Every year, it seems, is a stockpicker’s market. But BofA Securities is upping the ante, saying 2024 could be a “stockpicker’s paradise.”
One of the big questions for investors this year is whether we will see broader participation in the stock market, across most sectors, not just Big Tech.
The so-called Magnificent Seven—a group of highflying, mostly tech stocks—did much of the heavy lifting for the overall market gains last year.
Broader market “breadth” means a high number of stocks are participating in the S&P 500 index’s gains.
In a research note, Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, said while broadening “remains elusive,” there are reasons for optimism.
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“Today might be the best environment for fundamental stock selection,” she wrote. “Relative to private investments, public investments reflect higher rates and inflation and are trading near record-low relative valuations to private counterparts.”
What’s more, there are fewer analysts tracking public equities. “The number of analysts covering the average stock has dropped from the peak in 1989—21 pairs of eyeballs—to about 17 today,” she said. “The number of active large-cap mutual funds dropped 40% from 2014 to today.”
That’s great news for stockpickers because “fewer eyeballs means less efficiency, more alpha,” she wrote, referring to the extra returns that can be generated by picking the right stocks.
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That backdrop could make for a good setup for active managers this year. It’s always a high bar as most active funds typically deliver worse returns than cheap, passive alternatives over long periods.
Among the active stock strategies that
rates highly are Fidelity Blue Chip Growth fund, Oakmark Investor fund, and Primecap Odyssey Stock fund.
The four-star silver-rated Fidelity Blue Chip Growth was up 55.6%, including dividends, in 2023, making it one of the best-performing large growth funds. The strategy outperformed 97% of its Morningstar category peers.
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“If semiconductor stocks were to continue rallying as feverishly as they did in 2023, this strategy would be particularly well-positioned, given that it has one of the biggest stakes in semiconductors,” said Robby Greengold, a strategist for Morningstar. The firm’s most recent data show around 17% of the fund’s assets were in semiconductors.
Three-star Gold-rated Primecap Odyssey Stock fund has underperformed in recent years, but Greengold noted that the firm is a long-term investor that sticks with its picks and that the level of due diligence that goes into stock selection is “second to none.”
Last year the fund returned 21%, underperforming the broader market and its peers.
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“What an investor probably won’t be getting with any of the Primecap strategies is much exposure to the largest stocks in the market,” said Greengold. The portfolio managers take a benchmark-agnostic approach and that “has been a disadvantage as the mega caps have handily outperformed the rest of the market.”
He noted that unlike most equity funds, Primecap invests heavily in biotechnology companies.
“Biotech has generally been a challenging area to invest in for much of the past decade,” said Greengold. “But it’s a particularly interesting space for an active manager to be perusing.”
While growth was the clear favorite last year, the five-star Gold-rated Oakmark Investor fund, a large-cap value strategy, delivered stellar total returns. The fund was up 31%, trouncing the broader market and 99% of its Morningstar category peers.
Much of that performance was powered by highfliers
and
Amazon
.
“What the team might argue is that they aren’t specifically looking for value stocks,” said Greengold. “What they’re looking for are stocks that are trading below the team’s estimate of intrinsic value. And so those can include stocks with a high price multiple.
Write to Lauren Foster at lauren.foster@barrons.com
