Should I buy ASX value stocks right now?

It could be time to shine for the cheap end of the share market.

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Key points

  • Some stocks are trading on low earnings multiples
  • Financial outfit GMO thinks it’s time to recognise that value stocks typically outperform during a recession
  • GMO owns shares of Rio Tinto in its portfolio

The ASX value stock space can be a fruitful place to find cheap opportunities. One investing group thinks it's a great time to invest.

Everyone is looking for value when they invest, or else it's not really investing at all, is it? But some people take it to mean cheap.

'Value' can mean different things to different investors. It could mean that the investment has a low price/earnings (P/E) ratio or is valued at a significant discount to the net asset value (NAV).

Investment outfit GMO has outlined why this could be the right time to be looking at (ASX) value stocks.

The case for ASX value stocks

GMO acknowledged that there is investor focus on the possibility of a recession in the near term.

If, or when, a recession does come, GMO believes that the next recession is "much more likely to look like one or other of the prior recessions of the past 50 years than the COVID crisis".

There may be a number of (ASX) stocks at good value. GMO notes the "incredible cheapness of deep value" stocks today, but there is concern from some investors regarding the potential of a near-term recession. It noted that a "common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn."

In response to that view, GMO's co-head of asset allocation, Ben Inker, wrote some words that could apply to ASX value stocks:

We find that this conventional wisdom is false: empirical evidence shows that value stocks tend to outperform in recessions. Value stocks have the charm of low expectations. No one is expecting all that much from them, they have less to lose in an economic environment in which companies of all stripes wind up having a tough time.

Based on current valuations, deep value is priced to outperform the rest of the market significantly. Our analysis suggests that the prospect of deteriorating economic conditions in no way impairs this thesis.

Inker acknowledges that 'value' underperformed following the COVID-19 crash, but GMO's research shows that "the COVID event was very much the exception rather than the rule."

The expert went on to say:

It is the disappointing growth stocks that are the biggest headache for investors, since their disappointments call into question their premium valuations. Value stocks, by contracts, have the charm of low expectations. No one is expecting all that much from them, so they have les to lose in an economic environment in which companies of all stripes wind up having a tough time.

In a market that seems fraught with risk, deep value stocks are underheld by most investors, despite their extraordinary valuations.

…We believe those holding back due to recession fears should take some comfort in history and have a second look.

Foolish takeaway

GMO is a US-based fund manager that runs a variety of different funds, it's not focused specifically on ASX value stocks.

In one of the portfolios that Inker manages, the GMO Global Equity Allocation Fund is invested in Rio Tinto Ltd (ASX: RIO) shares, which is an interesting choice. It could also suggest that a similar business like BHP Group Ltd (ASX: BHP) could also make the cut.

I'm not sure what GMO would make of other ASX value stocks, but after heavy falls, there could be 'deep value' in beaten-up names like Adairs Ltd (ASX: ADH) and Universal Store Holdings Ltd (ASX: UNI) which now trade on low multiples of their trailing earnings. When conditions improve again, those current valuations could seem cheap.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs. The Motley Fool Australia has positions in and has recommended Adairs. 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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