As of this writing, the broader stock market is trading at record levels. When the stock market is this hot, it’s tough to find undervalued stocks with great upside potential. Despite the ongoing pandemic and shaky global economy, investors have sent stock valuations into the stratosphere.
Value stocks were the biggest winners of 2020, with big tech stocks sending the markets cruising higher. Growth stocks on the other hand took a back seat.
That may be about to change, though.
Where should investors look in 2021 to find the biggest returns? Keep reading.
What Are Value Stocks and Growth Stocks?
Growth stocks are made up of flashy businesses, more often than not tech stocks, that are reporting earnings and sales that are growing at an above-average pace.
Then there are value stocks. So-called big, boring stocks like consumer staples, banks, utilities, and real estate. Because value stocks generally trade at levels below their fundamentals, their share prices don’t soar as much as growth stocks.
At any given moment, one of these groups is more fashionable than the other.
Growth stocks have been hoggin the limelight for years now. Over the last 10 years, growth stocks have outperformed value stocks by a huge margin. During this period, growth stocks have provided average returns of 15.35% versus 7.61% for value stocks.
But that growth charge is slowing down. While Apple Inc. (Nasdaq:AAPL) continues to perform well, the rest of the FAANG stocks (Facebook, Inc., Amazon.com, Netflix, Inc., and Alphabet Inc) have not.
The same goes for Canada. Investors experienced huge gains with Shopify Inc (TSE:SHOP, NYSE:SHOP) in the first half of 2020, with shares in the retail giant advancing 1288%. Since then, Shopify has traded in a relatively tight range, and has increased just eight percent since then.
Admittedly, the best performing Canadian stock of the last six months is Lightspeed POS Inc. (TSE:LSPD, NYSE:LSPD) rising 198%. The rest of the best performing domestic companies are value stocks, like Whitecap Resources Inc (TSX:WCP), Intertape Polymer Group Inc (TSE:ITP), and Hudbay Minerals Inc (TSE:HBM, NYSE:HBM).
What Sent Growth Stocks Higher in 2020?
In an effort to juice the global economy and prevent it from falling into an even worse recession, central banks around the world, including the U.S. Federal Reserve and Bank of Canada, unleashed unprecedented fiscal and monetary stimulus in 2020, all of which helped send stocks to record levels.
Just because there are a number of COVID-19 vaccines out there doesn’t mean the global economy is going to return to normal any time soon. This means central banks will continue to print money. And, because of the low interest rate environment, income-starved investors will send stock prices even higher in 2021.
Over the last 10 years investors have turned their attention to growth stocks because the broader economy has been anemic. In the U.S. and Canada, gross domestic product (GDP) has hovered at around two percent.
That’s not the kind of economic environment that will send value stocks much higher, which is why investors have been so bullish on growth stocks. That could change in 2021 with traditional value stocks reporting better than expected returns.
Eventually, the economy will open up, and when it does, investors should expect to see value stocks, especially financials and economically cyclical companies, come back into fashion. That doesn’t mean all growth stocks will fall out of favour. There will continue to be a huge number of growth stocks with great potential.
Value stocks will give growth stocks a run for their money in 2021 if U.S. GDP hits four or five percent. According to the Federal Open Market Committee (FOMC), U.S. GDP growth is expected to advance 4.2% in 2021.Other projections see U.S. GDP expanding anywhere from 4.0% to 6.4%.
And that is exactly the kind of economic environment that could propel value stocks considerably higher in 2021.
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If the right economic conditions occur in 2021, there could be a big rotation from growth stocks to value stocks. That said, in this environment, it’s pretty tough to predict what is going to happen; 2021 could be just as unpredictable as 2020. The trading professionals at Learn-to-Trade.com, though, can teach you how to find the best stocks whether the markets are rising, crashing, or trading sideways.
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