caused a breakout past key resistance at $148, but ultimately failed. Now, CAT’s gearing up for a second run at it.
If the stock manages to trade above Friday’s high, it might make sense to go long with a trade trigger of $149.00 – just above key resistance. From there, the stock could very well take out the January high en route to a major rally.
Best of all, because CAT’s earnings are coming up on January 31st, bulls still have over a week’s worth of trading sessions for the stock to move in their favor should a trade trigger – something that seems likely given CAT’s recent price action.
