Value Stocks, Rotation Trades, and How to Capitalize on It All
Shah Gilani|December 18, 2020
If you want to know why I’m so bullish, all you have to do is look at the Russell 2000: It’s on fire.
The “rotation” trade has done A LOT for the Russell 2000 a lot for equities across the board.
And I’ve got the perfect trade to go along with this trend…
Rotation, Rotation, Rotation
I’m going to keep this short and sweet, like what you find in a stocking stuffer.
The so-called rotation trade is all about, has been all about, and will continue to be all about rotating out of the mega-cap tech darlings everyone owns, big winners, and bonds, and buying “value” stocks – small- and mid-cap stocks, the stocks that underperformed as everything else was going up in the post-COVID-crash rally.
Those are exactly the kind of stocks you find in the Russell 2000.
It’s not that the winners are bad, or even that investors are selling out of them. They’re just diversifying. Or maybe taking some profits, paring giant positions, and reallocating to value stocks.
So, what’s a value stock? There are plenty of definitions, some of which are long-winded and not necessary. Presently, where the market’s come from rallying like the dickens, the value stocks that haven’t participated in the rally are cheap. They’re the “left behind” stocks.
Their value resides not necessarily in their earnings potential, though that hopefully comes with the recovering economy; instead, their value stems from being overlooked, from being shunned because they don’t make sense if everything else makes so much more sense; like work-from-home (WFH) stocks, for example.
They’re cheap, on a relative basis, that’s what value means in today’s terms, in today’s market.
Only, they’re not so cheap anymore.
Since the March 23, 2020 lows, the Dow Jones Industrial Average is up a phenomenal 11,607.38 points (as of the close on December 15, 2020), or a robust 62.43%.
The S&P 500 is up a whopping 1,457.22 points, or a fabulous 65.13%.
The Nasdaq Composite is up the most. It’s up 5,734.39 points or an astounding 83.58%.
The Russell 2000, as measured by the iShares Russell 2000 ETF (NYSEArca:IWM), is up a measly 94.78 points… but wait, that’s 94.87%. Yeah, as in holy cow! The Russell’s swamping all the other benchmarks.
That’s because it’s about rotation, rotation, rotation.
After almost lapping the Dow and S&P, the Russell’s value seems to have been discovered.
But the rotation trade’s still got legs. That’s because lots of stocks in the Russell 2000 are still relatively “inexpensive” – relative, that is, to the likes of Amazon.com Inc. (NasdaqGS:AMZN), Tesla Inc. (NasdaqGS:TSLA), Alphabet Inc. (NasdaqGS:GOOG), or even Apple Inc. (NasdaqGS:AAPL).
I’m talking about price in dollars and cents terms, and how pricey per share so many stocks have become.
Stocks in the Russell, by comparison, are “inexpensive,” and that’s what’s going to drive more investors into them – especially retail investors.
You can laugh and say that doesn’t make sense from a professional perspective, but hear me, I’m nothing if not a professional, and I’m telling you that’s how they’re being looked at right now. That’s why the Russell can go higher, maybe a lot higher.
That’s why it’s worth buying some call options on IWM. I like the IWM January 15, 2021 $200 Calls (IWM210115C00200000) for around $2.00.
That’s how I’d play the rotation trade.
Now, there’s more than just one way to play rotation trades. This trend isn’t slowing down anytime soon, and more and more money will pour into sectors we previously wouldn’t have looked at.
The number-one example of this is the work-from-home trend that I mentioned earlier. Starting with the COVID-19 outbreak in early spring, working from home has transitioned into a permanent part of how we work.
WFH stocks are part of what I see as the moneymaking opportunity of a lifetime, and I’m not talking about companies you hear about all over the news, like Zoom or Slack. In fact, $353 billion is dumping into five very specific stocks…
Sincerely,
Shah