An entire library of academic analysis exists confirming that value investing has produced the best long-term historic returns. In other words, buying cheap shares and holding them for their cash dividends and capital gains has been the optimal strategy in the past. But no longer.
Cheap shares are dying a death
As this report shows, value investing is suffering its worst under-performance in almost two centuries. Instead of buying cheap shares, today’s investors are drawn to ever-rising, momentum-driven growth stocks. In particular, the US market’s 2020 gain has being driven entirely by steep increases in the stock prices of a few mega-cap tech shares.
Meanwhile, on this side of the Atlantic, cheap shares appear more unloved than at any time in my 33 years as an investor. Indeed, as I write, the FTSE 100 index hovers around 5,580 points. That’s roughly 1,960 points (26%) lost since 31 December 2019 and 900 points (14%) down from its post-March high of 6,484 on 5 June.
What’s more, the cheapest of cheap shares in the FTSE 100 appear to be the mega-caps — the very largest shares in the index. Indeed, in 2020, it seems the rule is: the bigger the company, the harder its share price has fallen this year.
Shell’s gone through hell
A classic example of 2020’s ‘big equals bad’ principle for cheap shares is the stock of Royal Dutch Shell (LSE: RDS). While Shell is not actually the worst-performing share in the FTSE 100 this year, it’s not far off. Below it in the table sits an airline and an aero-engine maker. I’m sure you can guess who they are.
On Wednesday, Shell’s share price closed at 866.4p, down 21.8p (2.5%) on the day. This values one of the world’s leading oil & gas super-majors at just £71.2bn. In mid-May 2018, Shell’s stock closed above £28, so it has crashed close to £20 in less than a year-and-a-half. Even as recently as 7 November last year, Shell was booming at its 52-week high of 2,348p. For the record, Shell’s shares have collapsed by almost two-thirds in the past 12 months. This has lopped £120bn from its market value, pushing it deep into the ‘cheap shares’ bin.
I’m sure Shell will be well
With Shell’s cheap shares closing today at the lowest price they’ve been this millennium, how low can they go? As an oil producer, Shell is a pariah to ethical and environmental investors. Also, as an old-economy business in this brave new world of tech and digital firms, it’s very unattractive to younger investors. Likewise, many investors believe that Shell will be left behind in the transition to our low-carbon future.
Yet, as Baron Rothschild wisely remarked, “the time to buy is when there’s blood in the streets”. Shell is a huge multinational business, employing 80,000 workers in over 70 countries. Yet its cheap shares today offer a dividend yield of 5.7% a year, in cash. And that’s after Shell slashed its dividend by two-thirds earlier this year, so these cash payouts have room to grow. That’s why I’d buy and hold Shell shares today, ideally inside an ISA, to bank these bumper cash payouts while awaiting capital gains in a post-Covid-19 world!
