• Investors can best prepare against an eventual market slowdown by buying low-cost, unloved stocks, GMO says.

• The investment firm finds the acute discounts of deep value stocks attractive.

• Once bullish sentiment starts to unwind, these valuations should correct, GMO wrote.

It is time to embrace the market’s most cost-effective stocks, with the worth sector poised to eventually roar back, GMO wrote in a latest research note.

The investment firm, led by legendary investor Jeremy Grantham, outlined a high conviction in “deep value” equities — or stocks which might be low-cost relative to their real fundamental value.

Based on this criteria, the investment firm began targeting the most cost effective 20% of stocks in May 2023, steering clear of “deceptively low-cost” value traps.

“In a world where many stocks are being driven ever higher by positive sentiment and investor optimism, lots of the ones which were most unloved and left behind are trading at extraordinary discounts,” the firm wrote.

Over the past 12 months, US investment has skewed heavily toward large-cap tech names, helping benchmark indexes notch a series of all-time highs.

Against this backdrop, deep value stocks have develop into extremely low-cost — not only against the broader market but in addition as compared to history.

“Outside of the US all value is reasonable, but deep value is within the 2nd percentile of its history,” the note said. “Throughout the US, deep value is similarly sitting on the tenth percentile of its history, while the remainder of value should largely be ignorable at current valuations.”

Based on GMO, that makes deep value well-positioned to deliver strong returns once investor sentiment toward mega-caps starts to unwind. Earlier this 12 months, GMO projected a 1% decline in US large-caps in the following seven years, predicting that deep value stocks will achieve 7.6% gains.

“The S&P 500 is tech and growth heavy, so an investment in international value is the right complement from greater than only a regional perspective,” GMO wrote.

Read the unique article on Business Insider