(May 12 – 17:45 ET) – Richard Bernstein, chief quantitative strategist at Merrill Lynch & Co. Inc., says that value stocks are the place to be right now.
In a report out today Bernstein says that high-quality stocks are historically undervalued based on old-fashioned valuation measures such as price-to-cash flow and price-to-earnings. “High quality and value now appear to be synonyms,” he says.
Over the past year Merrill has been recommending that investors overweight their portfolios in value, small cap and low quality stocks. It is now dropping the low quality stocks from that recommendation, “lower quality stocks have gone from fairly valued to significantly overvalued,” he says, noting that low-quality stocks are priced at about eight times high-quality stocks.
In recent months high-quality stocks have outperformed, largely because value outperformed growth, Bernstein suggests. “The technology bubble has caused some strange bedfellows, but one of the oddest is high quality and value,” he says, “It is not often in our work that one associates value investing with high quality investing. Today appears to be one of those anomalies.”
-James Langton