Why investors should load up on cheap, ‘left behind’ stocks as market trades near record highs, says Jeremy Grantham’s OMG

• Investors can best prepare against a potential market slowdown by buying cheap, unloved stocks, GMO says.

• The investment firm finds extreme discounts in high-value stocks attractive.

• Once bullish sentiment begins to unwind, these ratings should correct, GMO wrote.

It’s time to embrace the cheapest stocks on the market, with the value sector poised to finally make a comeback, GMO wrote in a new research note.

The investment firm, led by legendary investor Jeremy Grantham, emphasized a strong belief in “deep value” stocks – or stocks that are cheap relative to their true fundamental value.

Based on this criterion, the investment firm began targeting the cheapest 20% of stocks in May 2023, avoiding the “deceptively cheap” value traps.

“In a world where many stocks are increasingly driven by positive sentiment and investor optimism, many of the most unloved and left behind are trading at tremendous discounts,” the firm wrote.

Over the past year, U.S. investment has shifted heavily toward large-cap technology names, helping benchmarks hit a series of all-time highs.

In this context, deep value stocks have become extremely cheap – not only relative to the broader market, but also relative to history.

“Outside the US, all value is cheap, but deep value is in the second percentile of its history,” the note said. “In the US, deep value is similarly in the 10th percentile of its history, while the rest of the value should be largely ignorable at current valuations.”

According to GMO, this makes deep value well-positioned to deliver strong returns once investor sentiment toward the mega-cap begins to ease. Earlier this year, OMG projected a 1 percent decline in U.S. large-caps over the next seven years, predicting deep value stocks would post 7.6 percent gains.

“The S&P 500 is tech and growth strong, so an international value investment is the perfect complement from more than a regional perspective,” GMO wrote.

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