Searching for Growth Stocks in 2021

Since drug companies first began reporting promising efficacy rates for a COVID-19 vaccine, hopes in some circles have been restored that the economy could return to normal soon, even as infection rates have begun to spike nationwide at an alarming rate. This has ignited a flight to cyclical and value sectors.

The conventional wisdom is that this rotation follows about an eight-month period in which growth — specifically in the tech sector — has become overcrowded, with a long line of firms benefiting from work-from-home trends. While that’s true, the fact is that the bias for growth sectors in recent months is not a near-term phenomenon.

This goes back to the financial crisis. At the time, the Federal Reserve implemented a series of policies, including quantitative easing and interest rate cuts to previously unheard-of levels, to encourage growth and spending.

Even so, the U.S. economy was slow to recover, not returning to the point at which the Fed felt comfortable raising interest rates again until December 2015. By that time, though, China’s previous year’s decision to deleverage kept inflation and bond yields in check, which meant investors continued to pile into growth assets to find returns.

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Of course, there have been numerous short spells since 2009 when cyclical and value sectors have outperformed, but none of them lasted long. The most extended one was an 18-month stretch that began in November 2016, when President Donald Trump winning the White House, combined with Republicans controlling Congress, made tax reform a virtual certainty.

But that cycle came to an end after the U.S. slapped tariffs on Chinese goods in the summer of 2018, kicking off a highly disinflationary global trade war between the two countries. Although the spread between growth and value narrowed significantly once more when the sides signed the “Phase One” agreement earlier this year, the pandemic’s grip on the global economy brought that to a screeching halt.

When markets recovered from a monthlong nosedive, growth led the way, widening the spread one more time. All of which brings us back to today. After years of massive monetary stimulus, the table is set again for a reflationary period.

Based on recent history, it would be tempting to think this rotation could be short-lived. But thanks to tech stocks being overly frothy and a workable vaccine becoming widely available during the first part of 2021, it could have more lasting power, perhaps enough to endure into next summer.

None of this means that investors should look to pile into every bank, energy or materials company that has slumped. What it does mean, though, is that areas of growth value exist. Here are a few examples:

— L Brands (ticker: LB)

— AbbVie (ABBV)

— Brookfield Asset Management (BAM)

[Read: Best Vanguard Bond Funds to Buy.]

L Brands (LB)

The Columbus, Ohio-based retailer — whose flagship brands include Bath & Body Works and Victoria’s Secret — enjoyed a solid third quarter, generating earnings per share five times higher than consensus estimates. Comparable store sales at Bath & Body Works grew 56% year over year last quarter, and Victoria’s Secret enjoyed its first positive comparable store sales number in more than two years. In November, the stock eclipsed $40 for the first time since March 2018. Based on its current earnings momentum, it could hit $65 during the second half of 2021 and reinstate its dividend.

AbbVie (ABBV)

The election outcome is positive for pharmaceutical companies because , typically , significant legislation impacting their businesses only materializes when one party has sizable congressional majorities. Pharma valuations are at 30-year lows relative to the S&P 500. The reason behind AbbVie’s depressed valuation is partly because its Humira patent is set to expire in 2023. But the company has a strong pipeline of other drugs, including Skyrizi and Rinvoq, which treat plaque psoriasis and arthritis, respectively. Because of that, the stock has plenty of room to grow. Plus, ABBV already pays a dividend of 4.8%.

Brookfield Asset Management (BAM)

This alternative asset manager is entering a massive fundraising cycle, something that has often been a major growth catalyst for firms in that industry. For instance, BlackRock ( BLK), a peer, did the same thing about three years ago and its stock doubled. While we may not see that type of movement out of Brookfield, it’s reasonable to expect the price to increase by more than one-third over the next 12 to 18 months.

One note of caution is that bullish sentiment recently neared all-time highs, which is often a warning sign that investors should exercise caution. The last time sentiment reached this level was during the early part of January 2018. By the end of that month, the S&P 500 began a two-week stretch in which it shed more than 11%.

Will that happen again? No one knows for sure.

It is also worth considering that rising near-term infections and hospitalizations could cause a pullback in cyclical value sectors. But were markets to retreat some, investors could look at that as an opportunity to increase positioning.

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Searching for Growth Stocks in 2021 originally appeared on usnews.com

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