Two market leaders have stumbled, value investors see opportunity

In a market hovering at all-time highs, it’s easy to believe that opportunity lives only in the biggest winners. The headlines belong to momentum stocks, the index darlings, and the companies trading on eye-watering multiples. 

While investors chase the winners, value is quietly building elsewhere. It’s often in the least popular parts of the market that long-term opportunity begins to emerge.

Reece Birtles, Head of Australian Equities at ClearBridge Investments, argues that value isn’t scarce; it’s simply being ignored. 

“Finding value in today’s market isn’t hard, but one must look past the momentum-driven parts of the Australian equity market and towards value style stocks."

By focusing on fundamentals rather than market momentum, long-term investors may be positioning themselves early for what could be the next major rotation in market leadership.

Wide valuation spreads point to a turning point

While markets appear buoyant, Birtles warns the surface-level strength is masking historic dispersion between expensive and cheap stocks.

“Valuation spreads remain extremely wide, meaning the gap between expensive and cheap stocks is near historical highs,” he notes. 

This makes index exposure less appealing: “With the S&P/ASX 200 trading at a lofty price-to-earnings multiple, it’s difficult to see strong returns from the index itself.”

But stretched conditions don’t last forever. 

“History tells us that such extremes rarely last. Market conditions, and the current liquidity supporting high valuations, can change quickly,” he adds.

That shift, when it comes, is typically abrupt and rewarding for those positioned early.

The risks of index-driven market distortion

Birtles points squarely to the influence of index investing as a major force distorting valuations.

“Several areas of the market now look overly stretched to us, particularly where prices are being driven more by index flows than by fundamentals,” he says. 

“The Commonwealth Bank of Australia (ASX: CBA) is a clear example. Despite limited earnings growth over the past decade, its price-to-earnings ratio has expanded to levels that are difficult to justify.”

He also cites Wesfarmers (ASX: WES) as another case where “a major re-rating on relatively modest earnings growth” has occurred due to passive buying. 

According to Birtles, this isn’t sustainable: “As more investors buy simply to match an index, regardless of valuation, prices are being pushed higher, and volatility is increasing in these names. That dynamic can persist for a while, but history shows it rarely ends well.”

Where pessimism has gone too far

While parts of the market look dangerously expensive, others have been unfairly punished.

“There are several areas of the market where sentiment looks overly pessimistic, and quality stories are being overlooked,” Birtles says. 

These are not speculative plays: “These businesses often have solid earnings, strong balance sheets, and stable cash flows — yet they’re being discounted because attention remains fixed on a narrow group of expensive, momentum-driven names.”

ClearBridge’s portfolios are positioned accordingly: “We’re overweight attractively valued quality stocks such as ANZ Banking Group (ASX: ANZ), BHP Group (ASX: BHP), Aurizon (ASX: AZJ), AGL Energy (ASX: AGL) and Amcor (ASX: AMC), which we believe offer compelling long-term opportunities.”

Periods of excessive pessimism, he argues, “often lay the groundwork for the next phase of outperformance, and we think this environment presents a real opportunity for investors that are focused on the fundamentals."

How to separate opportunity from value traps

Not every cheap stock is a bargain. Birtles emphasises discipline, process, and forward-looking analysis.

“When assessing underperforming stocks, we believe that investors should focus on a company’s long-term earnings power rather than short-term share price movements,” he explains. 

ClearBridge relies on discounted cash flow valuations, but also uses proprietary systems to avoid risk.

“We’ve introduced a ‘Red Flag’ system that identifies companies showing signs of weakening performance or elevated risk. If multiple warning signs appear, it prompts a reassessment of the investment case.”

The key, Birtles says, is to distinguish between temporary headwinds and structural decline.

“Ultimately, genuine value investing is about combining patience and discipline with a clear understanding of where long-term fundamentals diverge from current market sentiment.”

Two stocks the market has left behind — but value investors are circling

Despite weaker share prices, Birtles sees opportunity in BHP and Amcor.

On BHP: “BHP (ASX: BHP) remains a high-quality, diversified resources company with a strong balance sheet, low-cost operations, and a portfolio well positioned for the global energy transition.” While tariffs and commodity softness have hurt sentiment, “long-term demand for critical metals such as copper provides meaningful upside potential.”

On Amcor: “We see Amcor (ASX: AMC) as a more defensive, cash-generative business with a clearer growth path. The market’s reaction to a softer fourth-quarter result was, in our view, overdone. Operational issues in North America should prove temporary, and the merger synergies provide scope for earnings recovery and yield support.”

Both, in his view, illustrate the value investor’s edge: buying when fear is high, but fundamentals remain intact.

The return of rational investing

Momentum may be ruling today, but Birtles sees the tide turning.

“We think the current environment is setting up well for [a] shift” back toward value, he says. When that shift comes, the market won’t reward those who chased what was already working; it will reward those who were willing to go where others wouldn’t.

For investors willing to look past price charts and focus on earnings power, cash flow resilience and valuation discipline, the next phase of market leadership may already be hiding in plain sight, within the ranks of the overlooked. 

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ClearBridge Select Opportunities Fund

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