Value Finally Has Its Day, but Will that Last?
Lower-cost stocks have outpaced hot-shot momentum plays since August.
Value stocks have finally edged ahead of growth after a long spell of underperformance. For almost three months now, value has outpaced growth: The S&P 500 value index has leapt ahead 12%, compared to 5.7% for the growth benchmark.
Could this be lasting? After all, growth stocks have dominated for the past decade—except for a brief period in 2016 during the oil bust, when recession fears mounted. “Understandably, investors wonder if this move is nothing more than a head fake,” wrote Sam Stovall, chief investment strategist at research firm CFRA, in a research note.
OK, but luminaries ranging from Benjamin Graham to Warren Buffett stand behind value investing as a sure-fire winning strategy in the long run. And statistics show that value has outdone growth over the many decades. So why shouldn’t this natural superiority keep on keeping on today?
Value stocks trade below their intrinsic value, namely what they should be worth given their fundamentals. But fast-growing tech and healthcare stocks have eclipsed them for a long time, and investors have overwhelmingly preferred these momentum plays until recently.
Lately, though, the climate has changed. Washington politicians’ qualms about the likes of Facebook and Twitter have tarnished some of the tech names’ luster lately. Both companies’ shares are down since July. The negative vibe has arisen thanks to talk, at least from Democrats, about imposing Medicare for all, of shutting private health insurance and clamping down on drug prices.
One other reason the turnaround is happening is that value has become even cheaper. To Cliff Asness, founder of quantitative fund manager AQR Capital Management, investors snubbing of value made sense for many years, but more recently their fundamentals have improved sufficiently to merit a reappraisal. Their earnings have improved but not their prices, which makes for even lower price/earnings multiples.
“Value fundamentals have not come in worse over this recent painful period, it’s prices alone that have gone the wrong way,” Asness said. “When losses are due to price moves, not fundamentals, and occur over shorter periods, that is when things actually cheapen.”
As Stovall emphasized, the value index is trading at a 4% discount to its average P/E since 2003, while the growth index is at a 24% premium. That’s not that investors are exactly shunning growth stocks, he said. Instead, they are including value shares, too.
He said “the market is rotating rather than retreating, meaning that we are seeing a gravitation toward more attractively valued sectors, styles and sizes rather than a cashing out altogether.”
Alas for value, if the economy skirts a recession and keeps rolling, the vaunted investing style’s day in the winner’s circle may fade away, as it has in the past.
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