Looking at US equity returns over the past 12 months, it would be easy to think that it was all smooth sailing with no rough seas: the US stock market has rallied over 50 per cent for the 12 month period through 31 March 2021.
But the reality is that the events of the past year have been anything but typical. Many of us are still working from home and waiting for our economy to fully reopen. For the first seven months of the recovery, it was a narrow market and not a traditional recovery: it did not lift all boats. While high-growth technology soared, energy stocks sold off and financials remained unloved. This landscape offers a huge opportunity for stock pickers looking for quality companies, well placed to benefit in the next stage of US recovery through 2021 and beyond.
This recovery goes beyond the growth stocks which have rallied in recent years. Since early November, when Pfizer announced that its vaccine had strong efficacy against Covid-19, we have seen the start of an interesting shift as the US market rotated towards value names.
This movement, which has continued ever since, shows a surge of optimism towards a broad US economic recovery. So with the strong market returns over the last year for US equities, where are the opportunities today?
Could 2021 be the year of the banks?
2020 was a challenging year for investors in US banks as they navigated a recessionary environment, lower interest rates and the pressure to build credit loss reserves alongside an inability to buy back shares or increase dividends.
Yet today, the sector is in a much stronger position: buyback programmes have recommenced and credit loss reserves are being released. Furthermore, positive economic indicators reinforce the overall market conviction in favour of a strong US recovery, with many strategists predicting 2021 US GDP growth to be the strongest in over 35 years. Of course with such strong growth expectations, the 10 year has started to move higher as well which has had a positive impact on the share price of the banking segment.
A strong economic environment should offer a period of growth for the banking sector, particularly Bank of America - the second largest bank in the US. During 2020 the bank prepared for the worst, setting aside billions for potential losses. Yet when this scenario thankfully didn’t materialise, Bank of America ended 2020 in a stronger financial position than it started.
As a result, the bank is expected to return £4.8bn in capital to shareholders in the form of share buybacks and dividends in Q1 2021. Trading at 1.4x book value and a forward price-to-earnings of 14x, as of the end of March, combined with a dividend yield of 1.8 per cent, we believe Bank of America looks very attractive on a risk vs reward basis and should, we believe, trade at a much higher multiple.
Looking for gems in travel and hospitality
The travel and hospitality sector presents an interesting opportunity for value investors, particularly for capital light, nimble business models like Booking.com. As the world’s leading provider of online travel and related services, Booking.com services consumers and local partners in more than 220 countries and territories through six primary brands including: Booking.com, Priceline, Agoda, Rentalcars.com, KAYAK and OpenTable.
In March 2020, Booking.com was in the eye of the storm, however the company has responded to the challenges of Covid-19 effectively, adjusting its cost structure to the new reality and keeping up with the rapid pace of technological and market changes. With the strong rollout of the vaccine in the US, air travel has surged to over 1 million travellers per day in March, the highest level since the pandemic began. We believe that the company’s strong fundamentals and unique proposition leave it well prepared to emerge on the front-foot in 2021 and it will continue to expand its global business.
Exploring wider opportunities in healthcare
Many big names in the US healthcare sector enjoyed strong investor support over the year on the back of increased research and development, however a number of interesting value plays in this sector remain. AbbVie is a healthcare company aiming to deliver medicines that solve serious health issues today and address the medical challenges of tomorrow. Through its competitive portfolio of products, AbbVie is generating a strong flow of cash, which supports its generous dividend alongside continued investment in future growth.
With an attractive valuation, a healthy balance sheet and a dividend yield of over 4 per cent, we believe this stock has long-term potential. This is further supported by the fact that since the company's inception in 2013, AbbVie has increased its dividend by 225 per cent. Looking forward, we are confident in AbbVie's long-term growth, driven by its impressive pipeline and expanding product portfolio.
Overall, when looking at the US, investors should continue to focus on the long term and avoid becoming distracted by short-term noise. In our view, value stocks have room to run, but it pays to be selective and to do your homework. While we are optimistic about the US economic recovery, the market is still healing. Therefore, we remain focused on individual quality and high conviction companies which have the potential to be sustainable market winners.
Jonathan Simon is portfolio manager of the JPMorgan American Investment Trust. The views expressed above are his own and should not be taken as investment advice.