Beaten-down value stocks on verge of comeback: Wells Fargo

Wells Fargo’s Christopher Harvey is turning positive on beaten-down value stocks. He expects them to be the big winners in the second half of 2019.

Harvey calls it a “pretty big departure” from his former stance — acknowledging he didn’t miss many opportunities to dismiss the group as a profitable play over the past two years.

“There hasn’t been a lot of value in value,” the firm’s head of equity strategy said Thursday on CNBC’s “Trading Nation.” “The difference between cheap and expensive has widened significantly. Your absolute value is much more attractive. And so, as we role forward, we’re finding a better risk reward.”

The , which tracks the value stocks of large U.S. companies, closed in bear market territory on Christmas Eve. It had hit its all-time high last January.

But just like the overall market, the index has bounced back since that Dec. 24 low — up 5 percent since then.

Even though Harvey is shifting his stance on value, he isn’t predicting a sustainable turnaround will happen overnight.

“We’re at three to six months away from that point of inflection. We think there’s a little bit more row to hoe,” he said. “What we’re looking for is some point of inflection. And, we’re looking for something in the macro — whether it’s the yield curve flattening or credit spreads coming down or whether it’s the Fed.”

An integral part of his value stock comeback forecast is fourth-quarter earnings season, which begins Tuesday.

“Expectations to a certain degree, we think, are still too high. If they can lower guidance, if they can manage expectations going forward, we think they can step over some lowered guidance,” he said. “We think they can make money as they go forward.”

Harvey predicts , REITs and food, beverage and tobacco could see the most substantial gains among value plays, which typically represent stocks that are trading below their fundamentals and priced under their peers.