Be like Buffett: Street recommends value stocks

Published Mon, Oct 19 201511:22 AM EDT

Taking a nod from Warren Buffett, some Wall Street strategists believe "value" stocks will lead the next leg of this bull market, not the momentum stocks that have been the best performers of the last six years. Fundstrat's Tom Lee and Deutsche Bank's Dubravko Lakos-Bujas were among the analysts last week who told their clients to make the strategy switch to cheaper, quality names. This came as shares of Netflix , the quintessential momentum stock and the S & P 500's best performer of 2015, plunged after reporting disappointing earnings last week. In a note to clients Friday, Lee gave three reasons why value will outperform and listed his top stock recommendations. "Healthcare is the leading indicator of growth over value (76 percent correlation) and as leadership cedes (we still like Healthcare but expect fewer names to outperform), this signals a shift to value over growth," Lee wrote. Health care stocks outperformed from December 2014 to May 2015 with 90 percent of the sector beating the S & P 500. However when the 90 percent level falls to below 70 percent like it did this month, Lee said five out of five times since 1999 the value strategy does better than growth afterward. The sector was long considered an area for "value" stocks that pay a big dividend, but that changed over the last decade as fast-growing biotech companies came on the scene and as retiring baby boomers turned hospitals and pharmaceuticals into a growth business. The shape of the yield curve is a key leading economic indicator for many macro investors. The curve is the spread between short-term and long-term Treasury yields. Lee says a steepening yield curve is also historically correlated with periods when value does better than growth. Right now the spread between short-term and long-term rates is the most since April 2014, according to Lee. "The relationship is logical as steeper curve implies faster growth, hence, 'growth is less scarce' and thus, value stocks should do better," Lee said. "Dollar moves tend to lead shifts between value over growth by about 6 months," Lee wrote. Lee notes how value stocks dominate the industrial, materials and energy sectors, which also have large international exposures. As a result, a weakening dollar increases earnings for firms that generate a lot of revenue outside the U.S. Due to the analysis above, Lee recommends stocks that are valued cheaper than the S & P 500 value index, but also show some earnings growth in 2016. Here are five stocks he likes. Read More US companies dash hopes for a China recovery

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Fundstrat's Tom Lee and Deutsche Bank's Dubravko Lakos-Bujas were among the analysts last week who told their clients to make the strategy switch to cheaper, quality names.

This came as shares of Netflix, the quintessential momentum stock and the S&P 500's best performer of 2015, plunged after reporting disappointing earnings last week.

In a note to clients Friday, Lee gave three reasons why value will outperform and listed his top stock recommendations.