Value Stocks to Shine: Banks, Energy and Materials Ripe For Rally

NEW YORK (TheStreet) -- Value stocks are poised to catch the next wave of investor interest as growth plays fall from favor amid a strengthening economy.

Strategists and fund managers say the mature market rally and economic backdrop have set the stage for value stocks to shine, overshadowing sectors that outperformed in the early part of the rebound.

These sectors included consumer discretionary, biotech and internet stocks as U.S. stimulus helped drive momentum investing in markets.

Now, fund managers point to industrials, banks, energy and materials as sectors ripe for a rally.

"Last year was a momentum year, but this year has been frustrating for anyone who was a momentum investor," Federated Investors senior vice president Linda Duessel said in a phone interview.

"So if I'm considering getting into the market and the economy is accelerating, I'd try and buy the value sector as it looks inexpensive."

Duessel also points to the growing valuation gap between small and large cap stocks.

Small caps are 10% more expensive than the S&P and 15% more expensive to their historical norm, according to Deutsche Bank.

In addition, the top 25 stocks with the lowest price-to-earnings ratios span the tech, financials and energy sectors. These stocks have an average P/E of 11.8 times earnings vs. 17.2 times for the S&P without these companies.

"The Fed Philly is a good early indicator of economic activity and it's looking good," Duessel added. "Value typically outperforms during periods of risk-taking and economic growth."

She sees lower-than-expected economic growth in China and U.S. as the two greatest risks to her thesis, but says Chinese authorities are likely to do all it takes to maintain growth while first-quarter U.S. economic data was likely affected by the weather.

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