Talk about turning things on its head! But if you are looking for "value", your best bet could be to target stocks trading at a premium to the market, according to Macquarie Group Ltd (ASX: MQG).
While most investors tend to think of price (which directly relates to stock multiples) to determine if a stock represents value, you only need to remember what investment guru Warren Buffett said: "price is what you pay, value is what you get".
From that perspective, it's stocks that trade on higher multiples that are better placed to outperform in our current market.
Macquarie thinks that value stocks (referring to stocks trading on low multiples due to their underperforming share price) continue to lack earnings growth, consistency and quality.
For these value stocks to outperform in 2018, they need to be re-rated by the market. The trigger for a stock re-rating is never price. Re-rating is about the lowering of risk.
For instance, if an underperforming company can convince the market that it has stemmed a profit decline or if sales have troughed, it will get re-rated due to the increase in earnings certainty.
What is interesting is that Macquarie found that around 50% of a stock's P/E multiple is explained by earnings per share (EPS) growth and EPS growth volatility over a five-year period.
This explains the high multiples that fruit grower Costa Group Holdings Ltd (ASX: CGC), blood products company CSL Limited (ASX: CSL), hospital operator Ramsay Health Care Limited (ASX: RHC) and toll road operator Transurban Group (ASX: TCL) trade on. And why investors are still happy to back these expensive stocks.
While the broker doesn't think value (stocks on low P/Es) can outperform growth (stocks on high P/Es) in general across our market, it thinks there are a handful of exceptions where cyclical undertainty is holding back a P/E re-rating.
These are mostly junior miners like Evolution Mining Ltd (ASX: EVN), Mineral Resources Limited (ASX: MIN), Saracen Mineral Holdings Limited (ASX: SAR) and St Barbara Ltd (ASX: SBM).
Outside of resources, the broker adds steel maker BlueScope Steel Limited (ASX: BSL), building materials group CSR Limited (ASX: CSR) and airline operator Qantas Airways Limited (ASX: QAN) to this group.
What's more, there are three additional growth stocks that the experts at the Motley Fool have found that are well placed to outperform in 2018. Click on the free link below to see what these stocks are.
