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Value Stocks Thrashed Growth Names This Year: Will the Trend Continue?

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Growth stocks have taken a back seat for the last few months this year. Value stocks have notably underperformed so far amid the impending economic recovery. As inflation continues to soar higher, value names will likely keep trading strong, beating the growth names. Let’s take a look at some of the top-performing TSX value stocks.

Value stocks are those that trade at a discounted valuation but offer solid growth potential in the very long term. They are generally out of the limelight, unlike growth stocks.

Value stocks versus growth stocks

Higher inflation usually makes overvalued assets unlikable. Growth stocks, which have been trading at stretched valuations this year, have taken a pause since February. Top tech giant stock Shopify (TSX:SHOP)(NYSE:SHOP) has returned a mere 3% so far in 2021. Despite reporting record quarterly revenue growth in Q1 2021, the stock has failed to pick up. Investors continued to take shelter in value stocks on the fears of higher inflation.

Consider a top Canadian consumer lender goeasy (TSX:GSY). It has returned a decent 57% year to date, beating even growth stocks. Despite the rally, the stock is trading at nine times next year’s earnings. The management has given upbeat guidance for the next three years, indicating that the momentum in the stock could well continue.

And there is a reason why the management is confident; goeasy has already seen an encouraging uptick in consumer loans in the last few quarters. This will further rise as economies re-open. Also, improving the employment situation plays well for repayments. Thus, goeasy should see its earnings growth accelerating with inspiring broader recovery. Notably, goeasy looks like an appropriate bet for growth at a reasonable price.

Top TSX stocks to buy

Another value stock that looks poised to grow is BRP (TSX:DOO)(NASDAQ:DOOO). It is up almost 15% so far this year. The stock has lost a significant portion of 2021 gains since last month. However, the company’s latest quarterly results showed that its growth prospects remain intact. The management once again increased its FY 2022 earnings guidance this month, driven by returning demand.

BRP, which makes popular brands like See-doo, Ski-doo, and Cam-off, has a major presence in the niche markets, which gives it a competitive edge. Expected higher consumer spending in the post-pandemic world and its aggressive foray in the EV space could drive BRP stock higher.

Notably, DOO stock is currently trading at 11 times its forward earnings. The stock has returned more than 500% since its dramatic crash last year. I expect a strong recovery in the BRP stock due to its attractive valuation and expected handsome earnings growth.

Bottom line

Having said that, I don’t see growth stocks trading subdued for a longer period either. Rising inflation and economic recovery indeed paint a bright picture for value stocks. However, interest rates could stay lower for longer, which will likely trigger a rally in growth stocks as well.

I am positive about Shopify despite its stretched valuation multiple. Stocks like Shopify have already been trading muted for a long time and investors can expect to change course later in 2021.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify.

 

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