Is it too late to get in on rotation?

Tej Kohli believes it is certainly not too late to ‘get in’ on rotation with these very attractive UK value picks.

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Research by Visual Capitalist recently revealed that typical IPO first-year returns in the USA during 2019 were -4.6% for ‘technology’ stocks, compared to an average IPO return for ‘consumer staples’ of 103%. $21.9bn was raised by technology sector IPOs compared to just $1.1bn for consumer staples. This reflects the strength of investor appetite for growth stocks, which continued unabated in 2020 and drove technology stocks to all-time highs.

Some have theorised that high return on invested capital companies stay high return on invested capital companies, and do not diminish over the long term. Certainly, that has been true for the more established technology stocks such as Amazon, but many of the ‘newbie’ tech stocks are yet to prove themselves. And as the old adage goes, what goes up must eventually come down, resulting in the rotation that we have seen during the last month.

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Rotation is the counter movement of investor capital from one equity sector into another. Typically, it is a rotation between growth and value stocks. In the UK, this has seen investors taking their profits from frothy technology stocks with astronomical price-to-earnings ratios predicated on as-yet-unproven future growth, and investing in under-loved ‘traditional’ dividend-paying stocks, whose yield have become more attractive as their prices have steadily fallen in 2020.

The price of these stocks has been surging in the UK in recent weeks, but that does not mean that it is too late to take a long position in value stocks. Many are growing from record low prices and, even after recent appreciation, are still looking cheap. And let’s not forget that despite the optimism of a Covid-19 vaccine, Brexit could still put a spanner in the works and reveal that the recent appreciation of value stocks was prematurely optimistic.

For relative safety, plus yield and opportunity for long-term price growth, I like FTSE 100 stalwart British American Tobacco (LSE: BATS). With a current price of 2,733p, the forward-looking yield for the next year is just over 8%, and the stock remains much nearer to its 52-week low than its pre-crisis high despite the green shoots of some recent price appreciation. I predict a 50% appreciation to its pre-crisis levels in 2021, with the potential investment returns compounded further if you reinvest the 8% annual yield.

I’m also bullish on another FTSE 100 stalwart in the form of Unilever (LSE: ULVR). Relatively speaking, the price has been stable during 2020 and, at 4,310p, is not far from its 52-week high of 4,944p. The Covid-19 pandemic has proven how defensive FMCG and consumer staples have remained, and Unilever’s stable of brands and entrenched position across so many segments in so many markets leads me to believe that investors will flock back into Unilever as consumer staples start to look like a safe haven, with a reliable dividend yield of c.3%.

The third stock I’ll highlight today is Boohoo Group (LSE: BOO). The company has been marred by PR disasters during 2020 but has recovered its poise well and, at 309p, remains healthily buoyant from its 52-week low of 133p whilst still short of its high of 433p. Of course, Boohoo has the profile of a growth stock rather than a value one and pays no dividend. But the underlying business model is not rocket science. Boohoo has been stealing the lunch of its ‘value’ bricks-and-mortar competitors for a long time already, and with the collapse of Arcadia Group and Debenhams, it is well positioned to capture a greater share of wallet.

Boohoo also has a good track record for acquiring the distressed brands of collapsing companies and giving them new life online, and it would not be a surprise to see Boohoo pick up and reinvent some Arcadia Group brands. The company has an unfortunate tendency to attract bad publicity, but the underlying business continues to offer attractive long-term prospects, albeit with no dividend currently paid. It’s a growth stock that I predict will also become a good value stock once dividends start to be paid.

So even though rotation has started to put some buoyancy back into the market for value stocks, do not be disheartened if you have not already taken some long-term value positions. It is not too late. There remains a lot of risk in the market from Brexit and the unknown economic fallout from Covid-19, so the prudence of being cautious is smart. It is certainly not too late to ‘get in’ on rotation with these very attractive UK value picks.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Tej Kohli owns shares in Amazon. The Motley Fool UK has recommended boohoo group and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Tej Kohli is the founder of the philanthropic Tej Kohli Foundation whose ‘Rebuilding You’ philosophy supports the development of scientific and technological solutions to major global health challenges, whilst also making direct interventions to rebuild individuals and communities around the world. Tej Kohli is also an investor who backs growth-stage artificial intelligence and robotics ventures through the Kohli Ventures investment vehicle.

 

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