The turmoil in global stock and bond markets at the end of February has triggered a dramatic re-rating for UK value stocks after a dismal performance against growth style stocks in 2020.
The Morningstar UK Index, which covers more than 300 stocks with a market cap ranging from a few hundred million pounds to around £10 billion, has gained 2% in February and is up just over 1% in 2021 so far – compared with a loss of 11% in 2020, as the UK’s heavy slant towards banking and energy stocks dragged on the index. But the moves within the index have been more pronounced, particularly among large-cap companies.
UK large-cap value stocks saw a chunky month-on-month gain of more than 10%, after eking out a loss of 0.37% in January, substantially outpacing UK blend stocks, which fell 4% - and growth companies, which rose 1.24%. Large-cap value stocks in the UK are very heavily skewed towards natural resources companies and banks, as well as tobacco stocks and a handful of highly cyclical names such as cruise company Carnival (CCL). The pattern of value outperforming growth was repeated further down the cap scale, with mid-cap and small-cap value stocks outpacing their blend and growth counterparts.
Banks and Airlines
Carnival was the best performer in the large-cap value category in February, posting a sizeable monthly gain of 35%, as the vaccine rollout and lifting of lockdown restrictions in the UK encouraged investors to think that cruise goers will be back on ship sooner than expected. The company was one of the worst hit in share price terms during the March sell-off. Despite the latest gains, the shares at £16 are still 30% below the level seen before the Covid-19 crash. Morningstar analyst Jaime Katz says that Carnival shares are currently trading above their fair value of £14.70. Banks were also among the biggest gainers in the wake of results season, with NatWest Group (NWG) the pick of the bunch with a gain of 25% after announcing the restarting of dividends.
The large-cap blend category, which contains stocks that combine value and growth characteristics, was the worst performer in the index last month, falling by 4%. Of the 13 companies in the category, four posted double-digit losses – with consumer goods giant Unilever (ULVR) as the biggest loser with a fall of 11%. Latest results suggest that Unilever’s sales slowed down in the most recent quarter, and investors are concerned about restructuring costs this and next year. Still, wide-moat Unilever is highly prized as a dividend stock with a yield of nearly 4%, and is held by a number of highly rated funds. Morningstar analyst Philip Gorham thinks the company shares are trading below their fair value of £46 and are undervalued at £38.
Large-cap growth stocks overall posted a respectable one-month gain of 1.24% but there was some extreme performances within this group – 2020 stock market darling Ocado (OCDO) was the biggest victim of the tech/growth sell-off, losing 20% in February. But this comes after an 80% rise in the share price in 2020. Morningstar analyst Ioannis Pontikis says the shares are now overvalued at around £22, with a fair value of £18.70. At the other end of the scale, shares in miner Antofagasta (ANTO) were up around a quarter after copper prices rose strongly. The industrial metal hit a 10-year high in February as commodity traders backed a sharp economic rebound for resources-hungry countries like China.
Lockdown Lifting Helps Mid-Caps
Many of the UK’s most domestically focused stocks inhabit the mid-cap value sector, including supermarkets, housebuilders, travel companies and financial services firms. While mid-cap value shares couldn’t match the performance of large-cap value names, a 7% monthly return is still impressive. The top performer was Virgin Money (VMUK) with a 40% gain in February, but still the shares are around their fair value of 170p, according to Morningstar analysts, who think the end of lockdown will mean increased demand for credit among UK consumers. Airline easyJet (EZJ), a former stock of the week, was not far behind with a gain of 35% last month. 2020 was a fight for survival for travel stocks worldwide, but the vaccine rollout has spurred hopes that 2021 will be better for these companies. A similar trend was seen in the mid-cap growth area, with commuter-focused stocks like WH Smith (SMWH) and Trainline (TRN) posting gains of around 25%.
Small-cap value companies gained more than 8% in February and again companies most exposed to a relaxation of lockdown fared the best – bus and rail operator FirstGroup (FGP) posted the biggest gains in this group, rising 25%. The company’s shares collapsed in spring 2020 but have been on a strong recovery trend since the autumn, and are up nearly 50% in the last three months. Rival National Express (NEX), in the small-cap blend group, also posted strong gains in February. Small-cap growth companies eked out a gain of less than 1% for the month and are down 2.40% in the year to date. Australian gold miner SolGold (SOLG) was the biggest faller, losing 25% in February, while flooring specialist Victoria (VCP) was the best of the risers with a gain of 17%.
