We may soon see the passing of the baton between outperforming growth stocks and underperforming value stocks.
The bull run seems to have stalled recently and it’s the popular growth stocks that are weighing on the S&P/ASX 200 Index (Index:^AXJO).
Questions about their overstretched valuations are likely to linger and that means this could be the time for the laggards to shine.
Why laggards could prove to be better value buys
Value stocks have recently been outperforming growth as the ASX 200 benchmark retreated around 5% from last month’s peak.
Growth stocks are those that trading on high price-earnings (P/E) multiples. Investors have been willing to pay a premium for earnings growth in this low-growth COVID-19 environment.
Value stocks are the opposite. The are seen as cheap as their share prices have so far failed to keep pace with the bull market and that puts them on undemanding P/Es.
I suspect some of these underachievers can outperform even if the top 200 stock index trades sideways or slips a little further.
The building stock deepest in value territory
One of these value laggards that I think look interesting is the CSR Limited (ASX: CSR) share price. The uncertain outlook for construction activity is keeping buyers at bay even though the building materials supplier delivered a better than expected full year results in May.
While that may feel like a long time ago on ASX time, investors may again be reminded of this come November when CSR posts its half year results.
UBS thinks profit margins for its building products division will be better than what the market is expecting.
Another catalyst could be the valuation of CSR’s 450 hectors of land in Western Sydney, which the market is pricing at around $500 million. Any uplift on land valuation will be warmly received by investors.
The broker is recommending investors buy the stock as it’s trading well below its target price of $4.77 a share.
Emerging from an earnings storm
Another laggard I like is the Nufarm Limited (ASX: NUF) share price, which slumped 27% since the start of calendar 2020.
The drought in Australia and Europe weighed on the stock but the adverse weather condition is turning!
Despite this, not much good news is priced into the stock. Also, Nufarm said it would take a $215 million write down in its European assets, so the bar is set reasonably low, in my view.
The turnaround in the stock could come before the end of the month when management hands in its full year results.
It won’t be the FY20 numbers that will trigger a rally as management already released the earnings number. It’s the outlook statement that investors will be scrutinising. Let’s hope management will also have something upbeat to say about sales of its omega-3 enriched canola seeds.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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