We see the potential for the rally in cyclical stocks to continue, although valuations and the pattern of past recoveries suggest to us that the next leg of any upcycle may favor names with higher‑quality business models. Selectivity, therefore, is especially critical in the current environment. Understanding secular risk is paramount for value investors. Not only can this knowledge help to avoid seemingly inexpensive names that face long-term headwinds, but it can also aid in identifying opportunities where the market may not fully appreciate the extent to which a company could benefit from the secular tailwinds associated with being on the right side of change.
Fig. 5: Rising Earnings Growth Expectations Projected growth to FY2 earnings, January 2020 to March 2021
Sources: Bloomberg Finance L.P., MSCI, T. Rowe Price analysis using data from FactSet Research Systems Inc. See additional disclosures at the end of the presentation. Source for Russell Index Data: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group"). Please see Additional Disclosures page for information about this FTSE Russell information.
Currently, we are finding opportunities in select cyclical sectors. For example, Equities CIO and U.S. Select Value Equity Portfolio Manager John Linehan sees compelling opportunities in the financials and energy sectors. In these sectors, Linehan is attracted to quality companies that could benefit from a continuing recovery in the U.S. economy but also exhibit what he considers favorable valuation profiles.
Similarly, Value Equity Portfolio Manager Mark Finn, is keeping a close eye on companies he regards as durable growers whose stocks have lagged during the risk-on rally. For example, Finn believes the market does not fully appreciate how well positioned some utilities companies could be to grow as they expand their low-cost, renewable energy generation capacity and make the necessary grid investments to support the clean energy transition.
