Four big name value plays to outperform

So-called "value" plays have underperformed growth stocks and lagged the improvement in macro newsflow, say analysts at Morgan Stanley. In fact, the disconnect in performance between the two is unusual and has only been lower 10% of the time in the past 40 years.

"If fundamentals continue to improve, bond yields were to rise or inflation expectations increase, we think value is likely to outperform," says Morgan, which this week raised its rating in value sectors - typically energy, financials, materials, telcos and utilities.

"We have increased our Overweight in banks, where valuations against cyclicals have only been lower 9% of the time in the last 20 years, and raised energy from Equalweight to Overweight, where relative trailing valuations are at their cheapest levels since 1986."

It’s why the broker has updated its Buyers' Compendium, which includes a number of its preferred stock valuation screens to identify potential investment ideas. It has also run a couple of guest screens to try to identify more oversold names.

Morgan screened for forward price/earnings ratios which were low versus history, and ran a Joel Greenblatt screen which looked for stocks with high return on capital employed and low enterprise value-to-cash profit ratio. It also tried to identify surplus cash yields (free cash flow yield minus dividend yield), ran a Ben Graham-inspired screen and another called 3 U's (unloved, undervalued and under-owned).

Then, Morgan ran two private equity-based screens - the first highlights companies that could look attractive to potential acquirers based on quantitative valuation metrics. The second looked at enterprise value-to-fixed asset ratios (EV/FA), finding companies that you could theoretically buy in its entirety and make a profit by breaking it up and selling off its assets. Lastly, it screened for stocks where the dividend yield is above the price/earnings (P/E) ratio.

Which companies did best?

There were 67 stocks that appeared in two or more of the eight screens, and value sectors now account for the highest proportion of multiple appearances since Morgan began running its Buyers' Compendium.

Of these, 11 are rated Overweight by Morgan Stanley analysts, among them four UK companies - oil services big-hitters Wood Group and Amec Foster Wheeler (AMFW), recovering supermarket giant Tesco, and pub and restaurant group Mitchells & Butlers (M&B), which runs the Harvester and All Bar One chains.

Wood Group did well on relative valuation, the Joel Greenblatt screen, surplus cash, 3 U's and quantitative valuation. Tesco featured in surplus cash, Ben Graham and EV/FA. Amec appeared in relative valuation, surplus cash and quantitative valuation, while M&B starred in surplus cash and EV/FA.

For the record, the other seven are Statoil, Subsea 7, ENEL, EDP, Software AG, Technip and Total.

Also in the top 20 for appearances in multiple screens, but which Morgan has on either equalweight, underweight or no rating, are Vedanta Resources, Morrisons, Sainsbury's, Berkeley Group, BHP Billiton, BP and Greene King.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.